Lake Street in Minneapolis has long been one of the most diverse districts in the country. Diverse in all ways: types of human activity; styles and modes of living; kinds, sizes, and ownership of businesses; smells and sounds; and, not least of all, the people who live, own, shop, make their living, and otherwise meander in and through this thoroughly Midwestern corridor of, by, and for the common people.
From Scandinavian immigrants in the late 19th century, through Asian and Latin immigrants in the late 20th century, to African entrepreneurs over the past 25 years, Lake Street weaves innumerable strands of different cultures the length of its six miles. It has always welcomed investment by families with a dream, trained entrepreneurs, venture capitalists, and large corporate enterprises to serve the surrounding neighborhoods, the city, and the world.
When rage boiled over last year following the tragic loss of human life, it resulted in damage to many of these homes and businesses. A closer examination of the events on Lake Street illustrates property insurance questions arising in the aftermath of social unrest in communities across the country.
Last Memorial Day—May 25, 2020—a mile south of one of the many utilitarian intersections along Lake Street, George Floyd died in the custody of the Minneapolis Police Department after his arrest on suspicion of attempting to pass a counterfeit $20 bill.
During the ensuing reaction to this tragedy, numerous buildings in the communities along Lake Street were destroyed and damaged. For the balance of 2020 and into 2021, public fury over police and other government conduct unfolded across the rest of the nation and other parts of the world. Governments responded by declaring emergencies, setting curfews, cutting off certain streets, shutting down freeways, calling out the National Guard, and imposing restrictions on the movement of people.
The fires, graffiti, break-ins, looting, and vandalism in cities across America resulted in estimated property losses exceeding $2 billion. In the Minneapolis-St. Paul area, more than 1,500 locations reportedly suffered property damage, including more than 200 buildings set on fire, totaling more than $55 million in property losses, by some estimates.
The tragic death of Mr. Floyd and the damage and losses sustained in the following days exacerbated the devastation that had already been caused by an array of executive regulations imposed on businesses and people by governments responding to the novel coronavirus, which can cause SARS-CoV-2 (COVID-19). In the days just before that Memorial Day weekend, the people of Minnesota had been mildly heartened by the government’s recently announced intent to loosen its grip and permit a limited reopening of small, selected parts of the economy on June 1, 2020.
Many of the businesses on Lake Street were small businesses already suffering through COVID-19 restrictions. And while the larger property owners likely have the financial wherewithal to purchase or otherwise have adequate financial protection to cover their losses from civil unrest, small and medium-sized business owners may have cut corners with lower policy limits, higher deductibles, longer waiting periods, shorter periods of restoration, or more (and lower) sublimits.
A policy’s insuring agreement describes the property damage it covers. A common formulation is that the policy covers “direct physical loss of or damage to” property described in the policy, caused by a covered peril. Investigation and documentation are critical to applying insurance policy provisions to the property damaged or lost, the perils that caused the damage, and the property’s value and cost to repair or replace it.
Businesses might also seek coverage for protecting their property. For example, during the rioting around Lake Street and other parts of Minneapolis, more unrest broke out six miles away in the Midway commercial district of St. Paul. In the areas surrounding the center of that unrest, some stores boarded up their windows and shut down for a few days, losing business income without suffering any property damage. Property policies may cover the expenses of protecting property from imminent damage by a covered peril. In fact, depending on the policy language, the insured may have an affirmative duty to take such protective measures or to preserve what remains of covered property after it is damaged. These provisions may be included as “Duties in the Event of Loss” or may be found in provisions named “Preservation of Property” or “Sue and Labor.” Applicable coverage provisions generally require that such costs be incurred to stop or minimize the risk of loss that would have been covered under the policy. If the damage sought to be avoided or the peril being guarded against would not have been covered under the property policy (e.g., a design defect), then “sue and labor” coverage does not apply.
In addition, the loss sought to be avoided must be imminent, a standard requiring a thorough record of the facts, circumstances, motivations, and predicted path of the peril at issue at the time the expense was undertaken. And the expense must have been incurred for the primary benefit of the insurer as a preventive measure (and not as a repair or other corrective measure). The policy may also contain a separate deductible or a sublimit for this type of coverage.
Claims for lost business income by Minneapolis and St. Paul businesses can be considered under several coverages. Among them are business interruption, contingent business interruption, and civil authority. As a threshold matter, each requires a fortuitous loss of or damage to property caused by a peril that is covered under the policy, as well as a causal nexus between property damage and the income loss.
Business interruption. In the nights following the death of Mr. Floyd, the nation watched Minneapolis burn: a police station, a liquor store, a barbershop, an old-time diner, an auto parts store, a fast-food restaurant, affordable housing under construction. All of these concerns were in the business of making money, and the damage to their property interrupted that business.
Business interruption insurance covers lost profits caused by covered damage to property described in the policy. Under one exemplar of such coverage, the insurer
will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises described in the policy. The loss or damage must be caused by or result from a Covered Cause of Loss.
In this exemplar, “suspension” is defined as “the slowdown or cessation of your business activities.” Other insuring agreements might require a complete cessation of business, rather than simply a slowdown. Still others might require an “impairment” of business operations. “Operations” typically refers to the business activities occurring at the premises described in the policy.
On Lake Street in Minneapolis, the businesses affected by the rioting, looting, fires, and other property damage had different experiences and suffered different effects. Coverage analysis requires an understanding of the property owner’s business and the extent to which the property damage interrupted—or stopped, impaired, suspended, etc.—that business. Some businesses closed entirely. Those that closed out fear rather than because of property damage may not be able to recover lost business income. In other cases, temporary measures allowed the business to continue operating. Each applicable policy, the property damage to a particular business, and the business’s ability to operate should be examined.
Contingent business interruption. Lake Street businesses that did not sustain property damage to their own property may still have had their business operations disrupted by damage to other property, not their own, to the extent such damage affected their ability to deliver goods or services, their customers’ ability to get to their stores, or their vendors’ ability to deliver supplies to them. To the extent this property damage caused such interruptions, any resulting business loss might be recoverable under contingent business interruption coverage in a commercial property policy. This coverage is designed to compensate a business for its losses when property damage negatively affects the insured’s ability to receive goods or deliver goods.
An exemplar provision might
insure against loss resulting from damage to or destruction by causes of loss insured against, to: (a) property that wholly or partially prevents any direct or indirect supplier to you from rendering their goods or services, or (b) property that wholly or partially prevents any direct or indirect receiver of goods or services from you from accepting your goods or services, such supplier or receiver to be located within the policy territory.
Contingent business interruption provisions come in many varieties. The italicized language in the above exemplar can differ by policy. What property must be damaged—the supplier’s property? The receiver’s property? Any property along that route? Must the property damage completely prevent delivery, or does a showing of only partial prevention meet the required showing and, if so, what does that mean? Does the coverage apply only as to direct suppliers and receivers, or also as to “indirect” suppliers and receivers, and, if so, how would that showing be made? The policy language, the specific events (including their locations and times), a practical knowledge of delivery systems and routes around the city, and the law all bear on this analysis.
Civil authority. Running east, Lake Street passes through a primarily residential area before crossing a bridge over the Mississippi River and into St. Paul, where the road becomes Marshall Avenue. The Minneapolis Police Department blocked access on and off that bridge. The tens of thousands of St. Paul residents on the other side of that bridge were cut off from their favorite businesses at that end of Lake Street.
That police roadblock, just under a mile and half from the parts of Lake Street under attack, was one of dozens of government orders effected in an attempt to stop the destruction and restore order. Many businesses did not sustain any property damage during the unrest, and their supply and delivery routes were not impeded by property damage. But some of these businesses did suffer financial losses because of how government orders affected their business operations. Under certain circumstances, such losses may be recoverable under the civil authority coverage in a commercial property policy.
Civil authority coverage requires a different causal nexus with property damage: It typically applies when “a covered cause of loss causes damage to property other than property at the described premises.” A covered peril must cause the damage, and the damage must be to property not covered under the policy. This coverage typically “pays for actual loss of business income and necessary extra expense caused by action of civil authority that prohibits access to described premises,” if certain conditions are met. Usually, those conditions are that access to the area immediately surrounding damaged property is prohibited by civil authority as a result of the damage; the insured premises must be within that area where access is prohibited but not more than a specified distance from the property damage (e.g., one mile from the damaged property); the action of civil authority must be taken in response to dangerous physical conditions resulting from damage or continuation of a covered cause of loss that caused damage, or to enable civil authority to have unimpeded access to damaged property.
In addition, civil authority coverage usually has a waiting period (e.g., 72 hours) after the first action of civil authority prohibits access to the described premises, and it often has a fairly short period of loss (e.g., four consecutive weeks from when coverage begins). There may be a separate sublimit for civil authority coverage. And civil authority coverage typically does not apply to orders based on a threat or danger (e.g., curfew orders).
The text, purpose, and effect of an order of civil authority may result in coverage for one claim and no coverage for another. Those businesses near the bridge at the east end of Lake Street have some hurdles. They may be more than a mile from the property damage giving rise to the police roadblock (there are other bridges). Access to their businesses was not prohibited; rather, it was simply made more inconvenient by the roadblock. And the government order was not put in place to give unimpeded access to the damaged property.
Commercial property insurance coverage requires an analysis of the number of “occurrences” involved in the events giving rise to the claims for damage and loss. The number of occurrences affects the number of deductibles or waiting periods that will apply, as well as the number of times a separate limit of insurance will come into play.
Some policies provide that losses occurring within a certain time period (e.g., 48 hours) constitute a single occurrence. Other policies look to physical loss that arises out of a single discrete event. Another formulation may include as a single occurrence all “losses directly or indirectly attributable to a cause or series of similar causes.” In applying the policy language, the number of occurrences depends on a thorough understanding of the sequence and timing of the events, their respective locations and progressions, their different personnel and their motivations, their specific actions, and other factors.
The people of Minneapolis reacted to the death of Mr. Floyd in different ways, in different locations, at different times (and days) and on different timetables, and for different reasons. Sometimes the reactions coalesced, sometimes they diverged; sometimes they intersected before continuing in their respective directions. Businesses in Minneapolis and the surrounding areas suffered looting, fire, and other property damage in many and varied ways: same or multiple locations, on the same or different days, by the same or different actors, by related groups or members of the same group, by actors reacting to different problems or seeking different outcomes for society.
All of these facts must be examined under the policy language at issue and the law of the jurisdiction in order to determine the number of occurrences.
When the unrest and property damage began in Minneapolis, the city (and much of the country) was three months into various combinations of shutdown and stay-at-home government orders. Many businesses were already closed or only open for limited service. However, many of the restaurants in Minnesota were preparing for a limited “reopening” permitted by the government a week later, on June 1. By the time the fires and other destruction had ended, that was no longer an option for many of the businesses along Lake Street. These facts affect the measure of actual loss sustained by a restaurant as a result of the damage to its property.
A typical policy formulation, assuming coverage, calls for a determination of actual lost business income based on (a) the net income before direct physical loss or damage occurred, (b) the likely net income if no physical loss or damage occurred, and (c) operating expenses necessary to resume operations with the same quality of service that existed just before direct physical loss or damage.
A restaurant on Lake Street may have been shut down since mid-March and had no income to show before the property damage on and after May 25. And if that damage had not occurred, several factors introduced by the pandemic might be considered in trying to determine the likely income upon “reopening” on June 1. How many people would risk contracting COVID-19 to dine out at that restaurant? How would operating costs be affected by government-required equipment and procedures?
Policies also provide for a “period of interruption,” or period of restoration, to which the business interruption loss formulation applies. A common policy definition of “period of restoration” is the period of time beginning 72 hours after the time of direct physical loss or damage for business income coverage caused by or resulting from any covered cause of loss at the described premises and ending on the earlier of (1) the date when property at the described premises should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or (2) when business is resumed at a new permanent location.
Extensive analysis is necessary to figure out how long repair, rebuilding, or replacement should take. The period of interruption for a barber renting out a storefront in one part of town will be different from that of a prominent liquor store burned to the ground in the heart of Lake Street. And, if a business remains closed for other reasons after physical loss has been, or could have been, repaired—such as concerns about customer or employee safety or a drop-off in customer traffic during a period of unrest—those additional, post-repair losses may not be covered. In addition, government restrictions over the pandemic admittedly favored some businesses (and some business owners) and hurt others, each to differing degrees. These details inform the calculation of the actual loss sustained.
In addition to the policy language and the law of the jurisdiction, the issues raised and discussed in this article call for, as usual, a close examination of the facts and circumstances of each individual claim.
There is no silver lining to the loss of human life at the hands of government. Reviewing and replaying these events in the context of an insurance claim can keep them fresh in our minds as a reminder to guard our liberty and to stay alert for opportunities to better our communities.
