Demand letters for denied property damage, business interruption, and civil authority claims
How Commercial Property Policies Handle Physical Loss, BI, and Civil Authority
Commercial property insurance protects businesses from losses due to property damage and resulting business interruption. Understanding your policy's coverage structure is critical to fighting wrongful denials.
Coverage Module Matrix
Coverage
What It Covers
Typical Triggers
Common Disputes
Property Damage (Building)
Direct physical loss or damage to covered buildings
Fire, wind, hail, vandalism, water (non-flood), theft
Valuation disputes (ACV vs RCV); inadequate inventory documentation
Business Income (BI)
Lost net income + continuing expenses during suspension of operations
Necessary suspension due to direct physical loss to covered property
"Suspension" vs partial operations; period of restoration; saved expenses offset; causation
Extra Expense
Costs to minimize suspension or continue operations
Expenses incurred to avoid/minimize BI loss
What qualifies as "extra"; reasonableness; mitigation duty
Civil Authority
BI loss when government prohibits access to premises
Government order + damage to nearby property
Was there qualifying "damage"? proximity requirements; causation; duration limits (often 4 weeks)
Contingent Business Income
Loss from damage to supplier or customer premises
Damage at dependent property prevents you from operating
Proving causation; coverage often requires endorsement
Direct Physical Loss or Damage Standard
Most commercial property policies cover "direct physical loss of or damage to" covered property. This phrase is the battleground for most disputes, particularly COVID-era business interruption claims.
Majority View (Federal Courts): "Direct physical loss or damage" requires some tangible alteration or physical change to the property. Purely economic losses (e.g., inability to use property due to government shutdown order without structural damage) generally do NOT qualify.
Minority View (Some State Courts): "Loss" can include loss of use or functionality even without visible physical alteration, especially where property is rendered uninhabitable or unusable.
Key 9th Circuit Case:Mudpie, Inc. v. Travelers Casualty Ins. Co. (2021) held that COVID-19 shutdown orders without physical alteration to property did not constitute "direct physical loss or damage."
North Carolina Exception (2024): North Carolina Supreme Court held certain policy language could cover COVID-related losses as "direct physical loss" under specific policy wording—defying the national trend.
Key Exclusions to Watch
Virus exclusion: Introduced post-SARS; excludes loss caused by virus or bacteria (heavily litigated in COVID cases)
Pollution exclusion: May bar smoke, chemical, or mold damage claims depending on wording
Ordinance or Law exclusion: Limits coverage for code-upgrade costs unless you have endorsement
Wear and Tear / Deterioration: Pre-existing or gradual damage not covered
Faulty Workmanship: Poor construction or repairs excluded, though resulting damage may be covered
Anti-Concurrent Causation (ACC) clause: If a covered peril and excluded peril both cause loss, exclusion wins (controversial; some states limit ACC clauses)
Suit Limitations & Appraisal
Like homeowners policies, many commercial policies include:
Suit-limitation clause: Must file lawsuit within 12 months (or 24 months for fire policies under CA Ins. Code § 2071) from date of loss
Appraisal clause: Either party can demand binding appraisal to resolve valuation disputes (not coverage disputes)
Appraisal Pitfall: Appraisal only resolves HOW MUCH is owed, not WHETHER coverage exists. Don't agree to appraisal if the insurer is denying coverage entirely—you need a court to resolve coverage interpretation.
Top Reasons Insurers Deny or Minimize Business Property Claims
Property Damage Denials
"Cosmetic only" damage: Insurer claims visible damage (e.g., smoke staining, minor water marks) is cosmetic and doesn't constitute covered loss
Pre-existing conditions: Alleging damage existed before covered event
Exclusion invoked: Claiming damage falls under wear-and-tear, pollution, or other exclusion
Maintenance issue: Asserting damage resulted from deferred maintenance, not a sudden covered peril
"You continued partial operations, so no suspension"
Policy covers "necessary suspension"—even partial is covered if some operations must stop due to damage; cite policy definition
No direct physical loss
"Property is physically intact; economic loss alone isn't covered"
Show tangible damage (smoke residue, water infiltration, HVAC contamination); cite broad "loss" definition; argue property was rendered unusable/uninhabitable
Period of restoration too short
"You could have reopened sooner"
Provide contractor timelines, permit delays, code-upgrade requirements; show insurer's timeline is unrealistic
Saved expenses offset claim
"Your expenses decreased, reducing net income loss"
Distinguish continuing vs discontinued expenses; show contractual obligations (rent, salaries) that didn't stop; calculate net income accurately
"Trending" disputes
"Your revenue was already declining before loss"
Provide historical financials showing growth or stability; explain seasonal variations; refute insurer's assumptions about business trajectory
Civil Authority Denials
Civil Authority coverage requires:
A government order prohibiting access to your premises
Damage to property near your premises (not necessarily your property)
The order was issued because of the damage
Common denial reasons:
"No damage to nearby property": Insurer claims government order wasn't triggered by physical damage (COVID civil authority denials)
"Order doesn't prohibit access": Reduced capacity or restrictions don't qualify as "prohibition"
"Damage not within X blocks": Some policies require damage within specific distance
"Coverage limited to 4 weeks": Policy caps civil authority BI at short duration
COVID Civil Authority Claims: Most courts held COVID shutdown orders did NOT trigger civil authority coverage because there was no "direct physical loss or damage" to nearby property. Virus presence alone (without structural damage) was deemed insufficient under most policy language. However, minority jurisdictions and specific policy wordings have allowed some claims.
Business Interruption 101: Calculating Loss, Period of Restoration, and Extra Expense
How Business Income Coverage Works
Business income coverage pays for:
"The net income (net profit or loss before income taxes) that would have been earned or incurred AND continuing normal operating expenses, including payroll, during the period of restoration."
Formula:
Business Income Loss = (Projected Revenue - Projected Variable Costs) + Continuing Fixed Expenses - Actual Revenue During Period of Restoration
Key Concepts
Period of Restoration
The period during which you're entitled to BI payments. It begins when the direct physical loss occurs and ends when:
The property should be repaired or replaced with reasonable speed and similar quality, AND
You're able to resume operations at the same level as before the loss
The period does NOT end just because you reopen—it ends when you're fully operational again.
Insurer Tactic: Insurers often try to artificially shorten the period of restoration by claiming you could have reopened sooner. Counter with contractor estimates, permit timelines, supply chain delays, and code-upgrade requirements. The standard is "reasonable speed," not the absolute fastest possible.
Continuing vs Discontinued Expenses
You can recover continuing expenses even if no revenue is coming in. Examples:
Continuing Expenses (Covered)
Discontinued Expenses (Not Covered)
Rent / mortgage payments
Utilities if building is vacant and shut off
Payroll for retained employees
Payroll for laid-off employees
Insurance premiums
Inventory purchases (not made during closure)
Loan payments, leases
Marketing costs reduced during closure
Property taxes
Variable costs tied to production (which stopped)
Extra Expense
Extra Expense coverage pays for reasonable costs incurred to:
Avoid or minimize the suspension of operations
Continue operations during the period of restoration
Examples of extra expenses:
Renting temporary space while your building is repaired
Overtime wages to speed up repairs
Expedited shipping for replacement equipment
Temporary relocation of inventory
Advertising to notify customers of temporary location
Mitigation Duty: You have a duty to mitigate (minimize) losses. Reasonable extra expenses incurred to reduce BI loss are covered and won't be second-guessed if they were reasonable under the circumstances.
Proving BI Loss: Financial Documentation
To support a BI claim, provide:
Historical financials: Profit & loss statements for prior 12-24 months showing revenue, expenses, net income
Projections: What revenue you would have earned absent the loss (use historical trends, seasonal adjustments, growth trajectory)
Continuing expense proof: Invoices, statements, cancelled checks showing expenses continued during closure
Actual revenue during period: If you partially reopened, document reduced revenue
Contractor timelines: Estimates and actual repair timelines to justify period of restoration
Industry benchmarks: If insurer disputes your projections, show industry data supporting growth assumptions
COVID-Era and Catastrophe-Era Decisions: Where Courts Are Landing Now
COVID Business Interruption Litigation: Overview
The COVID-19 pandemic triggered thousands of lawsuits by businesses seeking BI coverage for government-mandated shutdowns and capacity restrictions. Insurers denied nearly all claims, asserting:
No "direct physical loss or damage" (virus presence without structural damage doesn't qualify)
Virus exclusions bar coverage
Civil authority coverage doesn't apply (no physical damage to nearby property)
Majority Federal Appellate View: No Coverage
Federal appellate courts, including the 9th Circuit, have overwhelmingly held that COVID-related economic losses without tangible property damage do NOT constitute "direct physical loss or damage."
9th Circuit – Mudpie, Inc. v. Travelers (2021): San Francisco restaurant sought BI coverage for losses due to COVID shutdown orders. 9th Circuit held "direct physical loss" requires "tangible alteration or physical damage" to property. Virus presence and government orders alone, without structural damage, don't trigger coverage.
Other federal circuits (3rd, 6th, 8th, 11th) have reached similar conclusions, creating a strong majority view against coverage.
Minority State Court View: Limited Pro-Coverage Rulings
A few state courts have allowed COVID BI claims under specific policy language or state-law interpretations:
North Carolina Supreme Court (2024): Held certain policy language could cover COVID shutdown losses as "direct physical loss" where policy defined "loss" broadly. This decision bucked the national trend but is limited to specific policy wording.
Pennsylvania state trial courts: Some early rulings found virus presence could constitute "physical loss"; later appellate decisions reversed many of these.
Ohio, Vermont, Massachusetts: Mixed results depending on policy language and factual allegations (e.g., presence of virus on surfaces, contamination requiring remediation).
Realistic Assessment: If your COVID BI claim is based solely on government shutdown orders without evidence of actual physical contamination or damage to your property, your chances of success are low in most jurisdictions (especially federal court). However, if you can show:
- Actual virus contamination requiring professional remediation
- Structural damage (e.g., HVAC contamination, physical alterations needed)
- Policy language defining "loss" more broadly than "damage"
...you may have a viable claim, especially in minority-view states.
Virus Exclusions
Many policies issued post-2006 (after SARS) include virus or bacteria exclusions. Courts have consistently enforced these exclusions to bar COVID claims, even where "direct physical loss" might otherwise be arguable.
Example exclusion language:
"We will not pay for loss or damage caused directly or indirectly by any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease."
If your policy has this exclusion, COVID coverage arguments are extremely difficult.
Non-COVID Property Claims: Lessons and Strategies
For traditional (non-COVID) BI claims, focus on:
Concrete physical damage evidence: Photos, expert reports, testing (e.g., air quality for smoke, moisture readings for water)
Causation chain: Covered peril → physical damage → suspension → income loss
Policy language interpretation: Argue "loss" is broader than "damage" if applicable
Avoid exclusions: Show damage doesn't fall under wear-and-tear, pollution, or other exclusions
Business records: Strong financials, clear period-of-restoration timeline, documented continuing expenses
Appraisal for Valuation, Litigation for Coverage: If the insurer concedes BI coverage exists but disputes the amount, consider appraisal for fast resolution. If the insurer denies coverage entirely (e.g., claiming no physical loss), you need a declaratory judgment action to establish coverage first.
Sample Business Property Demand Letters
Sample 1: Fire Damage + BI Denial (Wrongful "Cosmetic Only" Determination)
[Your Business Name]
[Your Address]
[City, State ZIP]
[Email]
[Phone]
[Date]
[Insurance Company Name]
Commercial Claims Department
[Address]
RE: Demand for Payment – Wrongful Denial of Fire Damage and Business Income Claim
Policy Number: [POLICY#]
Claim Number: [CLAIM#]
Date of Loss: [DATE]
Insured Property: [BUSINESS ADDRESS]
Dear Claims Manager:
I write on behalf of [Business Name] to demand immediate payment of our property damage and business income claim arising from the fire that occurred at our premises on [DATE]. Your denial letter dated [DENIAL DATE] asserts the fire damage was "cosmetic only" and that business income coverage doesn't apply. Both conclusions are factually and legally incorrect.
FACTS
On [DATE], a fire broke out in [location of origin] of our [type of business] facility. The fire was caused by [electrical malfunction / kitchen equipment / arson / cause]. The [City] Fire Department responded and extinguished the fire within [TIME FRAME].
The fire caused:
- Structural damage to [areas]
- Smoke and soot infiltration throughout the building
- Heat damage to walls, ceilings, and flooring
- HVAC system contamination
- Destruction of inventory and equipment valued at $[AMOUNT]
- Necessary closure of the business for [TIME PERIOD]
We submitted our claim on [DATE] with full documentation. Your adjuster, [NAME], spent approximately [TIME] on site and issued a cursory report concluding the damage was "cosmetic." This conclusion ignores the extensive evidence of covered physical loss.
PROPERTY DAMAGE: NOT "COSMETIC"
Your adjuster's characterization of the damage as "cosmetic" is unsupported and contradicted by expert reports.
1. **Restoration Company Assessment (Exhibit A):** [Company Name], a certified fire restoration specialist, inspected the property on [DATE] and documented extensive smoke damage requiring:
- Complete HVAC duct cleaning and filter replacement ($[AMOUNT])
- Thermal fogging and ozone treatment for smoke odor ($[AMOUNT])
- Removal and replacement of porous materials (ceiling tiles, insulation) ($[AMOUNT])
- Surface cleaning, sealing, and repainting ($[AMOUNT])
**Total estimate: $[AMOUNT]**
2. **Structural Engineer Report (Exhibit B):** Licensed engineer [NAME] assessed fire and heat damage to structural components and concluded repairs are necessary to meet building code and ensure safety. Estimated cost: $[AMOUNT].
3. **Indoor Air Quality Testing (Exhibit C):** IAQ testing by [Lab Name] documented elevated levels of particulate matter and combustion byproducts making the building unsafe for occupancy without remediation.
This is not "cosmetic." The building was rendered uninhabitable and unsafe for business operations. Under the policy's insuring agreement, we have suffered "direct physical loss to covered property."
POLICY COVERAGE
The policy provides:
- Building coverage: $[LIMIT]
- Business Personal Property: $[LIMIT]
- Business Income with Extra Expense: $[LIMIT]
The policy covers "direct physical loss or damage" to covered property from fire, a covered peril with no applicable exclusions. Your denial cites no policy exclusion or limitation—only a baseless factual conclusion that the damage is "cosmetic."
California law requires insurers to pay all covered losses promptly and in full. Characterizing significant fire and smoke damage as "cosmetic" to avoid payment constitutes bad faith.
BUSINESS INCOME CLAIM
We were forced to cease operations from [DATE] to [DATE]—a total of [X] days/weeks. During this period:
- Revenue dropped from an average of $[AMOUNT]/month to $0
- We incurred continuing expenses including rent ($[AMOUNT]), retained employee payroll ($[AMOUNT]), insurance ($[AMOUNT]), and loan payments ($[AMOUNT])
- We incurred extra expenses including $[AMOUNT] for temporary storage of inventory and $[AMOUNT] for notification of customers
Our business income loss for the period of restoration is $[AMOUNT], calculated as follows:
- Lost net income: $[AMOUNT] ([CALCULATION BASED ON HISTORICAL FINANCIALS])
- Continuing expenses: $[AMOUNT]
- **Total BI claim: $[AMOUNT]**
We have provided:
- Profit & loss statements for the prior 24 months (Exhibit D)
- Evidence of continuing expenses (Exhibit E: invoices, statements)
- Contractor timeline showing [X weeks] required for repairs (Exhibit F)
Your denial of the BI claim rests entirely on your incorrect conclusion that there was no covered property damage. Once you acknowledge the property damage (as the evidence compels), the BI coverage follows automatically.
DEMAND
We demand payment within 30 days:
1. **Property damage (building & BPP):** $[AMOUNT]
2. **Business Income:** $[AMOUNT]
3. **Extra Expense:** $[AMOUNT]
4. **Policy interest from date of loss**
**TOTAL: $[AMOUNT]**
BAD FAITH
Your handling of this claim violates California Insurance Code § 790.03(h) and constitutes bad faith. You:
- Failed to conduct a thorough investigation (cursory inspection, ignored expert reports)
- Denied the claim based on unsupported conclusions ("cosmetic")
- Did not provide a clear explanation of why the extensive documented damage doesn't constitute covered "physical loss"
- Offered no alternative valuation or basis for partial payment
If you do not tender full payment within 30 days, I will pursue litigation for breach of contract, bad faith, and unfair claims practices. I will seek not only policy benefits but also extra-contractual damages, consequential damages (ongoing business losses due to your wrongful denial), emotional distress, punitive damages, and attorney's fees.
The evidence is overwhelming. Pay the claim.
Please contact me at [PHONE] or [EMAIL] within 30 days.
Sincerely,
[Your Signature]
[Your Name / Title]
[Business Name]
Enclosures:
Exhibit A: Fire Restoration Company Estimate
Exhibit B: Structural Engineer Report
Exhibit C: IAQ Test Results
Exhibit D: Financial Statements (24 months)
Exhibit E: Continuing Expense Documentation
Exhibit F: Contractor Repair Timeline
Sample 2: Water Damage + BI (Exclusion Dispute)
[Your Business Name]
[Your Address]
[City, State ZIP]
[Email]
[Phone]
[Date]
[Insurance Company Name]
Claims Department
[Address]
RE: Demand for Coverage – Water Damage Claim Wrongfully Denied Under Flood Exclusion
Policy Number: [POLICY#]
Claim Number: [CLAIM#]
Date of Loss: [DATE]
Insured: [BUSINESS NAME]
Property: [ADDRESS]
Dear Claims Manager:
I demand immediate coverage and payment of our water damage claim, which you wrongfully denied on [DENIAL DATE] by misapplying the flood exclusion. The loss resulted from a burst pipe—a covered peril—not flooding.
FACTS
On [DATE], a water pipe in our building's [location] burst due to [freezing / corrosion / excessive pressure], causing water to flood the interior of our [type of business] premises. Over the course of [TIME PERIOD], water damaged:
- Flooring, drywall, and baseboards throughout [AREA]
- Inventory valued at $[AMOUNT]
- Equipment including [ITEMS] valued at $[AMOUNT]
- Business was forced to close for [X] days resulting in lost income of $[AMOUNT]
Our plumber, [Company Name], responded immediately and confirmed the source: an internal plumbing failure (report attached as Exhibit A). The pipe was [AGE] years old and failed due to [CAUSE].
YOUR DENIAL MISAPPLIES THE FLOOD EXCLUSION
Your denial letter states: "Loss is excluded under the Flood exclusion. Water damage from flood is not covered."
This is incorrect. The policy defines "flood" as:
"[QUOTE POLICY DEFINITION, typically: 'surface water, waves, tidal water, overflow of streams or bodies of water, or spray from these, whether driven by wind or not']"
A burst pipe inside our building is NONE of these things. It is an internal plumbing failure—a covered cause of loss under the policy's grant of coverage for "risk of direct physical loss" unless excluded.
**The water did not come from an external flood source.** There was:
- No rain or storm (weather records, Exhibit B)
- No overflow of streams or bodies of water
- No surface water intrusion
- No flood in the area (no FEMA flood event declared)
The flood exclusion does not apply to internal plumbing failures. Numerous courts have held that water damage from burst pipes, plumbing failures, and internal sources is covered under commercial property policies and does NOT fall under flood exclusions.
COVERED CAUSE OF LOSS
The policy covers "direct physical loss" unless specifically excluded. Water damage from plumbing failures is a covered peril. The policy does not exclude:
- Water from internal plumbing systems
- Sudden and accidental water discharge
- Burst pipes
Your denial cites no applicable exclusion other than the flood exclusion, which doesn't apply.
BUSINESS INCOME COVERAGE
As a direct result of the covered water damage, we were forced to suspend operations for [X] days while repairs were completed. During this period:
- We lost revenue of approximately $[AMOUNT] (based on average daily sales of $[AMOUNT])
- We incurred continuing expenses including rent, payroll for key employees, and utilities totaling $[AMOUNT]
- Period of restoration: [DATE] to [DATE]
Business income coverage applies because the suspension was necessary and resulted from direct physical loss to covered property.
DEMAND
We demand payment within 30 days:
1. **Property damage (building, inventory, equipment):** $[AMOUNT]
2. **Business Income:** $[AMOUNT]
3. **Policy interest**
**TOTAL: $[AMOUNT]**
If you do not withdraw your denial and pay this claim, I will pursue litigation for breach of contract and bad faith. Your misapplication of the flood exclusion to internal plumbing failures demonstrates unreasonable claim handling and warrants extra-contractual damages.
Contact me at [PHONE] or [EMAIL] within 30 days.
Sincerely,
[Your Signature]
[Your Name / Title]
[Business Name]
Enclosures:
Exhibit A: Plumber Report
Exhibit B: Weather Records / FEMA Flood Data
Exhibit C: Damage Photos
Exhibit D: Repair Estimates
Exhibit E: Financial Records (BI calculation)
Attorney-Led Representation for Business Property Insurance Disputes
Commercial property claims often involve substantial amounts and complex coverage issues. As an attorney specializing in insurance disputes, I help businesses fight wrongful denials and recover the full benefits they're owed.
Why Hire an Attorney for Your Business Claim?
High stakes: Business property and BI claims can exceed hundreds of thousands or millions of dollars
Complex policy interpretation: Commercial policies are dense and filled with technical definitions, exclusions, and endorsements
Expert witnesses required: Property damage and BI claims often require engineers, restoration specialists, accountants, and business valuation experts
Bad faith exposure: California law allows significant extra-contractual damages for unreasonable claim handling
Litigation leverage: Insurers take attorney-represented claims more seriously and settle more favorably
Appraisal vs litigation strategy: Knowing when to invoke appraisal vs when to litigate coverage is critical
My Approach to Business Insurance Cases
Initial assessment: I review your policy, denial letter, and claim documentation to evaluate coverage and identify insurer errors
Evidence development: I work with experts (engineers, forensic accountants, restoration specialists) to build a strong record
Demand letter or litigation: Depending on deadlines and facts, I send a detailed legal demand or file suit immediately
Discovery: I obtain the insurer's claim file, depose adjusters and experts, and expose bad faith through internal documents
Settlement or trial: Most cases settle once I've demonstrated the strength of your claim; if necessary, I take cases to trial
I offer flexible fee arrangements tailored to your situation:
Contingency fee: I take a percentage of your recovery (typically 25-40% depending on stage of case); no recovery, no fee
Hourly fee: For clients who prefer hourly billing; rates depend on case complexity
Hybrid: Reduced hourly rate plus success fee
California's Brandt rule allows recovery of attorney's fees from the insurer in breach-of-contract cases, making representation affordable.
Schedule a Consultation
If your business property claim has been denied or underpaid, don't let the insurer bully you into accepting less than you're owed. I have extensive experience with commercial property, business interruption, and bad faith cases.
Serving businesses throughout California. Contingency fees available for qualifying cases.