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Business Interruption Insurance May Be Available Despite Terrorism Exclusion

Jon Cowen April 24, 2013

When an act of terror is not terrorism – Business interruption insurance may be available to those affected by the Boston Marathon bombings and other terrorist acts.

In the aftermath of the Boston Marathon bombings, the full economic impact on the local economy is yet to be determined.  The lost productivity from the shut-down of the City of Boston for one day alone has been estimated at upwards of $333 million.  While Boston and surrounding communities will undoubtedly bounce back, the road to recovery for businesses directly affected by the bombings (and the resulting closures) is less clear.  Those businesses would be well-advised to review their existing insurance policies to assess whether they have coverage for losses, including lost business income, extra expenses and even fixed costs associated with the Marathon bombings. Even for businesses outside of Boston’s “Ground Zero,” recent events should provide the impetus for reexamining the adequacy of their insurance coverage for previously unthinkable risks. In either event, it would be a mistake for business owners to assume, as some local media have reported, that they will be unable to recover for such losses because of a terrorism exclusion contained in their insurance policies.

There are many variations in the type and scope of insurance policies issued to small business owners. Differences in coverage depend on the nature of the business being insured, the type of coverage bound (e.g., business owners or commercial property coverage), and most importantly, the specific language contained in the policy. However, most insurers adopt industry-standard ISO (Insurance Services Office) policy forms and language.  The ISO policy forms provide the framework for assessing whether or not certain risks – such as the Boston Marathon bombings – fall within the scope of coverage.  The so-called Terrorism Exclusion endorsement is one such form.

With the caveat that individual policies may vary, the Terrorism Exclusion endorsement is only triggered when these three conditions are met:

1.  the Secretary of the Treasury, with the concurrence of the Secretary of State and Attorney General, certifies that the event constitutes an act of terrorism pursuant to the federal Terrorism Risk Insurance Act; 
2.  the act results in an aggregate loss of more than $5 million or $25 million (depending on the particular policy endorsement); and 
3.  the act is a danger to human life, property or infrastructure, and was intended to either coerce the civilian population or influence the policy or conduct of the federal government.

As the investigation into the Marathon bombing continues, it is too early to tell whether the first and third prongs will eventually be satisfied, that is, whether members of President Obama’s Cabinet will certify that the Marathon bombings were “an act of terrorism,” and whether it will ever be established that the bombings were intended to coerce the civilian population or to influence U.S. foreign policy.  Equally uncertain is whether property and casualty losses will exceed either the $5 million or higher $25 million threshold. Early estimates are that physical property damage claims alone will be less than $5 million, although if medical costs are included, one or both thresholds may well be exceeded.  Regardless of how one characterizes the Boston Marathon bombings, it is highly debatable whether the Terrorism Exclusion should even be part of the discussion in assessing the existence of insurance coverage.

There is another lesser-known, and largely untested, form of insurance which may ultimately prove more important for small business owners directly impacted by the forced shut-down of Boston’s Back Bay. The standard form Business owners insurance policy, issued by the ISO, includes additional insurance, called “Civil Authority” coverage, for the loss of Business Income and Extra Expense “caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises.” A similar provision is found in the ISO standard form endorsement for loss of business income under commercial property policies. These insurance clauses, unlike other kinds of business interruption insurance, potentially provide much broader coverage because physical damage to the insured’s property is not a prerequisite. Rather, the “Civil Authority” coverage allows business owners to recover for lost business income and associated expenses so long as they were forcibly shut down by the action of state or local authorities- even if their premises are fully intact. 

Whether or not they realize it, business owners may well have recourse to obtain recovery for losses sustained as a result of the Boston Marathon bombings. A careful review of their insurance policies, together with their insurance brokers and professional advisers is well worth their while.

If you have any questions or need additional information regarding this, please contact Jon C. Cowen.

This Alert is provided for information purposes only, and does not constitute legal advice.  According to Mass. SJC Rule 3:07, this material may be considered advertising. ©2013 Posternak Blankstein & Lund LLP.  All rights reserved.

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