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The Rough Notes Company Inc.



September 28
12:22 2020

No Indirect Coverage Without Direct Damage

The owner of a car dealership was frustrated with their insurer due to a couple of incidents that occurred after an area snowstorm. The dealership’s roof suffered storm damage but that didn’t cause an issue. The dealership’s problem was the snowstorm eliminated access to its location, so customer traffic ceased. Naturally, this significantly reduced car sales revenue. The dealership’s insurer paid for the roof but rejected the income loss claim. The insurer’s position was that the damaged roof did not interrupt the business so no direct damage contributed to the dealership’s income loss. The dealership sued to recover its lost revenue.

See how a court viewed the insurance company’s reasoning in denying the dealership’s request to be reimbursed for the loss of sales due to a storm blocking customer access.


In March 1993, a snowstorm moved through Buncombe County, NC creating problems for Harry’s Cadillac (Harry’s). The storm damaged the building’s roof. While the roof damage did not affect operations, the storm caused lost income because it blocked access to the car dealer. Harry’s filed a claim with Motors Insurance Corp (MIC) and MIC Property and Casualty Insurance Corp (MIC P&C).

MIC/MIC P&C paid for the roof damage but declined the business interruption claim. Harry’s filed suit to recover the lost income. Harry’s position was that the snowstorm rendered the business inaccessible and lost income resulted. Harry’s also argued that a loss caused by blocked access was the same as direct snowstorm damage to the building.

Again, MIC/MIC P&C denied coverage. It stated that Harry’s did not lose income from physical damage creating a suspension of operations. Specifically, since repairs for the roof damage did not affect normal operations and the snowstorm blocking access was not a covered peril, there was no coverage for the loss of business income.

During court proceedings, several items must be reviewed, i.e., pleadings, affidavits, and discovery materials. If any ambiguity is discovered, courts find in favor of the insured party. In this case, the meaning of the policy language was the focal point. The court examined the policy language. It noted that the Coverage Form stated that suspension of operations must be caused by a direct physical loss or damage to the premises. It read in the policy Definitions that coverage begins with the date of the direct physical loss caused by or resulting from a covered cause of loss. Further, the policy’s Covered Cause of Loss form defined loss as the “risk of Direct Physical Loss” and that covered business interruption losses are only those requiring “repair, rebuilding, or replacement.”

The Appellate Court affirmed the trial court’s ruling in favor of the insurer for several reasons. In its opinion, the loss of income was only due to the snowstorm making the business inaccessible, the roof repairs did not affect normal operations, coverage only applied when a covered peril created direct damage that suspends operations, and the snowstorm was not a covered peril.

Harry’s Cadillac–Pontiac–GMC Truck Co., Inc., Plaintiff,V. Motors Insurance Corporation and Mic Property And Casualty Insurance Corporation, Defendants. No. Coa96–1211. July 1, 1997.

Lost Income Is Covered Under Right Circumstances

Commercial insurance policies offer a wide range of protection and many sources of loss are eligible for protection, including a reduction of business income. However, this is an important requirement. Business income losses must result from a tangible loss to covered property. Further, the tangible (also called a direct) loss must be a type that is eligible for coverage under the given policy.

Consider a company that loses income because an incident interrupts its operations. The business is insured under a Commercial Property Policy. Scenario A, the interruption is due to a fire. Scenario B, the interruption is due to the business getting bomb threats for more than a week. While both instances result in a measurable loss of business income due to temporary closure of business, one scenario won’t be eligible to recover the financial loss.

Here is an excerpt of wording on coverage found in the ISO Time Element Coverage Overview in PF&M.

(June 2019)


Time element insurance covers time-sensitive consequential losses that result from covered direct physical loss or damage to buildings and/or personal property. Time element insurance losses are considered to be consequential or indirect damage because they develop only after direct damage occurs.


Direct damage refers to physical loss or damage to tangible property. When an apartment building burns down, the structural damage is visible and readily measured. However, the time element loss is much less apparent and more difficult to quantify.

The flow of rental income revenue from the damaged apartment building ends immediately after the direct damage loss occurs. The total gross rental income loss is the number of months needed to repair or rebuild the facility multiplied by the monthly rental income. This is considered business income.

The apartment owner arranges with a fellow apartment owner to offer temporary housing to his tenants in order to reduce his business income loss and retain his tenants. The additional cost to assist the tenants is considered extra expense.

Another issue to consider is that some tenants in the damaged or destroyed building may lose very attractive leases as a result of the direct damage. They incur the financial loss of the value of the remaining portion of their leases. This is considered leasehold interest.


Direct loss of or damage to tangible property is only one of many causes of indirect losses.


  • A printing operation is completely shut down when its employees go on strike for two months.
  • A local restaurant that specializes in offering Australian cuisine loses 80% of its business when its customers’ tastes change, and they decide to eat elsewhere.
  • A tenant in a building has an attractive ten-year lease. It must move out when the building owner goes out of business trying to affect repairs to address environmental issues and nobody else purchases the building.

Each of these is an example of a business risk. Each is a result from an event other than direct physical loss or damage to property that insurance covers. Standard insurance coverage forms and policies do not cover such indirect losses.


It is difficult to determine the correct business income limit to carry because losses are evaluated based on expected or anticipated lost income. The named insured’s financial statement is a useful and practical starting point to develop an appropriate limit for the coverage selected. Current financial conditions, emergency plans, long-term business plans, and specific business processes are just a few examples of other issues that must be addressed and evaluated before selecting the appropriate coverage form and its limit.

Regardless of the coverage form selected, Insurance Services Office (ISO) CP 15 15–Business Income Report/Work Sheet should be used as part of the process to develop and determine the proper limit of insurance. It has detailed instructions and steps to follow to determine the appropriate limit for the coverage selected.

Related Article: 131.6-2, CP 15 15–Business Income Report/Worksheet


Time Element coverage requires at least the following seven forms:

  • Common Policy Declarations
  • IL 00 17–Common Policy Conditions

This mandatory form contains the common conditions that apply to all commercial insurance coverages. It is required to be used with all simplified monoline or multiline policies.

Related Article: Related Article: 130.6-31, IL 00 17–Common Policy Conditions Analysis

  • CP DS 00–Commercial Property Coverage Part Declarations

Related Article: 130.4-1, CP DS 00–Commercial Property Coverage Part Declarations

  • CP 00 90–Commercial Property Conditions

Related Article: 130.6-24, CP 00 90–Commercial Property Conditions Form Analysis

  • One or more time element coverage forms:
    • CP 00 30–Business Income (and Extra Expense) Coverage Form
    • CP 00 32–Business Income (without Extra Expense) Coverage Form
    • CP 00 50–Extra Expense Coverage Form
    • CP 00 60–Leasehold Interest Coverage Form

Related Article: 131.4-2, ISO Time Element Coverage Forms Analysis

  • One or more of the Causes of Loss Forms:
    • CP 10 10–Causes of Loss–Basic Form
    • CP 10 20–Causes of Loss–Broad Form
    • CP 10 30–Causes of Loss–Special Form

Related Article: 130.6-1, Basic, Broad, and Special Causes of Loss Forms Analysis

  • Policy Cover or Policy Jacket


ISO provides four primary time element coverage forms:

Related Article: 131.4-2, Time Element Coverage Forms Analysis

  • CP 00 30–Business Income (and Extra Expense) Coverage Form

This is the most frequently used coverage form. It reimburses the named insured for business income lost and extra expenses incurred that result from direct physical loss or damage to property by a covered cause of loss. Extra expense coverage reimburses the named insured for the additional costs incurred to continue operations.

Example: Tony’s Comic Book Shop burns to the ground. Tony loses significant income from walk-in customers. He rents space at another location so his regular customers can continue their reading habits while a new shop is being built. The extra expenses to rent the location plus the reduced income due to the loss are covered.

Many Considerations Involved in Determining Needed Coverage

Establishing that a business has lost significant income and that loss is tied directly to a covered physical loss is fairly straightforward. These losses are protected under Time Element Policies. It may seem that a given time element loss amount merely depends on determining daily sales and how long regular operations are affected. Time Element loss calculations take a bit more work and there are a variety of considerations.

For one thing, losses are usually based on a net loss that determines loss amounts by considering operation costs that don’t continue during halted operations, such as utilities. Losses may have a greater level of contingency, caused by damage suffered by a supplier, may vary due to a business cycle, or have a greater affect because they occur during seasonal peaks.

See the different aspects of Time Element protection discussed under Gordis Property and Casualty found in Advantage Plus.


Business Income

What is Covered

What Else is Covered–Additional Coverages

What Else is Covered–Extensions

For How Much

Insuring to Value–Coinsurance

Alternatives to Coinsurance

Optional Business Income Coverages

Building Ordinance – Increased Period of Restoration

Business Income from Dependent Properties

Extended Period of Indemnity

Insurance on Loss of Rents

Business Income for Educational Institutions

Causes of Loss Not Covered



Finished Stock

Increase of Loss Due to Cancellation of Lease, Contract or License

Additional Time Element Coverage Forms

Extra Expense

Leasehold Interest Insurance

Confused Expectations Over Business Income Protection

Time Element or business income coverage is at the heart of, literally, millions of discussions across our planet. The COVID 19 Pandemic has affected the insurance market as seriously as it has any facet of business. The primary requirement that business income loss be tied directly to a covered, physical loss first occurring has been established for many years. That fact is constantly being challenged in agencies, business premises, lobbies of insurance regulators and in the courts. The pandemic has raised the stakes so high for many businesses and their insurers. Due to various factors, untold numbers of businesses have had their operations severely curtailed or completed halted due to the pandemic and responses to control its spread. Besides the serious human toll, the disease has also been an economic catastrophe.

Regardless of policy language, many businessowners are arguing that the lack of coverage for closures runs in direct contrast to their protection expectations. A flood of litigation is in progress, including a secondary deluge of appeals after initial decisions. The pressure to find coverage sources is so great, regulators and legislators are taking action to create it, including rules requiring retroactive coverage.

While public relations, political, and legal battles over the issue are likely to continue for years, this situation is illustrative. It is an epic reminder of the importance in clearly communicating what polices are intended to cover.

Below is an article discussing various issues swirling around the pandemic. It’s from the June 2020 issue of Rough Notes Magazine.

Public Policy Analysis & Opinion

By Kevin P. Hennosy


COVID-I9 business closures trigger claims and conflict

As the COVID-19 pandemic swept across the country, civil authorities ordered people to stay in their homes; many businesses closed, and these enterprises suffered financial loss.

Some business owners are looking to their commercial property policies to recoup those losses under business interruption coverage. Old insurance books describe one of its uses as replacing lost business income if a city closes a sidewalk in front of a store.

Paying claims under the civil authorities business interruption provisions of commercial property policies could help the United States avoid a serious and lasting economic downturn.

On the microeconomic level, the proceeds from those claims could keep small businesses solvent and hasten recovery after the public health crisis passes.

On the macroeconomic level, the collective impact of compensating those businesses would be increased demand for supplies, and it would put money in the pockets of employees to recharge consumer demand.

In short, business interruption payments could inject Keynesian countercyclical purchasing power from the private sector into a damaged economy.

The U.S. Supreme Court referred to this same dynamic more than 20 years before Keynes, in German Alliance Ins. Co. v. Lewis, 233 U.S. 389 (1914). In that case, the court held that insurance served a public interest (beyond claimants and policyholders); therefore, it should be subject to public regulation.

Bad news

Or the insurance carriers can cavort before a golden image of Baal and really mess things up for the business of insurance, which is based on trust.

Agents, as representatives of insurers, have the unwelcome task of explaining business interruption provisions to their clients, given the exclusion for losses that result from viruses and bacteria.

In some quarters, business owners are blamed for “misunderstanding” what they bought. Who would assume that an insurance policy would provide financial benefits after a catastrophe?

In many cases, the virus did not directly trigger the loss. Instead, government orders forced the closure of some categories of small business, such as bars and restaurants. Other entities remained open but lost customers because of stay-at-home orders issued by civil authorities. Still, carriers deny claims.

Many observers believe carriers sought to insert exclusions in business interruption coverage after Hurricane Katrina in 2005. Overall, carriers avoided the full force of Katrina claims, which breached trust in insurance in the areas affected by the storm.

For example, because of a clumsily worded evacuation order issued by civil authorities, insurers denied claims by arguing that the order was not “mandatory.” Insurers denied water damage claims under the flood exclusion, even when evidence existed that the damage was not the result of a natural flood event. Some policyholders tendered claims based on contamination caused by bacteria and mold after the water receded, which likely led to policy changes.

In 2006 the Insurance Services Office (ISO) issued Circular letter [LI-CF-2006-175], which announced an exclusion in commercial property policies for business interruption losses arising from viruses and bacteria.

Throwing ISO under the bus seems habitual to some carrier executives. Blaming ISO is particularly effective because outside of the insurance sector, no one has heard of it. An acronym sounds so official, and if anyone asks what the acronym stands for, the words are so plain that they are almost boring … like some lesser bureau in the “Ministry of Love” in George Orwell’s dystopian masterpiece 1984.

ISO conducts the technical work to create policy forms and rates. In this endeavor, ISO engages in the technical activities that the Supreme Court used as a definition of “the business of insurance”-but more on that later.

State action

ISO is the last historically operative link to the grand system of legally approved cartels that governed fire insurance between the Civil War and World War II. This is not to allege that ISO is a cartel today, but it has residual power.

The cartels operated legally because the Supreme Court decision in Paul v. Virginia, 8 Wall. 168, 75 U. S. 183 (1869) held that insurance was a contract, not commerce; therefore, insurance was subject to state jurisdiction.

Insurers worked with New York political boss William M. Tweed to create what is now known as the National Association of Insurance Commissioners (NAIC) to tame state officials who might interfere with the cartel system.

In those days, stockholder-owned insurers relied on the regional cartels to design and price policies. In addition, the cartels castigated any agent who sold a policy for a non-cartel company. This anticompetitive activity remained legal even after Congress passed the Sherman Antitrust Act, the Federal Trade Commission Act, the Robinson-Patman Act, and other antitrust legislation and enforcement-until everything changed on June 5, 1944.

On that date, the Supreme Court ruled that insurance is interstate commerce when it granted standing for the Antitrust Division of the U.S. Department of Justice to bring a case against South-Eastern Underwriters Association (SEUA), a regional cartel.

In United States v. SEUA, 322 U. S. 533 (1944), Justice Hugo Black wrote for the majority and overturned Paul as precedent, saying insurance is a commercial transaction and further that it constitutes interstate commerce in risk.

The Constitution reserves jurisdiction over interstate commerce for Congress, not the several states. Still, Congress and the Roosevelt Administration deemed insurance too technical for consumers to make informed choices; therefore, the business of insurance was inappropriate for competitive markets and the antitrust laws that foster and police those markets.

After the SEUA decision, Congress passed the McCarran-Ferguson Act.

The law makes a limited and contingent delegation of jurisdiction over insurance to the several states, to the extent that state law regulates the business of insurance. In a signing statement, President Roosevelt expressed his belief that after a moratorium period the business of insurance would rise to federal jurisdiction.

In passing the McCarran-Ferguson Act, Congress did not provide the insurance sector the limited and contingent shield from federal antitrust law as a special-interest gift. (Consumer groups allege that corrupt transactions give away one of their greatest advantages-a federal law requiring regulation.)

Congress stayed antitrust laws to allow insurers to cooperate to provide consumers apples-to-apples choices at a fair price-if state action regulates that activity.

Early court interpretations of the statute found that states cannot transfer that loaned jurisdiction to private entities, nor may one state act on behalf of another state.

What activities must the several states regulate? Some argue that the states must merely concoct a “regulatory scheme” limited to solvency.

One can understand that breadth of activity by reading Supreme Court opinions with an historical perspective. In a clearly written opinion in Securities and Exchange Commission v. National Securities, Inc., 393 U.S. 453 (1969), the court offered a definition of the “business of insurance.”

The court reversed actions taken by the Arizona director of insurance to benefit shareholders, which the court found to be beyond the jurisdiction given to the states by McCarran-Ferguson. Justice Thurgood Marshal defined the business of insurance as: The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement-these were the core of the “business of insurance.”

Under federal statute, the states should act to regulate that “relationship between insurer and insured.”

Tweed lives

Of course, as this column noted in a recent issue, the business of commercial property and casualty insurance no longer benefits from state regulatory action. In the 21st century, most states adopted legislation based on the NAIC Property and Casualty Commercial Rate and Policy Form Model Law (MDL 777), which prohibits state action in commercial lines unless there is not a competitive market, and then presumes market competition, stating:

A competitive market is presumed to exist unless the commissioner, after hearing, determines that a reasonable degree of competition does not exist in the market and the commissioner issues a ruling to that effect.

NAIC corrupts the McCarran-Ferguson framework with a model law that recommends inaction, in contradiction to the federal statutory scheme. NAIC recommends a framework where assumed competition “regulates markets. “In the absence of state action, private groups like ISO or large insurers create policy forms and prices, which translates to “rubber stamp.”

Any informed observer would see that argument as a “pretense of regulation,” which Justice William O. Douglas warned about almost 50 years ago. When the Supreme Court declined to “order up” the case of Ohio AFL-CIO, United Autoworkers of Ohio v. Insurance Rating Board, 409 U.S. 917 (1972), Justice Douglas wrote in dissent:

In Federal Trade Commission v. National Casualty Co., 357 U.S. 560, 563, 2 L. Ed. 2d 1540, after examining the statute and its legislative history, we held that federal regulation as to advertising practices was prohibited in those States which were regulating such practices under their own laws. We indicated, however, that the grant of exclusive regulatory power to the State would be ineffective if the state statutory provisions which purported to regulate were a ‘mere pretense’ of regulation.

Justice Douglas believed that the plaintiffs provided enough supporting evidence of a pretense of regulation that the court should have heard the case.

Unlike the case with Katrina, this year localities and states responded to the COVID-19 pandemic by issuing unambiguous orders to broad business categories to cease operations, so a reasonable person can opine that those policyholders have a strong claim under the “civil authorities” provision of business interruption coverage-even if carriers try to apply the virus and bacteria exclusion.

The carriers seem nervous about all those insured businesses that have been ordered to close. In March, David Sampson, president and chief executive officer of the American Property and Casualty Insurance Association (APCIA), estimated that the sector would pay $220 billion to $383 billion per month in business interruption claims.

Coverage denials triggered litigation.

What test?

The McCarran-Ferguson Act does not apply a test for a “reasonable degree of competition.” The statute requires regulation by state law, which encompasses the “relationship between insurer and insured.” A “pretense of regulation,” perpetrated with a rubber stamp applied to the proposals of private entities, does not seem to meet the historic meaning of the statute.

Failing that test, the statute automatically returns insurance to federal jurisdiction-complete with antitrust law, Federal Trade Commission enforcement, and treble damages from the courts.

In the absence of affirmative regulation by the states, who knows where litigation might lead?

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