A client suffered a business income loss due to the loss of internet and phone services from their provider. The policy form, IL 70 77 11, covers loss of these services, provided the loss of services results from a covered loss. Both the client and the carrier have asked the provider what caused the loss, but the provider never responded to either. The carrier then denied the claim because it was unable to confirm the cause of loss was covered.

Q: Who is responsible for determining the cause of loss? If the policy covers all losses unless it's excluded, is it the insured's responsibility to prove the loss is not excluded?

Response 1: A carrier that provides a “special cause of loss" policy that insures “risks of direct physical loss or damage unless excluded or limited" have the burden of proving that a loss is specifically excluded.

In contrast, when an insurance company provides a “specified causes of loss" policy, the burden falls upon the policyholder to show that a loss meets the policy's definition of specified cause.

In this case, the policy's Cause of Loss - Special Form specifically excludes “the failure of…communication services (including internet access or any electronic, cellular or satellite network)."

The service interruption coverage extension provided by IL 70 77 11 17 is specified causes of loss protection. The policy lists equipment breakdown as one, which would include a steam explosion, mechanical or electrical breakdown of boilers, or mechanical or electrical equipment breakdown.

In short, this policy places the burden on the insured to prove that the loss was caused by an incident falling within the policy's equipment breakdown definition.

Response 2: The policy covers time element loss that results from direct loss to the described property, including property owned by the service provider, as long as the cause of loss isn't excluded. The loss should be covered unless the insurance company can demonstrate that the cause was excluded. 

However, before you get to that determination, there needs to be a direct loss. This is where an attorney needs to get involved. It would seem that the initial burden is on the insured to demonstrate that there was direct loss to the provider's property, rather than it just being shut down while equipment was upgraded.

Once there's evidence of a direct loss, then the burden shifts to the insurer to either pay up or demonstrate that the cause of loss was excluded. Somebody needs to force the provider to explain why they shut down. 

If I was your client, I'd start with the low-cost solution: a phone call to the state agency that regulates public utilities and see if it can generate an answer. The next option is to hire a lawyer to force the provider to answer. 

Response 3: The policy does not cover all losses unless it's excluded. The policy covers losses from direct physical damage to covered properties unless excluded. Other considerations should also be thrown in, but my point is to focus on the direct physical damage aspect. That's the core issue in the COVID-19 business interruption claims, and most of them have been thrown out in courts immediately because there was no direct physical damage to covered property.

Something happened to stop the provider from providing services, but it remains unknown if there was any direct physical damage, or some other cause for the interruption of service. The internet and phone provider could have stopped providing services to do system upgrades. Or an employee could have thrown the wrong switch that scrambled the system but without causing direct physical damage.

In short, at this point, there is no evidence of direct physical damage, and that is a sine qua non for the claim.

Response 4: No, it is not the insured's responsibility to demonstrate that the cause of loss is covered—this is a question of fact to which they are apparently not privy.

Was the loss of internet and phone service limited to your insured's premises, or was the problem more widespread? In the latter case, it is possible that the provider reported the cause to a regulating entity, or to some other customer, or to news organizations. Those routes might be worth checking out.

Since the insurer seems to be abrogating responsibility, perhaps it's time to file a liability claim against the utility and to notify the insurance department about the issue with your carrier. Sad to say that it might be time to involve an attorney—that is, of course, assuming it can be definitively demonstrated that the loss didn't arise from some glitch that occurred internally to the insured.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

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