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Riot losses mount; pandemic complicates lost income claims

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Commercial property insurers will likely pay property damage losses resulting from the civil unrest in cities across the United States, but business interruption loss calculations will be complicated by ongoing issues with coronavirus lockdowns.

Insurers will likely base business interruption claims payments on projected income rather than past income, which will be reduced for many policyholders due to business closures related to COVID-19, experts say.

Data analytics firm Verisk Analytics Inc.’s unit Property Claim Services Inc. over the weekend declared property damage from riots in the Minneapolis area a catastrophe, meaning that insurers will pay out at least $25 million in losses.

This is the first riot and civil disorder event designated by PCS since the Baltimore riots of 2015.

Sunday marked the sixth day of protests after the May 25 death in police custody of George Floyd in Minneapolis. Graphic video footage of Mr. Floyd, an African American man, being pinned to the ground by police sparked widespread outrage.

Some of the protests have turned violent, with retail stores looted in several major metro areas including New York, Los Angeles, Chicago, Philadelphia and Boston, as well as Minneapolis. Smaller metro areas, such as Charlotte, Cleveland and Indianapolis also saw civil unrest. Nearly 40 cities have imposed curfews and at least 21 states called in the National Guard.

The damage adds to the mounting costs faced by businesses in the wake of government lockdowns and travel restrictions due to COVID-19.

Property damage to businesses arising from riots, civil commotion and vandalism as well as fire, is covered under most commercial property policies and business owners policies, according to the Insurance Information Institute in New York.

“There is absolutely coverage… for civil unrest, both the physical damage impact and possibly injury claims or premises liability claims,” said Kenneth Tolson, U.S. president of claims solutions at Atlanta-based Crawford & Co.

“There will be coverage for some portion of these, depending on each individual policy type and the degree to which the business insured it,” he said.

Business interruption coverage will also kick in if a business had purchased a policy and if there’s a coverage trigger and a covered loss, Mr. Tolson said.

However, because businesses in many cities and states across the U.S. are in various stages of reopening after government-ordered pandemic lockdowns, “there will be some complexity because of COVID-19 around at what point is the business interruption from a civil unrest situation or still tied to COVID-19,” he said.

Insurers will base business interruption claims calculations on what revenue a business would have seen had there not been any civil unrest, said Kevin Grudzien, managing director at Pyxis Group LLC, a Chicago-based forensic accounting and consulting firm.

“The projections and calculations are going to take into account the already depressed impact of the coronavirus,” he said.

Some of the businesses may already have started to reopen but their claims payment will be based on projected income amid the pandemic rather than a simple comparison with the equivalent weeks and months in 2019, Mr. Grudzien said.

Insurers use similar calculations when assessing claims for businesses closed by multiple storms in one year, he said.

Grocery stores, which have continued trading through the lockdowns and in some cases may have seen increased revenue, will not see claims estimates reduced, Mr. Grudzien said.

The “fact patterns” surrounding individual businesses affected by both COVID-19 shutdowns and rioting will dictate how business interruption coverage plays out, said Mike Rouse, New York-based U.S. property practice leader for Marsh LLC.

The overlay of COVID-19 with recent events is definitely going to “complicate” some of the business interruption claims due to the idle periods, he said.

“If a location has been closed for the past number of weeks because of COVID-19 that could be a concern with what the potential business interruption exposure is,” Mr. Rouse said.

Many businesses are in different states of opening throughout the country and policies differ, so businesses should check with their insurer how their business income coverage works, a spokeswoman for III said.

Business interruption, or business income, insurance typically includes civil authority coverage, which covers loss of income due to access to a business premises being prohibited by civil authority, according to the III, however, access must be prohibited due to damage by a covered peril to property not located at the policyholder’s premises.

In general, personal and commercial property insurance policies, including auto physical damage, will cover damage caused by recent riots, Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore, said in a Monday note.

The cumulative impact of pandemic-related underwriting losses, weather losses year-to-date and potentially above-average hurricane losses could turn 2020 into a capital event for some insurers and reinsurers, Mr. Shields said.

While it’s too early to estimate damages from the civil unrest, the insured loss is “not going to be insignificant,” and the duration of the rioting will impact the final cost, Mr. Tolson said.

“As we monitor for insured losses outside Minnesota, the event shows potential to become the first PCS riot and civil disorder event to include more than one state,” said Tom Johansmeyer, head of PCS.

Historically, riot catastrophes in the U.S. have had relatively low insured losses, PCS said.

Louise Esola and Gavin Souter contributed to this report.