Company Bulletin 2020-15 issued June 8, 2020, by the Illinois Department of Insurance (IDOI) threw key provisions of the business income policy out the proverbial window. In this directive, the IDOI addressed the recent riots and how the department expects insurance carriers to respond.
In a press release accompanying the bulletin, the IDOI and Governor’s office stated: “Damage to businesses follows dramatic declines in revenue for businesses across the state as a result of COVID-19 pandemic. As the state works with businesses to recover, the governor’s office and IDOI have made expectations clear to insurance companies.”
To clarify the IDOI’s expectations, the bulletin states, in part:
The Department hereby requests that all insurers licensed or authorized to transact insurance business in this State immediately implement the following protective measures:
- To the extent business interruption provisions are included and operative under a policy, insurers should base payouts on business activity levels that eliminate the impact of COVID-19.
Note the highlighted phrase. The IDOI is directing the insurance carriers to pay losses they do not owe. Why do the carriers NOT owe the loss when coverage is written using Insurance Services Office (ISO) or similar language? Because both business income policies, CP 00 30 10 12 – Business Income Coverage Form-With Extra Expense and CP 00 32 10 12 – Business Income Coverage Form-Without Extra Expense, apply the same methodology for determining business income loss payments, specifically both policies state:
- Loss Determination
a. The amount of Business Income loss will be determined based on:
(1) The Net Income of the business before the direct physical loss or damage occurred;
(2) The likely Net Income of the business if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses;
(3) The operating expenses, including payroll expenses, necessary to resume “operations” with the same quality of service that existed just before the direct physical loss or damage; and
(4) Other relevant sources of information, including:
(a) Your financial records and accounting procedures;
(b) Bills, invoices and other vouchers; and
(c) Deeds, liens or contracts.
Paragraph 3.a.(2) in both ISO’s business income policies state that the loss is partly determined based on the LIKELY Net Income. If the business was considered “non-essential” and was thus closed in an attempt to control the spread of COVID-19, the likely Net Income is zero. No dollars were being earned.
IDOI is strongly suggesting (maybe requiring) insurance carriers to ignore this and similar policy language. Carriers appear to be expected to pay business income claims resulting from riots and looting as if the business was fully operational.
The Independent Insurance Agents and Brokers of America (Big I) addressed the issue of covered losses occurring during the period of shut down as a result of COVID-19 in late March. As was specified in this article, the only business income loss any carrier should owe is the amount of income lost AFTER the business COULD have opened but was not able to because of the property damage.
Any carrier paying claims not supported by policy language is doing so in violation of the principle of indemnification, the cornerstone of property insurance. Paying losses unsupported by policy language puts the insured in a better position than they would have been had these losses not occurred.
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