A tighter radius of coverage requires new consideration
The experience of 9/11 raised the prospect that,
in the wake of a disaster, states and municipalities might
be inclined to close off wide areas quickly out of an excess of caution … .
By Joseph S. Harrington, CPCU
Ours is the age of countless and proliferating choices. Athletic shoes. Auto accessories. Nutritional contents. Cell phone plans. You name something, and you’ll find ever more factors to consider when purchasing it. The same holds for insurance.
In our complex, decision-crammed world, it would be easy for agents, brokers, and insureds to overlook an obscure but important new condition for covering business income losses. If neglected, this consideration might leave your client without critical coverage. Even worse, your client might learn that its neighbor has the coverage under an otherwise identical policy.
Conditions for coverage
For decades, business income insurance has extended coverage to situations where civil authorities close off access to a location when there is property damage in the vicinity. This “civil authority” coverage has traditionally been subject to four conditions:
- The coverage is triggered by an order of civil authorities, not by the loss event itself.
- The order must prohibit access to an insured location, not just impair access or cause a reduction in operations.
- The damage must be to property other than at an insured location. (Damage to property of an insured triggers its own income coverage.)
- The damage must be caused by a peril insured against under the policy.
Up into the early 2000s, standard ISO[1] civil authority provisions covered three weeks of lost income following a 72-hour waiting period after an order was issued. Extra expenses to resume operation were covered up to three weeks after the order was issued, with no waiting period.
Limiting the radius
In 2007, ISO added a new condition for triggering civil authority coverage. The revised wording requires that the insured location (“described premises”) can be no more than one mile from the property damage that triggered the order.
Now, a “within-one-mile” requirement is not so stringent as to block application of civil authority coverage in most cases, since most such situations involve damage to adjacent or nearby properties. So why was the limitation enacted?
Among other things, the destruction of the World Trade Center demonstrated how vast dependent income exposures could become. Thousands of businesses in lower Manhattan were directly impacted by street closures following the Sept. 11th attacks, adding to an already staggering level of income losses for businesses that had suffered direct damage.
Apart from the sheer size of losses, the experience of 9/11 raised the prospect that, in the wake of a disaster, states and municipalities might be inclined to close off wide areas quickly out of an excess of caution, believing that insurance would cushion the economic blow.
Decisions to make
While incorporating the one-mile limit into its business income and BOP forms, ISO also introduced an endorsement option, called “Civil Authority Changes” (CP 15 32), for declaring a different distance and/or a different coverage period than those built into the base forms. (The revised civil authority coverage provisions increased the coverage periods for income loss and extra expenses from the previous three weeks to four weeks.)
It takes a few years for an ISO revision to be widely adopted by insurers, but by now it’s safe to assume that a business income form includes a distance-from-damage limitation in its civil authority coverage. If a carrier allows for use of a change endorsement, insureds now have a choice to make: Stay with built-in limits or extend them for additional premium.
As already indicated, a one-mile limit would not affect coverage for closures arising from damage to neighboring properties. That may be sufficient in most cases but could leave a policyholder uninsured in the wake of civil orders that apply more broadly, such as those that arise from riots and civil commotion and from the “wider, wetter” hurricanes that have occurred in recent years.
So, here’s what to look for as buyers and producers package income coverage:
- The built-in distance limit. Some policies provide for more than the one-mile radius of distance from the damage, perhaps five to 10 miles, for cover to apply. That is a factor in comparing the value offered by different policies.
- Any option to amend the distance limit. How far can you extend it, and for what charge? Can you decrease it for any premium savings? (Probably not.)
As if insureds and their risk counselors didn’t already have enough to think about.
[1] ISO, the Insurance Services Office, is the largest advisory organization (rating bureau) that develops standardized policy forms and rating information for property/casualty insurers in the United States. Today, ISO is a branch of Verisk Analytics, an international risk information organization.
The author
Joseph S. Harrington, CPCU, is an independent business writer specializing in property and casualty insurance coverages and operations. For 21 years, Joe was the communications director for the American Association of Insurance Services (AAIS), a P&C advisory organization. Prior to that, Joe worked in journalism and as a reporter and editor in financial services.
