Insurance Coverage for Droughts, Due to Climate Change: The Case for “Loss Of Business Income” and “Loss Of Use”

Abstract

This article addresses the issue of insurance coverage for commercial enterprises as a consequence of the recent spate of droughts in the southwestern United States.2 This almost two-decade long drought results from increasing temperatures and climate change. The article posits that damage or injury to property and lost profits caused by this wave of droughts may be covered by insurance policies. It focuses on businesses—including tourist attractions such as hotels, motels, boat rental facilities, and others—that are so critical to the economies of the southwestern states. I posit that when these commercial enterprises are, or will be, affected by droughts they may be able to recover their lost income and profits via two supplementary provisions or riders3 to their routinely contracted for Commercial General Liability (“CGL”) policies. The “Loss of Business Income” rider and the “Loss of Use” rider have covered losses under other circumstances, including hurricanes, but never for drought affected harms. This article is the first to explore the use of these riders in the context of droughts. However, such coverage has not been afforded to suspended business operations that lost income due to droughts. The article also analyzes the development of insurance coverage for the riders. Throughout the article I offer hypotheticals that demonstrate how courts and claims people may interpret the riders. The article proceeds as follows: Part I introduces the framework for the article. Part II provides a brief historical description of the Southwest’s drought epidemic and defines what a drought is. Part III is a primer on the liability insurance coverage, which incorporates the two riders. Part IV discusses the impacts of Hurricane Katrina on the legal field concerning loss of business income and loss of use coverage. Finally, the article concludes with another hypothetical, and introduces a new product developed by the insurance industry that addresses business income. It closes with a discussion regarding the future of climate change and droughts.