To say we are living in unprecedented times in the insurance and reinsurance world, and everywhere else, would be a gross understatement. While we continue to work from home, insurers and policyholders are litigating whether commercial property policies cover business interruption losses resulting from the COVID-19 pandemic, and now there is the prospect for coverage disputes arising from the recent riots, vandalism and looting. But, for policyholders, there appears to be more favorable wording in more policies than is the case with business interruption loss for the pandemic that could cover losses from the recent protests.
As you may have seen in the media, the protests arose after George Floyd was killed on May 25, 2020 while in the custody of the Minneapolis police department. A recording of a police officer fatally kneeling on Mr. Floyd’s neck for 8 minutes and 46 seconds was posted on social media and then shortly thereafter reported on by numerous news and media outlets. Protests calling for police reform and an end to institutionalized racism arose throughout the World, including Washington, DC, New York, and Philadelphia. A few of these protests erupted and gave way to significant looting and vandalism of stores, buildings and vehicles on May 30 through June 2, 2020, causing damage and losses.
And now protests are continuing in Portland, Oregon, and other cities, resulting in the federal government sending or threatening to send federal officers to ostensibly quell the protests and protect federal property. But, even after these steps, the protests are continuing in greater numbers. In these cities, we are seeing the defacing of property, namely graffiti on buildings, and the inability of downtown businesses to open, even if they had been allowed to open because of the COVID-19 pandemic. On July 26, 2020, authorities declared riots in Portland and Seattle, Washington.
Businesses damaged by the riots, vandalism and looting may be covered for their Losses under certain policies or related endorsements to commercial property and business interruption policies, namely political violence, civil commotion and riot and looting policies, all-risk polices, and policies with civil authority cover. While any particular claim must be evaluated based on applicable policy terms and its own circumstances, we briefly discuss here the legal issues that may be relevant to assessing coverage for vandalism, looting and related business interruption and civil authority claims under named peril and all-risk property insurance policies.
We remain cognizant that certain courts may approach coverage disputes with an eye toward finding coverage, particularly under these exceptional circumstances. Further, certain insurance departments have jumped into the fray through regulatory actions aimed at expanding insurance coverage for affected businesses which might also impact any analysis. For instance, on June 8, 2020, the Illinois Department of Insurance issued a bulletin to insurers requesting that vandalism and looting related to recent activity in the state be categorized as “catastrophic events” for purposes of processing claims arising out of such events. The bulletin also requested that carriers implement various other pro-policyholder policies with respect to such claims. Other states have issued similar bulletins, which should be reviewed carefully for applicable mandatory provisions.
Finally, damages claims must be carefully investigated and scrutinized as many businesses impacted by recent vandalism and looting may otherwise have had limitations on operations due to COVID-19 restrictions and were otherwise operating under challenging economic circumstances. Consideration should be given as to whether insureds have also presented business interruption or related coverage claims related to COVID-19.
The following insurance may cover damages to businesses arising from the recent protests:
- SRCC cover in Political Violence wording: A Strikes, Riots and Civil Commotion Clause (SRCC Clause) in Political Violence wording typically covers loss or damage directly caused by strikers, locked-out workmen, persons' participation in labor disturbances, and riots. Subject to policy wording and exclusions, the protests here could be deemed to be riots and thus covered by a SRCC Clause. Policies covering Political Violence perils typically include an SRCC Clause.
- Civil Commotion Cover: Commercial policies may include “civil commotion” as a named peril which may extend coverage to riots and looting. Some courts have held that in order for an event to qualify as a civil commotion, there must be: (1) unlawful assembly of three or more people (or lawful assembly that due to its violence and tumult becomes unlawful), (2) acts of violence, and (3) intent to mutually assist against lawful authority and (4) some degree of public terror. Courts typically have restricted coverage for “civil commotion” to losses that have a direct causal connection to the specific civil commotion at issue. It appears that in appropriate circumstances, looting arising out of recent events may be covered under policies listing “civil commotion” as a named peril. That being said, any such coverage would be subject to the policies’ other terms, conditions and exclusions. For instance, there may not be coverage for expenses incurred because of the fear of a violent event. If a business does not experience actual violence, but incurs costs to board up windows in anticipation of violence, such costs may not be covered.
- Vandalism as a Named Peril: Even if recovery for losses due to looting is not available under a named peril policy, there may still may be coverage for vandalism. In such policies, the named peril of “vandalism” may be defined as “willful and malicious damage to, or destruction of, the described property.” Under these provisions, coverage generally extends to losses arising out of acts directed at covered property, such as damages caused by graffiti on the property and damage to the premises caused by intruders breaking into buildings. But, some provisions relating to vandalism may contain an express exclusion for recovery from losses arising from theft. Such exclusions clearly exclude claims for the cost of items that were stolen. Where a named peril policy does not list theft, looting or civil commotion as a named peril, it is unlikely that the cost of stolen items would be covered, even if looting occurs after a premises is first vandalized. However, a more complicated question is whether an insured may recover for damage done to property during the commission of a theft by categorizing such damages as “vandalism.” Some courts interpret the theft exclusion more narrowly, holding that damage to property occurring during the commission of a successful burglary is covered as vandalism. Other courts hold that damage done in furtherance of an attempted, but unsuccessful, theft is excluded from coverage. Insurers responding to claims under named peril policies insuring against vandalism should request detailed and specific information to enable them to determine if the claimed damage was the result of vandalism or theft.
- All-Risk Coverage: All-risk policies typically require that the insured support its claim for recovery resulting from looting and vandalism by submitting direct evidence of the Loss. Courts have taken different approaches as to what evidence suffices for establishing a loss for looting and vandalism. With respect to potential claims arising out of looting relating to recent violent events, insurers should be prepared to request detailed information about the specific items being claimed. Requesting evidence such as video footage, photographs or recorded/sworn statements should be part of the investigative efforts. A denial of coverage may be appropriate where, notwithstanding repeated requests for supporting information, the only evidence of the Loss is an inventory count.
We note that some all-risk policy forms (like ISO Form BP 00 03 01 10) specifically carve out certain tangible items from the definition of “covered property,” such as “Money,” “Securities,” and outdoor property. The specific policy forms will vary widely depending on the issuing insurer and the level of coverage purchased. For instance, policies that exclude “Money” and “Securities” from “covered property” may have that coverage added back in through a Crime Coverage Part Endorsement. Policies could also contain an endorsement restoring coverage for outdoor property. Insurers should review all policy forms carefully to determine if any categories of items are excluded and whether any such excluded items are covered through an applicable endorsement.
All-risk policies may also contain an express exclusion for coverage of losses arising from civil commotion and riots. If a relevant policy contains exclusions for civil commotions or riots, it is possible that coverage would be excluded for vandalism and looting arising out of violent gatherings. Insurers should review policy wording carefully for any potentially applicable exclusions relating to civil commotion or riots.
- Commercial Property Policies: If an exclusion does not apply, it is possible that vandalism and looting could qualify as a “Covered Cause of Loss” if such resulted in “direct physical loss” to covered property, which is likely. For example, a broken window or defaced structure would likely be considered “direct physical loss” with respect to potential coverage. Assuming that vandalism and looting results in “direct physical loss,” an insured may be entitled to Business Income losses arising out of that physical loss. Standard Business Income provisions provide coverage for “the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration.’” “Operations” is typically defined as the “business activities occurring at the described premises.” Loss of Business Income is only covered where there is a necessary “suspension” of operations, which generally requires more than a slow-down in business. It is possible that the physical damage from vandalism or looting could cause a “suspension” of operations. However, some businesses directly affected by some degree of vandalism or looting may not need to close entirely. Temporary measures can be taken that allow the business to continue operating and physical damage can be repaired. Depending on policy language, Business Interruption coverage may not be available in such cases or the period of indemnity may be limited to the time necessary to repair physical loss or damage. To the extent a business remains closed for other reasons after physical loss has been, or could have been, repaired – such as concerns about customer or employee safety, or a drop off in customer traffic during a period of unrestthose additional, post-repair, losses may not be covered. Similarly, to the extent a business closes because of safety concerns before any physical damage has occurred, such pre-damage losses may not be covered. Additionally, some policies contain an exclusion for “increase of Business Income loss, caused by or resulting from … delay in rebuilding, repairing or replacing the property or resuming ‘operations’, due to interference at the location of the rebuilding, repair or replacement by strikers or other persons.” Depending on the specific facts and policy presented, this exclusion may limit coverage for business income losses.
- Civil Authority Coverage: Businesses that did not suffer any vandalism and looting, but that were affected by curfews put into place by governing authorities because of the protests, may make claims under the Civil Authority provision of their commercial property policies. Subject to important limitations, this provision generally provides coverage for lost business income and extra expense when (1) a covered cause of loss results in damage to property not at the covered premises; (2) damage to the other property causes a civil authority to prohibit access to the covered premises; and (3) the access prohibition causes the insured to lose business income or incur additional expenses. But note, geographical limitations may apply, a causal connection between property damage and access prohibition may be required, and access must be prohibited, not merely burdened or reduced.
Thus, there is a wide range of insurance coverages that may respond to losses arising from protests, vandalism and looting. And there are also related coverages that policyholders may conceivably seek to invoke, namely a policy providing for Terrorism and Sabotage cover. “Terrorism” is typically defined as a use of force or violence by a person or group acting in connection with any organization, committed for political, religious, ideological or similar purposes, including the intention to influence any government or put the public in fear. “Sabotage” typically must be acts that are also committed for these similar purposes and to cause the same effect. So as not to overlap with SRCC cover, Terrorism and Sabotage insurance typically includes an exclusion for damage caused by “strikes, riots, or civil commotion.” Thus the damage arising from the recent riots would be excluded.
But again and as always, any particular claim must be evaluated based on applicable policy terms and its own circumstances. We just hope that 2020 doesn’t provide any further unprecedented developments that raise even more novel insurance coverage questions.