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On June 8, 2020, the Illinois Department of Insurance (IDOI) issued Company Bulletin 2020-15 (CB 2020-15): “Coverage Related to Business and Property Damage Losses, Including but not Limited to Those Arising Out of Vandalism and Looting” directed to all insurance companies issuing and/or delivering property and casualty policies in the state of Illinois.  The Bulletin outlines claims handling best practices for carriers in light of Governor J.B. Pritzker’s early June 2020 disaster proclamations regarding incidents of looting, vandalism, and property damage. The Bulletin “requests” that all insurers licensed or authorized to transact insurance business in Illinois implement the following five “protective measures” as part of their claims handling.

  1. Insurers should apply “claims best practices” consistent with those events categorized as a “catastrophic event,” including expedited claims handling, advance claim payments, and fair treatment of all policyholders.

Many commercial policies contain exclusions that address insurrection, rebellion, revolution, civil unrest, and political unrest. These exclusions usually also preclude coverage for actions taken by the government in response to these scenarios. For example, where a business sustains property damage, lost inventory, or closes and sustains lost income because of looting, the coverage issue becomes whether such acts fall within one or more civil unrest exclusions. The dearth of authority interpreting these exclusions will make applying them to our current, unprecedented circumstances difficult for insurers, insureds, and the courts.

The Bulletin, however, provides claims handling guidance. As an initial step, carriers are encouraged to handle current civil unrest claims as they would any “catastrophic event,” and employ expedited claims handling, advance claim payments, and fair treatment of all policyholders. The categorization of these claims by the Department as a catastrophic event likely aids an insured’s ability to argue that its loss, even if occurring over a prolonged period, constitutes a single occurrence for purposes of meeting its deductible.

2) Insurers should implement a moratorium on the cancellation or non-renewal of impacted policy holders for a period of 60 days from the date of the Bulletin.

Some insurance policies expressly prohibit an insurer from cancelling or refusing to renew a policy due to losses caused by a catastrophic event. However, where such policies are silent, the Bulletin requests that carriers implement a 60-day moratorium on the cancellation or non-renewal of impacted policies, which extends to August 7, 2020.

3)  When paying claims which are the result of riots, civil commotion, or vandalism, carriers should err on the side of policyholders who were unable to make full premium payments during the period following the Governor’s Executive Order 2020-10, dated March 20, 2020.

Here, the Bulletin urges carriers to consider the continuing effects of the COVID-19 pandemic on business operations when paying claims. Due to temporary business closures many companies have not been able to pay their full insurance premiums, instead offering partial payments in line with their decreased revenues. In this regard, the Bulletin encourages insurers who are paying claims to err on the side of the policyholder, even where the policyholder could not make full policy payments. Along these lines, insurers are encouraged to waive provisions requiring policyholders to bring premium payments up to date prior to processing claims.

4) To the extent business interruption policy provisions are triggered, carriers should base their payouts on business activity levels that eliminate the impact of COVID-19.

Business income generally refers to the net income that would have been earned but for the claimed loss or damage. However, in light of the economic downturn caused by the ongoing pandemic and government responses thereto, the calculation of lost business income due to civil unrest, alone, is more difficult.  In this regard, the Bulletin urges carriers to eliminate the economic effects of the pandemic from the calculation for business interruption caused by civil unrest.

This presents a challenge to insurers in determining the amount of lost business income related solely to civil unrest. In businesses with long-established track records and financial documents, prior years’ net incomes will be instructive in this evaluation, coupled with market trends and indicators reflecting consumer confidence and spending prior to the onset of the COVID-19 pandemic. However, businesses with highly unpredictable net incomes and newly opened businesses without established financial records will be more difficult to evaluate.

5) When considering a policy defense based upon an exclusion, the carrier should err on the side of the policyholder.

The current global situation may implicate rarely used policy exclusions, including those related to vacancy, terrorism, and military action. The Bulletin encourages insurers to carefully consider invoking these exclusions and err on the side of the policyholder when considering their use. Government shutdowns may especially affect the vacancy exclusion found in many policies, for businesses who have been completely closed during the pandemic. Oftentimes vacancy exclusions establish that if loss or damage occurs to a building that has been vacant for more than a prescribed period, certain damages including vandalism, theft, and glass breakage are not covered. The Bulletin requests that insurers err on the side of the policyholder when invoking this potential coverage defense.

Many current policies also contain exclusions for loss or damage resulting directly or indirectly from terrorism. Application of the terrorism exclusion depends largely on the policy’s definitions. Policies may define terrorism as use or threat of force or violence when it appears that the intent is to intimidate or coerce a government or to express opposition to a philosophy or ideology.  Further, most terrorism exclusions impose a quantitative $25M threshold for triggering the exclusion. The threshold applies to the aggregate of damage incurred by all insured property damage, under all policies written by all insurers, for all insureds. Thus, the exclusion is designed to be applicable only when the terrorist act causes catastrophic injury or damage.  Aggregating property damage from recent events almost assuredly meets and exceeds the minimum property damage threshold.  Nevertheless, the Department urges carriers to err on the side of the policyholder when considering potentially applicable exclusions.

While the Department’s Bulletin provides important claims handling guidance for the near term, the application of the principles outlined therein to real-life losses will raise legitimate coverage questions for both the carrier and the insured. If you are presently faced with an insurance coverage question arising out of these recent, unprecedented events, please contact Johnson & Bell attorneys Glenn F. Fencl, Peter R. Ryndak, Martha E. Drouet or the Johnson & Bell attorney with whom you regularly work.