Where Did the Term “Physical” Come From In Business Income Form Policies?

The litigation over lost income to businesses caused by Covid-19 has been raging for three years. A recent law review article1 provides a good summary of this litigation and arguments for coverage from the policyholder view.

One important portion of the article was when the term “physical” was placed into the business income portion of ISO policies:

Until the mid-1980s, most policies employed a standard-form trigger for Business Income that required ‘damage’ or ‘destruction’ of property. The term ‘loss’ was used only in reference to the amount owed by the insurance company. In the mid-1980s, however, the Insurance Services Office (‘ISO’), the primary drafting organization for property insurers, changed the trigger on its standard-form policies to ‘direct physical loss of or damage to’ property. ISO made this change to make clear that standard-form property insurance policy did not require tangible ‘damage or destruction’ of property, and instead extended coverage to things like ‘theft’ where a physical force interfered with a right of possession or use. This change was consistent with the case law in the United States, which had already construed ‘physical loss’ this way under non-ISO forms.

All insurance coverage cases start with policy wording. Knowing the history of why that wording was placed into policies can help with the understanding of insurance coverage.

Thought For The Day

History never looks like history when you are living through it.
—John W. Gardner
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1 Charles M. Miller, Richard P. Lewis and Chris Kozak. COVID-19 and Business-Income Insurance: The History of “Physical Loss” and What Insurers Intended It to Mean. 57 Tort, Trial & Ins. Prac. L.J. ___ (forthcoming 2022).