In past blogs, I have suggested that businesses strongly consider purchasing business interruption insurance as part of an overall insurance program. Simply stated, business interruption insurance is insurance coverage that assists a business in replacing lost income and helps pay for extra expenses when a business is affected by a peril. Business interruption insurance is usually purchased as part of an overall business owner's insurance policy. The essential question becomes what kinds of "perils" does business interruption insurance cover and does that coverage extend to either epidemics or pandemics such as Covid-19?
1. The perils generally covered in the usual business interruption policy include, but are not limited to, theft, fire, wind, falling objects, or lightning. Since all insurance policies differ in terms of coverage it is imperative that you read the precise clause of your policy to determine the actual scope of coverage. For example, some policies specifically stipulate coverage for tornados, hurricanes, mudslides, and dust storms. In every case, however, there has to be a proximate relationship between the peril and any resulting physical damage to the business causing the economic loss.
2. Having said this, typical reimbursable expenses from a covered loss only include lost income and extra expenses. Loss of income reimbursement would be based on pre-loss earnings. A businesses' lost earnings or actual losses are typically defined as revenues minus ongoing expenses. For example, if your business was to relocate to another location due to damage from a fire then insurance would cover the costs associated with the relocation to a temporary location. As a business owner, it is always a good policy to document any immediate losses to your business and the costs associated with those losses before a determination is made by your insurer as to the applicability of coverage. Most insurers will pay for expenses prior to a coverage determination if they are well substantiated and otherwise fall under the definition of coverage in a policy.
3. Most business interruption coverage has specific coverage limits which represent the maximum your insurer will pay toward a covered claim. Any losses that as a result of business interruption that goes beyond the policy limits will likely need to be paid by your business.
4. The areas that are not normally covered in ordinary business interruption insurance are epidemics and pandemics. Currently, even those businesses that have business interruption insurance are realizing that they are not covered for losses sustained as a result of Covid-19. As stated earlier, most policies do NOT cover damage as a result of a virus or disease. If there is physical damage to a business as a result of Covid-19 then such claims might be covered in such narrow circumstances. Most of the losses being generated by the instant pandemic relate to losses of revenue which are not within the scope of coverage. From the insurance perspective, it is almost impossible to underwrite claims to be paid as a result of an epidemic or pandemic because the damage is so uncertain and unquantifiable.
5. In light of the narrow exception that coverage will only exist if your business sustains physical damage, companies are trying novel approaches to fitting into the exception in order to obtain coverage. For example, in one instance, an insurance claimant tried to make the argument that Covid-19 was damaging its property just by its presence ( no actual damage to the property was sustained). Not surprisingly, the claimant's request was denied. Additionally, since government orders are forcing the shutdowns of many businesses in many parts of the country the question will be, in those situations, is it the virus that is shutting the business down( particularly in situations or areas where the virus has not had a large foothold like New York) or is the actions of the local and or state government up to now that is the proximate cause of the shutdown?
In other situations, carriers have denied coverage for business interruption insurance even though those policies contained coverage for an epidemic and not, as here, a pandemic. Unfortunately, for many business owners, this insurance will not apply unless the order from the civil authority resulted from circumstances caused by physical damage to the insured's property. Physical damage to property has been widely defined as a demonstrable alteration of the insured property. Given this definition, it is easy to see why property damage claims stemming from Covid-19 will be denied. It will take an act of Congress to impose coverage requirements on insurers to cover pandemics and epidemics in the future. Assuming any congressional action is taken, the insurance industry will then have to price out policies for such coverage. What inevitably will happen is that the cost of any additional coverage will be so high that most businesses will make it impossible for any additional coverage to be purchased.
While the avenues to getting coverage for business interruption insurance in cases of an epidemic or pandemic may be extremely narrow, the Katz Law Group can assist your company in developing ongoing strategies to assist in recovering from the Covid-19 crisis. Please call the Katz Law Group at our main office at 508-480-8202 for further information.