Many commercial and homeowner insurers issue “all risk” policies to businesses, stating that the policies provide maximum protection against risks that could cause business interruption and monetary losses. But as business owners learned the hard way during the pandemic, an all-risk policy has many coverage gaps.
Business interruption claims submitted by restaurants, gyms, retail establishments, offices and other shuttered businesses were routinely denied, whether because the policy explicitly excluded viral or bacterial events, or because the policy required actual physical damage to the property in order for lost income to be covered.
Here is a closer look at all-risk policies and what they do, and don’t, cover.
Commercial property insurance policies usually state that “direct physical loss or damage” to covered property is required for coverage to kick in. Further, most property policies providing business income coverage require that there be a causal connection between insured physical loss or damage and the loss of income. Further, an all-risk insurance policy does not cover the insured from all perils. Rather, the coverage is for all perils except the ones excluded in the policy.
Insurance agents typically do not review exclusions with customers prior to a sale, so it’s incumbent on you, the insured, to carefully check your policy’s exclusions and wording and ask questions to determine if you will be protected from certain events. This can be challenging, however, because insurance policies are written in such an arcane fashion that even many attorneys have difficulty deciphering what is included and what is not.
Homeowner and commercial insurance policies typically have many listed exclusions, such as earthquakes or earth movement (including settlement); several types of water damage, such as from storms and sewer or septic tank backups; an act of terrorism; a mechanical breakdown; hidden or latent defects; war; government seizure or destruction; wear and tear/gradual damage; breakage of fragile items; damage caused by freezing; infestation; pollution; nuclear hazards; and market loss.
Policies typically cover wind damage caused by a storm or hurricane, but not flood or storm surge-related damage. For some of the listed exclusions, a business may have the option to pay an additional premium, known as a rider or an endorsement, to add a peril to its coverage.
The burden of proof
Under an all-risk policy, the event, occurrence or trigger for coverage is typically physical loss or damage to property. The burden of proof to show that physical damage or loss has occurred is on you, the insured. Once the insured demonstrate it has suffered a potentially covered loss, the burden of proof shifts to the insurer to prove that the loss is not covered due to an exclusion or for another reason.
This can get tricky. Take, for example, when businesses suffer a power loss, such as the thousands of businesses in Texas that were closed last month for extended periods due to widespread power outages after a series of winter storms crippled the intrastate power supplier. Businesses may claim they lost use of their property, resulting in lost business income, because of the power outage. However, insurers may counter that no physical loss of property occurred and, therefore, losses are not covered.
The vague wording of many policies leaves them open for judicial interpretation, requiring insureds to bring lawsuits to get the coverage they deserve. The recent winter disaster in Texas, for example, will result in numerous such legal battles. Cases in which the power outage resulted in damage to the property, for example – such as if it caused a pipe to freeze and burst – will be challenging, because when losses are caused by a combination of covered and non-covered perils, coverage may be limited only to those losses caused by the covered peril.
If your commercial insurance claim is being challenged or denied, contact us today. We have the experience, knowledge and tenacity to make sure insurance companies keep the promises they made to you.
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack