Picking Up the Pieces

On May 25, 2020, police officers in Minneapolis responded to a 911 call from an employee at Cup Foods market who complained that a customer had just purchased cigarettes with a counterfeit $20 bill. When police arrived, they were directed to George Floyd, sitting in his car parked on the street near the store. Police arrested Floyd, secured him in handcuffs, and attempted to guide him into a police car. When Floyd could not or would not get into the car, three officers restrained him face-down on the ground, with one kneeling on his neck for more than eight minutes. Seventeen minutes after police arrived on the scene, Floyd was unresponsive and had no pulse.

Video of the incident was captured from multiple angles by witnesses with phones and by police-worn body cameras. The shocking images that saturated social media and news broadcasts galvanized public sentiment like never before. On May 26, protesters gathered in Minneapolis demanding justice for Floyd and an end to police brutality and systemic racism directed at Black people. In the days and weeks that followed, protests spread throughout at least 400 communities, large and small, in the U.S., including all 50 states and even to cities around the world. The result has been perhaps the most vigorous and widespread outpouring of frustration over issues of racial injustice in a generation.

By and large, demonstrations remained peaceful, which is remarkable given the evident and sustained passion of protestors. Still, widespread property damage and looting were reported. Businesses were burned, windows smashed, and monuments toppled. Shops and restaurants closed down and boarded up in anticipation of destruction that often never came, sustaining business income losses nevertheless. Cities also imposed curfews in an effort to weed out the destructive elements among the otherwise peaceful demonstrators, further limiting access to businesses that tried to remain open during the unrest.

The extent of insured losses associated with these most recent protests has not yet been tallied with any certainty; as of this writing, losses continue to mount as protests in places like Seattle carry on. On June 1, 2020, Property Claims Service (PCS), an industry group that tracks catastrophic losses, announced that damage in Minneapolis alone would exceed $25 million, qualifying the unrest there as a catastrophe. Regrettably, that distinction alone is not unusual. PCS has classified 13 previous civil unrest events as catastrophic losses. Setting this most recent rioting in a category by itself, however, PCS also designated the riots that occurred as a result of  George Floyd’s killing as a multi-state catastrophic event, the first time the organization has done so in its history for a loss event based on civil unrest. PCS made its determination based on projected significant losses in more than 20 states, although the scope of those losses is still undetermined.

The Insurance Information Institute (I.I.I.) also tracks insured losses caused by civil unrest. By far the costliest riot event in history, according to I.I.I., were the 1992 Los Angeles riots that followed the acquittal of four Los Angeles police officers related to the arrest and beating of motorist, Rodney King. That event cost more than $775 million ($1.4 billion when adjusted for inflation). Notably, seven of the 10 most expensive riot losses from an insurance perspective occurred in the 1960s. Some industry analysts expect that losses from these most recent riots and protests may surpass the 1992 Los Angeles riots. Still, losses associated with civil commotion tend to be relatively modest compared to natural disasters. To put the numbers in context, insured losses associated with Hurricane Katrina cost insurers $55.1 billion in today’s dollars.

Business Income and COVID-19

Whatever the final numbers, losses suffered by individual shopkeepers were certainly devastating to them, especially coming as they did on the heels of a lengthy shutdown in response to the novel coronavirus global pandemic, which has crippled large segments of the economy and prompted many small businesses to close permanently.

The good news is that standard business owners’ insurance policies and commercial property insurance generally cover the types of losses sustained by businesses in the path of the destruction that sometimes attended these recent protests. Typical “all-risk” property policies cover physical damage to insured property so long as it was not caused by an excluded cause of loss. For the most part, “civil unrest” or “commotion” do not fall under this umbrella. Covered property usually includes the building; fixtures and machinery; appliances; business personal property; and glass. Cleanup and removal of debris should also be covered, as is the cost of efforts to prevent further losses, such as board-up after an event.

Many business owners will also be covered against business income losses in the event of damage serious enough to prevent their immediate return to business. Business income coverage usually requires physical damage to property at the insured’s premises. As a result, businesses that actually sustained damage—whether it be broken windows, fire, or looting—may have a valid claim, but the shopping malls and department stores that closed down and boarded up simply as a precaution probably do not.

It is worth noting that even if business income coverage is available and triggered by physical damage, it will be limited to the “period of restoration,” a somewhat subjectively defined period of time that it should take to rebuild. Given the disruption caused by many states’ stay-at-home orders and the interruption of government services (such as inspections and permitting), the time required to repair damage and get back to business may be even longer than expected or anticipated.

It is also possible that businesses impacted by curfews and other mandated closures and access restrictions could find coverage under the civil authority coverage of their policy. Civil authority coverage is designed to protect against business losses sustained when governments force business closures with curfews and restricted access to areas in which the policyholder’s business is located. This is common in the case of a natural disaster when widespread destruction makes roads impassable, for example. Given the expansive nature of these social justice demonstrations, heavy police presence, and the deployment of curfews, it is possible some policyholders may be able to claim the benefit of civil authority coverage.

Even if it applies, however, the coverage usually is significantly limited. For example, most civil authority coverage requires physical damage away from the insured’s premises that prevents access to the business. Even though many cities imposed curfews in order to limit the scale of protests, the curfews may not have been prompted by physical damage in the area, but instead employed as a means of preventing damage from occurring in the first place. On a more practical level, civil authority coverage often includes a 72-hour waiting period before business losses are covered. Given that curfews were generally short-lived where they were imposed, it may be that civil authority coverage, even if triggered, will provide little added remedy for business losses.

Both business interruption and civil authority coverage may also cover expenses attendant with suspension of business caused by a covered risk. These expenses might include emergency needs like the cost of a generator, storage facilities, plywood to cover broken windows, moving trucks, and the cost of resuming business operations at a temporary location.

Commissioners Respond

In the wake of protests, coming as they did while most states were beginning to emerge from stay-at-home orders prompted by COVID-19, several states issued bulletins urging—or perhaps mandating—that insurers view coverage generously in order to assist businesses rocked by the sudden economic havoc of the pandemic followed by disruptions and damage caused by protests and riots.

For example, the Minnesota Commerce Department, the agency that regulates insurance in the state, issued a bulletin on June 22 directly addressing the protests. In it, Commissioner Steve Kelley directed insurers to treat losses associated with the protests as a catastrophic event, including expedited claims handling and advance claims payments. The commissioner’s bulletin instructed insurers to institute a 90-day moratorium on cancellation or non-renewal of policies in the affected areas, too. Similarly, insurers were instructed to disregard whether policyholders were able to make full premium payments during the period of Minnesota’s stay-home order beginning in March.

Perhaps more significantly, Kelley urged insurers to take into account COVID-19 closures when calculating business income losses. Specifically, Kelley suggested that it would be unreasonable to base income calculations on income earned during the period of the stay-at-home order and suggested instead that insurers look to the same period from the previous year. Further, without referring to civil authority coverage specifically, the bulletin noted that local declarations of emergency had “resulted in limitations and restrictions on public access to affected areas.” The bulletin warned that “[i]nsurers should take into account the practical effect of such orders…when evaluating the applicability of exclusions.”

Insurance regulators in Illinois, New York, and Pennsylvania have issued similar bulletins. In Illinois, Insurance Commissioner Robert Muriel instructed insurers to err on the side of the policyholder when processing claims for property damage and looting, even if the insured had been unable to pay premiums during the lockdown. Illinois Governor J.B. Pritzker said he expected insurers to “do everything in their power to give their customers the resources they need to rebuild and get back on their feet as soon as possible.”

Clearly, regulators and state officials are looking to insurers to shoulder much of the load when it comes to picking up businesses already diminished by the pandemic. Whether that will be enough in this economy remains to be seen. Regardless, insurers can take heart that their role in this recovery is not taken for granted. As Muriel noted, “The department understands the importance of the insurance industry in the recovery during times of great loss, and thanks insurers in advance for handling claims in a fair and timely way.”