Covered Causes of Loss

Flood and Mudslides

Business Income from Dependent Properties

 Business Income Coverage

Business income coverage requires both a suspension of business operations and a resulting loss of business income. One, without the other, will not result in a covered claim. An operation that can function around repairs to the building and does not lose customers or business has not suffered a business income loss. Business income coverage is triggered by a suspension of business operations that is caused by direct physical damage to, or loss of, property at the premises described in the policy. For business income to be covered there must first be damage to property that is caused by a covered cause of loss. For example, if a florist has a fire that interrupts the business, there is lost income coverage until the florist can get back on his feet. If the restaurant next to the florist sustains a fire but the reconstruction of the restaurant slows business to the florist by blocking foot traffic, that situation is not covered loss of business income.

 Covered Causes of Loss

The standard business income coverage form provides for the same causes of loss as are covered on the insured's commercial property policy. Covered causes of loss in the typical commercial property policy include fire, lightning, explosion; windstorm or hail; smoke, aircraft or vehicles; riot or civil commotion; vandalism, leakage from fire-extinguishing equipment; sinkhole collapse; volcanic action; falling objects; weight of snow, ice or sleet; water damage.

 The windstorm cause of loss includes tornadoes, cyclones, hurricanes, tropical storms and dust storms. Many of these windstorms become disastrous and often result in other causes of loss such as floods and mudslides. However, the standard policy does not provide coverage for these resulting or concurrent causes of loss.

 Other causes of loss not covered are earthquakes, tremors, landslides, mine subsidence, earth sinking (other than sinkhole collapse), and volcanic eruptions.

 However, fires and explosions that result from these causes of loss are covered, even if the cause of loss is not covered in the policy. For example, there is coverage when an earthquake results in a fire from downed wires and the insured's business must close for several weeks for repairs. That loss of business income is covered since the fire is a covered cause of loss. The insured can buy coverage for earthquakes and floods separately.

 Many property forms include additional coverages that address specific loss situations. Examples of such loss situations associated with disasters include the closing of roads and bridges, and forced evacuations of areas that lay in the path of a hurricane or wildfire. When a property within one mile of the insured premises is damaged and local authorities restrict access to the entire area, business income coverage is provided. The restriction of access must be due to the dangerous nature of damage at the affected premises or for easy access to the premises by the authorities. However, a decrease in business simply because people did not want to venture outside during a storm or disaster, absent a governmental order shutting down access, would not satisfy the criteria for coverage under the civil authority provision. In addition, there is typically a seventy-two-hour waiting period before civil authority coverage is triggered, so a business would have to be shut down by the authorities for three days before there would be coverage.

 The issue of what constitutes "direct physical damage or loss" and whether this damage is caused by a covered cause of loss lies at the heart of whether there will be business income coverage. There is little doubt that disasters cause substantial direct physical damage and loss, and coverage is available as long as the specific damage or loss is the direct result of a covered peril on the insured company's business income policy.

 Flood and Mudslides

A potential issue may arise if flood is deemed the primary cause of business interruption to a property that is not damaged by wind. That may lead to a question of fact as to which peril caused the loss of business income – the wind or the flood? Likewise, if power outages, windstorm, and flooding all converge to cause a suspension of business, finders of fact may question whether the suspension should be covered by business income insurance. The details of a given situation may have to be studied to determine if there is coverage. However, if windstorm can be at all attributed to the cause of the suspension, coverage should be triggered.

 While flooding caused by tornadoes, cyclones, tropical storms or hurricanes could lead to business interruption losses, flood is not a covered cause of loss on most policies. Although flood insurance may be available to commercial property insureds through the National Flood Insurance Program, it is important to note that the NFIP coverage specifically excludes loss from interruption of business or production. Therefore, if business operations are interrupted solely due to floodwaters and not by windstorm, business income insurance may not be available.

 Likewise, mudslides are not a covered cause of loss on most policies. Even though mudflow is included in the definition of flood covered by the NFIP policy, the exclusion for loss from interruption of business or production would preclude business income coverage.

 Business Income from Dependent Properties

The typical property form provides some coverage, or an option for coverage, for damage to insured operations that lose business income because of damage to one or more of their "dependent properties" by a covered cause of loss. A dependent property is typically defined as one that delivers materials or services to the insured, accepts the insured's products or services, manufactures products under contract for the insured, or attracts customers to the insured's business. Utility supply services, communication supply services, and wastewater removal services are not covered dependent properties.

 An example of a loss from dependent properties is a situation where an insured manufactures furniture and there is a fire at the fabric supplier, which suspended the supplier's operations for three weeks. Because the insured cannot finish his products without the fabric, the fabric supplier is a dependent business. Again, there is a requirement for physical damage at one of these properties that arises from a covered cause of loss for business income coverage to apply.