Can the Federal Government Shut Down Cause a Business Interruption Loss? The Answer Is: Maybe!

10/16/2013 - By Zachary Farrington

By now, we all know that parts of the federal government officially shut down at 12:01am on Tuesday, October 1, 2013 after Congress failed to come to an agreement to fully fund normal operations. As a result, essential functions are operating but certain areas such as national parks and non-essential services are completely closed. We are now entering the third week of the shutdown and while we hear about closed national parks and monuments the budget impasse is expected to continue till the debt ceiling limit is reached on October 17. This is not just an inconvenience to you and your family if traveling but it may also have an impact on your business or the vendor handling your travel.

The impact of the shutdown is being felt not only by federal employees but also those businesses that rely upon the government. This is an unintended consequence of the federal government shut down. Government contractors as well as businesses that serve government employees, such as restaurants adjacent to large federal offices, may be affected. The shutdown may also result in significant financial losses to tour companies and hotels catering to national park visitors. As financial losses mount, policyholders may have a loss covered under the business interruption (BI) section of their policies. Generally, many of these claims are denied and claimed to be filed without merit. This is because BI coverage is normally triggered by property damage to the policyholder's own property that causes impairment to a business operation and that is unlikely to be applicable here. Typically, that party must suffer a physical loss that would be covered if it happened to your business.

For example, if an earthquake incapacitates a company's key supplier, contingent BI may kick in if the company in question itself has earthquake coverage. However, policyholders who operate the types of businesses directly affected by a government shutdown may have purchased contingent BI coverage riders in their policies that provide coverage without requiring physical damage to property. Many businesses that may be affected by the shutdown may have provisions or riders in their policies that protect them in the event of a government shutdown. Coverage such as Contingent Business Interruption Riders, Political Risk Insurance, D&O coverage and Employment Practice Liability Insurance (EPLI) may be included in an insured’s basic policy. Depending on policy language, policyholders may also bring claims under “civil authority” provisions, which offer coverage for BI losses where governmental action has limited access to the insured premises.

While the government is not shutting down operations because of a physical loss but because of a political stand-off, an occurrence not covered by most business income provisions may be covered if your policy has the required language or riders. So it is worth checking your coverage, as policies vary widely. So, how can this impact your business? Well it depends on the nature of your company. Examples:

Take a business in the defense contracting business that was planning on spending a significant amount of money for a project whose only potential client is the government. As a result of the government shutdown, the project gets delayed or, even worse, shuts down altogether. The insured can possibly have a covered claim for the loss period impacted by the government shutdown.
Take a business that does not directly contract with the government such as a tour company, hotel or other travel-related business that relies on national parks or landmarks being open to service its clientele. A government shutdown resulting in the closing of a national park or landmark resulting in cancellations could have an impact on the business income stream.

Only a review of your policy will let you know if you have coverage for lost income as a result of the government shutdown. For more information, please contact us at (800) 477-7458. © 2013 EisnerAmper LLP