Understanding Business Income Claims During Times of Civil Unrest

California’s Mehserle Verdict a Reminder to Review Coverages

While Oakland, Calif., police donned riot gear to ward off potential violence and vandalism following the Mehserle verdict announcement, businesses may be wondering what insurance coverages are available to protect themselves at times of civil unrest.

At about 4 p.m. on June 8, jurors decided that former (San Francisco) Bay Area Rapid Transit (BART) officer Johannes Mehserle is guilty of involuntary manslaughter for the death of Oscar Grant III. Twenty-two-year-old Grant, who is black, was unarmed when shot by Mehserle, who is white, on a BART platform in Oakland, Calif., on New Year’s Day 2009. Mehserle testified during the trial that he did not intend to shoot Grant, but said he thought he had reached for his Taser to subdue Grant, who was resisting arrest.

Given the controversial nature of the trial, California officials prepared for weeks for potential protests, riots and vandalism once the verdict was read. Many businesses in the Oakland area that had been damaged following the tragic event in 2009 boarded up their store fronts in anticipation of more damage.

Immediately following the verdict announcement, police were on “tactical alert,” traffic snarled to a halt, with people fleeing Oakland to avoid any commotion, and people avoided BART. This no doubt had an impact on business receipts. But according to insurance industry experts, during any time of civil unrest, for there to be a covered business income loss, there must be actual damage to the insured property necessitating a suspension in the businesses operations.

“The mere fact that there is a loss of business due to protests or riots in the area is not covered,” said Chris Boggs, director of education for the Insurance Journal Academy
of Insurance. “However, if a store is damaged by the rioters and must be closed while the damage is being repaired – that qualifies as a business income loss, provided there is business income coverage in place.”

Business interruption claims generally provide compensation for up to two weeks, although different carriers’ forms may vary, according to Betsey Brewer, senior vice president and partner of The Rule Co. in Pasadena, Calif. Moreover, owners who are proactive in protecting their businesses by boarding up their windows should not expect compensation for those supplies.

“That’s just being a prudent business owner, like boarding up windows when you prepare for a hurricane. It’s exactly the same concept,” she said.

Chris Behymer, director of marketing for Markel’s west region, agreed. “Having a plan, notifying employees in advance to work from home, incurring expenses to prepare potentially for what could happen … there’s no coverage for that,” he said. “That’s good risk management.”

When securing business income and expense coverage for the ir clients, agents should discuss what coverage is available when a civil authority restricts access to an area. According to Boggs, the ISO Business Income (and Extra Expense) Coverage Form states that if the civil authority restricts access to an area, some of the lost income is covered during the restricted time period if:

Additionally, there is a 72-hour deductible before any business income loss is covered, meaning that the coverage applies 72 hours after the first action of civil authority that prohibits access, Behymer explained.

“In essence, the civil authority’s closing of an area as a preemptive strike against damage does not qualify for the coverage extension,” Boggs added. “If, however, there is a building on fire and the civil authority closes the surrounding blocks – that would qualify for coverage. But again, there is nothing paid out unless the closing lasts for more than 72 hours.”

A couple of hours after the verdict was read on June 8, Oakland downtown was deserted. Yet the dozens of businesses that sustained damage later that night – a Footlocker had shoes stolen, Whole Foods’ window was broken, and other stores were vandalized – would have a valid claim if they had business income and expense coverage. But because city officials did not officially restrict access to the Oakland downtown and people left voluntarily, businesses would not be covered for a loss of business.

On the other hand, Brewer said when Southern California experienced riots a few years ago, the city imposed a curfew from 6 p.m. until 6 a.m. This affected restaurants’ dinnertime receipts. Many restaurants put in business interruption claims, and initially carriers denied them, she said. However several businesses, even if they weren’t in the immediate area, eventually got compensated because the courts ruled they had a proven, sustained loss of business caused by the action of a civil authority.

The bottom line is that agents should review business income coverages with their customers, especially those insured by carriers that had loss sustained in previous civil disturbances, Brewer advised. Some large chains may be able to negotiate longer periods of business interruption claims, beyond the standard two weeks. And businesses or residences in sensitive areas especially might want to take extra precautions.

“If last year when the Lakers basketball team won a shoe store located near Los Angeles’ Staples Center got broken into, it would be prudent this year for that vendor to board up their windows and evaluate their coverages,” she said.