Who pays the claims costs if the natural disaster never comes?
A business can still suffer monetary damage when forced to close shop to comply with orders from civil authorities.
Business owners are probably aware of the various risks a natural disaster can pose to an establishment. Damage from disasters such as earthquakes or floods can equate to hefty losses for a business.
To protect their businesses, most owners purchase some form of commercial property insurance to mitigate losses in the event of a natural disaster occurring. But what if the natural disaster never happens?
When faced with a potential natural disaster, civil authorities (such as the federal, state and/or local government) may take preemptive steps, such as an evacuation, to mitigate casualties and loss. This is what we consider action of a civil authority.
What if an owner is unable to operate a business due to the action of a civil authority, but no actual damage occurs that results in loss of income? Is there reimbursement for losses incurred due to these preemptive measures?
For example, if an owner is forced to evacuate and close a business due to an impending flood, and no damage results, you may still have incurred losses from having to close. While the standard ISO (Insurance Services Office) commercial property policy contains coverage for business interruption by caused by the action of a civil authority, many property catastrophe policies (such as earthquake, flood or hurricane) do not.
This means that any losses incurred due to interruption of operations as a result of the action of a civil authority would fall on the business owner. A civil authority endorsement can lessen the blow to business owners in these scenarios. However, there are some nuances to this type of coverage to keep in mind.
Related: NFIP changes: What agents selling flood coverage need to know right now
What is civil authority coverage?
Under most property catastrophe policies, coverage is predicated on direct physical loss or damage to the covered property by a covered cause of loss. Should a business experience financial loss absent actual direct physical loss or damage to an insured property, there may not be coverage. The civil authority endorsement, may provide coverage for loss of income due to interruptions caused by the actions of a civil authority – provided that the actions of the civil authority are in response to, or an expectation of, a covered cause of loss.
What this means is if a property catastrophe policy (with civil authority coverage included) excludes flood as a cause of loss, actions of a civil authority that interrupt your business due to impending flood would not be covered. Under the civil authority endorsement, direct physical loss or damage to the premises is not required to trigger the coverage, but the underlying peril (cause of loss) that predicates the civil authority action must be a covered cause of loss under the policy in order for civil authority coverage to respond.
A great example of this occurred in early 2017, when Northern California experienced an unprecedented mandatory evacuation of more than 188,000 people living and working along the Feather River, below the Oroville Dam. Due to dangerous levels of erosion, failures in both the main and emergency spillways brought the dam’s ability to release water into question. Evacuation orders went out and home and business owners along the riverfront abandoned the area in anticipation of a massive flood.
As it happened, the flood never occurred, but the economic loss from the evacuation still impacted many. In this case, only those with civil authority coverage on their flood insurance policies would have been compensated for losses due to the local government’s action to evacuate the area.
Related: Results from J.D. Power’s 2018 U.S. Property Claims Satisfaction Study
How to ensure coverage
Although standard property insurance policies (covering fire, theft, etc.) for business income usually have some form of civil authority coverage included, any losses incurred in excess of this basic coverage will fall on the business owner. An additional civil authority endorsement must be purchased to ensure coverage if a company is forced out of business longer than the three-week period covered under the basic policy.
It is important to understand what type of policy a business has. Some policies will have civil authority coverage built in and the insureds will be able to add more if necessary, or they may have to purchase the endorsement separately.
Civil authority coverage is sold in blocks of time with the ultimate recovery from the insurer also limited by the business income limits on the policy. (Based on the earlier example, a company would increase its policy from coverage for three weeks to as much as three months.) In most cases, it is possible to add civil authority (or extend the duration) by endorsement to an existing policy, rather than having to find a civil authority only policy. A knowledgeable risk management and insurance professional can provide valuable insights.
Civil authority coverage is often overlooked, since many do not consider instances of mass evacuations when buying commercial property insurance. It is important to understand the impact these events may have on a business and to prepare for them to mitigate the potential loss.
Escaping catastrophic physical damage to a property is a good thing, but a business can still suffer monetary damages when forced to close shop to comply with orders from civil authorities.
Related: Tackling the U.S. flood insurance challenge
Michael Brown (michaelbrown93442@gmail.com) is vice president and property department manager at Golden Bear Insurance Company.