The Boston Marathon Bombing One Year Later:  Insurance Coverage for Business Raises Concerns

Cowen_Jon Sattler_Rosannaby Jon C. Cowen and Rosanna Sattler

Viewpoint

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.


Aftermath: The Legal Community’s Response to the Boston Marathon Bombings

by Robert A. Whitney*

Viewpoint

*Please note that the opinions expressed in this Viewpoint are solely those of the author and do not necessarily reflect or represent the position of the Massachusetts Division of Insurance.

Whitney_RobertOn Patriots’ Day, Monday, April 15, 2013, the 117th annual Boston Marathon began in much the same way as the previous 116 Boston Marathons had begun, with runners crowding the starting line in Hopkinton awaiting the gun, and thousands of spectators lining the race course to see the racers go by.  At the finish line, crowds had gathered to await the winning runners and cheer on the thousands of non-professionals who completed the 26.2 miles from Hopkinton to Boston.

I was one of those people, standing on the right side of Boylston Street facing the finish line, watching for a friend.  As my friend ran past me toward the finish line, I cheered and then left the area, heading back to my office at the Division of Insurance.  About 20 minutes later, at 2:49 pm, the first of two bombs exploded outside Marathon Sports on Boylston Street.  A second blast came 13 seconds later, just before the finish line near Copley Square.

The explosions killed three spectators and injured over two hundred and fifty others.  The area around the two explosions—nearly a mile long and three blocks across—was immediately closed off.  The Copley Square area did not reopen until April 24, 2013, more than a week after the Boston Marathon bombings.

The Boston legal community immediately stepped up to help the victims and their families.  For example, as noted in the Boston Business Journal, the Boston Bar Association (“BBA”) was among the first to provide assistance by recruiting volunteer attorneys.  Within ten days of the bombings, some 125 attorneys, five law firms and law students had already signed up to help individuals and small businesses.  The Massachusetts Bar Association (“MBA”) also reached out to its membership, asking them to provide free services to affected persons and property owners, including helping victims of the bombings with applications to the “One Fund Boston,” a compensation fund that raised more than $60 million for the victims and their families.

The MBA proposed that victims be permitted to submit personal statements about their injuries and the effect that the bombings have had on their lives, in addition to merely submitting just medical records.  BBA volunteer attorneys also helped marathon bombing victims fill out One Fund Boston claims.  In total, the volunteer attorneys helped 14 victims complete One Fund Boston claims, including making three home visits to meet with those who are unable to leave home because they were still recovering from physical injuries.

Many local businesses also faced an immediate, major issue after the bombing: whether the damage from the explosions themselves and from the resulting lost revenue, would be covered by their respective insurance policies.  The issue turned in part on an important matter of insurance law, namely, whether the bombings at the Boston Marathon could be viewed as an “act of terror.”  To much of the general public, there was little doubt that the Boston Marathon bombings were an “act of terror;” even President Barack Obama, in statement on April 16, 2013, said that, although the perpetrators were still unknown, the bombing was an “act of terror,” and that “[a]ny time bombs are used to target innocent civilians, it is an act of terror.”

But from an insurance perspective, the situation was less clear.  After the terrorist attacks on “9/11” in 2001, the insurance industry began to write exclusions into business insurance policies, that would preclude coverage relating to business interruption and lost income resulting from “acts of terror.”  Many of the insurance policies held by businesses affected by the Boston Marathon bombings contained these so-called “terrorism exclusions.”  Of course, determining exactly what is considered to be a “terrorist act” for insurance exclusion purposes is not clear cut.  If the Boston Marathon bombings were to be considered “acts of terror,” that potentially would trigger the exclusions contained in local businesses policies, then there might be no coverage available to those businesses for any physical damage and loss income resulting from the explosions.

The Boston legal community responded to these insurance-related issues by offering pro bono legal services to local, affected businesses to help them determine whether they could make insurance claims for losses including business interruption, property damage and relocation expenses, despite any “terrorism exclusions.”  As reported in the Boston Globe, one priority for the BBA’s volunteer lawyers was to make sure that business owners were able to file their claims with their insurance carriers in a timely fashion, and to make the best arguments in favor of finding insurance coverage available for any damage.

In the immediate aftermath of the bombings, the Massachusetts Division of Insurance (“Division”) issued a bulletin detailing appropriate procedures for insurers to use in reviewing claims made as a result of the bombings.  The Division was concerned that all insurers “promptly investigate all claims for all lines of coverage including, without limitation, business interruption insurance, home insurance, property insurance and health insurance.”  The Division also sought to make sure that any insurer’s investigation of any claimed loss was done strictly on a “claim-by-claim basis.”

In the weeks and months following the Boston Marathon bombings, insurers paid the vast majority of the insurance claims made with respect to damages from the explosions, and the Division is unaware of any claims for damages being denied by any carrier because of any “terrorism exclusion.”  Insurers may have had difficulty determining exactly what constituted “terrorism” for purposes of excluding insurance coverage, particularly where the definition of “act of terror” might be different in each affected insurance policy, and where the burden would be on the insurer to affirmatively demonstrate the applicability of each policy’s exclusion.

The volunteer work of the MBA, BBA, law firms, individual attorneys and law students in the aftermath of the bombings enabled victims to make claims for compensation for their injuries that they otherwise may not have been able to make.  Moreover, affected businesses were likely back up and running faster due to the assistance of the volunteers.

There can be no doubt that the immediate and strong pro bono efforts of these lawyers and law students during this terrible time made a bad situation much better for many individuals and businesses that suffered from the effects of the Boston Marathon bombings.

Robert A. Whitney is currently the Deputy Commissioner and General Counsel of the Massachusetts Division of Insurance, a position to which he was appointed in 2011.  Previously in private practice for over 20 years, he has frequently written and spoken on insurance and reinsurance topics.