The Government Shutdown: Can “Contingent Business Interruption” or “Civil Authority” Coverage Mitigate Business Losses?

10/10/2013

Whether you call it a “shutdown” or a “slowdown,” the lack of a fully-funded federal government is impacting more than the 800,000 federal workers furloughed since October 1.1 According to economic consulting firm, IHS Global Insight, the federal budget debacle will cost $1.6 billion per week in lost gross domestic product.2 Government contractors and other businesses, in industries from defense, health care, construction and hospitality, may face significant financial losses and even layoffs if the federal funding freeze continues.3

For those contractors and other businesses whose operations have been slowed or stopped by the “shutdown,” “contingent business interruption” insurance coverage may provide some recourse or relief. Contingent business interruption (“CBI”) coverage is often a part of commercial property insurance policies and is intended to insure the losses sustained by a business when a significant customer’s or supplier’s operations are interrupted by covered loss or damage.4

While direct physical “damage” is often the trigger for commercial property coverage, including CBI coverage, physical “loss”, such as the loss of functionality caused by the lack of government appropriations, may be sufficient to invoke CBI coverage for businesses dependent on the federal government for their operations. Depending on the terms of the applicable policy, a business, for example, that is required to suspend or reduce operations because its customer, the federal government, has sustained a physical loss from the “shutdown” may be entitled to coverage for the resulting losses.

Alternatively, in some cases, “civil authority” coverage—also found in many commercial property policies—may be appropriate. Subject to variations in policy terms, such coverage generally extends to losses sustained by an insured when, as a direct result of an insured peril, access to real or personal property is prohibited by order of civil or military authority. Since the “shutdown”, various government facilities, including national parks and other agencies, have been ordered closed until funding is restored.5 To the extent that civil orders to close government facilities have caused direct losses to insureds, such losses may be compensable under the “civil authority” coverage commonly found in commercial property insurance policies.

Given the significant financial impact for federal contractors and other business operators, companies whose operations have slowed or ceased since October 1 from the “shutdown” should carefully examine their commercial property policies or other potentially applicable insurance contracts to determine if coverage is available and a claim is appropriate. As with any insurance matter, it is important to provide prompt and adequate notice of a claim. Particularly for business interruption claims, a satisfactory proof of loss is typically also required in addition to notice of the “occurrence” resulting in the insured’s loss.

If you have any questions about “contingent business interruption”, “civil authority” or other insurance coverage issues relating to the government shutdown, please contact one of the Haynes and Boone Insurance Coverage Practice Group partners listed below.

Ernest Martin, Jr.
214.651.5641
ernest.martin@haynesboone.com

 Micah E. Skidmore
214.651.5654
micah.skidmore@haynesboone.com

 

Werner A. Powers
214.651.5581
werner.powers@haynesboone.com

 David Taubenfeld
214.651.5531
david.taubenfeld@haynesboone.com

 

Leslie C. Thorne
512.867.8445
leslie.thorne@haynesboone.com

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1See Jim Snyder & Jeanna Smialek, Furloughed U.S. Federal Workers Await Half-Sized Paycheck, Bloomberg.com (Oct. 7, 20013), available at http://www.bloomberg.com/news/2013-10-08/furloughed-u-s-federal-workers-await-half-sized-paycheck.html.
2 Steve James, Money for nothing: Government shutdown costs $12.5 million per hour, nbcnews.com (Oct. 1, 2013), available at http://www.nbcnews.com/business/money-nothing-government-shutdown-costs-12-5-million-hour-8C11308802.
3Josh Hicks, Contractors find little relief from government shutdown impacts, The Washington Post (Oct. 8, 2013), available at http://www.washingtonpost.com/politics/federal_government/federal-contractors-find-little-relief-from-the-effects-of-the-government-shutdown/2013/10/08/b7e3da0e-303e-11e3-9ccc-2252bdb14df5_story.html.
4See, e.g., Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 162 (2d Cir. 2005) (addressing a policy insuring actual losses sustained “due to the necessary interruption of business as the result of direct physical loss or damage of the type insured against to properties not operated by the Insured which wholly or partially prevents any direct supplier of goods and/or services to the Insured from rendering their goods and/or services, or property that wholly or partially prevents any direct receiver of goods and/or services from the Insured from accepting the Insured's goods and/or services.”)
5See Alan Farnam, Shutdown Rebels Defying Federal Orders to Close, abcnews.com (Oct. 8, 2013), available at http://abcnews.go.com/Business/shutdown-rebels-defying-federal-orders-close/story?id=20496154.

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