One year after the Boston Marathon bombing, most retailers, hotels, and restaurants in the Back Bay have returned to normal business operations. Many businesses have filed claims with their insurers for business interruption losses. Not all businesses, however, have been made whole, despite having insurance policies in place that were intended to provide such coverage. According to data supplied by the Massachusetts Division of Insurance, 133 businesses made claims for business interruption losses. Only half of them (64) received insurance payments. What can be learned from their experiences and what, if anything, can business owners do to enhance insurance protection in the event of another catastrophic event?
As a participant in the Boston Bar Association’s Marathon Assistance Project, our firm, Posternak Blankstein & Lund LLP, volunteered to assist a number of Back Bay businesses impacted by the Boston Marathon bombing on a pro bono basis, in pursuing insurance claims. One of our clients is a small retail store on Newbury Street that had been open for less than a year, and which was relying on the Boston Marathon to kick off a busy tourist season. Instead, it suffered a large drop in sales after the bombing. Another client is a music recording and production studio which suffered losses from the bombing and resulting shut-down of the Back Bay. In our experience, notwithstanding public sympathy and the urging of state and local officials to act expeditiously in resolving Boston Marathon bombing-related claims, many insurers have strictly interpreted policy provisions and they have sought to aggressively enforce policy exclusions and limitations, delaying or denying insurance payments.
The Boston Marathon bombing was the first terrorist attack to occur on U.S. soil since the events of September 11, 2001. As such, it provided the first opportunity for insurers and policyholders to test the application of exclusions and affirmative coverage for terrorist events created under the Terrorism Risk Insurance Act of 2002 (TRIA). At first, many feared that terrorism exclusions – by which insurance recovery is limited or excluded for losses resulting from terrorist acts – would prevent business owners from obtaining any recovery. That fear was misplaced, however. It is now clear that terrorism exclusions had little, if any, impact on insurance recovery for businesses affected by the Marathon bombing.
The terrorism exclusion is triggered only when certain conditions are met. First, the Secretary of the Treasury, with the concurrence of the Secretary of State and the Attorney General, must certify that the event constitutes an act of terrorism under TRIA. Second, the act must result in an aggregate loss of more than $5 million. Third, the act must be a danger to human life, property or infrastructure and must be intended to coerce the civilian population or influence the policy or conduct of the federal government.
No certification has been made by the President’s cabinet that the Boston Marathon bombing constituted an act of terrorism – and it is questionable whether any such declaration will be made. But even if it were, and even if aggregate losses exceeded the monetary threshold, no clear mechanism exists for establishing whether or not the Marathon bombers intended to coerce the civilian population or influence U.S. foreign policy under the third prong of the TRIA test. Insurers who might avoid making payments by enforcing the exclusion have, perhaps wisely, decided not to press the issue; they would have the burden of proof to establish that the exclusion applies. It appears that no property or business interruption claims were denied on the basis of the terrorism exclusion.
Although the terrorism exclusion has been largely a non-issue for businesses impacted by the Boston Marathon bombing, insurers have been cautious in making payments under another form of insurance known as the Civil Authority coverage. In an event like the Marathon bombing, this type of insurance coverage has much broader application than standard business interruption insurance because it is triggered whether or not there is physical damage at the insured’s business premises. The Civil Authority coverage allows recovery of lost business income and expenses so long as the business was forcibly shut down as a result of the actions of state or local authorities. The Civil Authority coverage came into play here because a six block area surrounding the Marathon finish line was closed to the public for 10 days while the Boston police and federal law enforcement authorities conducted their investigation.
The Civil Authority coverage has been implicated in past natural disasters and, unlike the terrorism exclusion, there is at least some limited precedent for the handling of such claims. But for Boston Marathon-related claims, insurers have been inconsistent in making payments under this form of coverage. In one case we handled, the carrier denied coverage entirely. In another, the insurer paid for lost business income but refused to reimburse our client for extra expenses that also fall within the scope of coverage. These differences cannot be explained by where the businesses are located – in both cases, the storefronts are on Newbury Street, outside of the area cordoned off for the crime scene investigation. Slight differences in the policy language could be the explanation. For the business that was denied Civil Authority coverage, the policy required that access be prohibited to the area “immediately surrounding the damaged property.” For the client that received payment of a portion of its lost business income, the policy required only that the loss be caused “by action of civil authority.” However, that insurer has refused to pay for lost and spoiled inventory, denying that it constituted a “necessary Extra Expense” under the Civil Authority coverage.
The events of a year ago have raised awareness about the need for businesses to carefully assess their risks and to examine the scope of coverage provided by their insurance policies. For business interruption losses, coverage may vary widely depending on the insurer, the policy terms and applicable law. Policies differ both in terms of how coverage is triggered, and how losses are measured in the event of a loss. While some policies require a complete suspension of operations, others will allow recovery based on a material decline in business income between pre- and post-event levels.
The lesson learned is that when purchasing insurance policies, businesses must ensure that they have maximum protection in the event of a catastrophe. At minimum, this should include affirmative terrorism coverage, as well as business interruption, extra expense and civil authority coverage.
Rosanna Sattler is the Co-chair of and Jon C. Cowen is a partner in the Litigation Department of Posternak Blankstein & Lund LLP. Both regularly represent clients in complex first-party and third-party insurance coverage disputes.