[UPDATED] Are you Covered? Business Interruption Insurance and Covid-19
This article was originally published on April 9, 2020. We have updated it as of May 1, 2020 to reflect new developments. Click here to jump to the update.
Does your business interruption insurance cover pandemic losses? Three things to do today.
Your property insurance policy likely includes business interruption (“BI”) coverage. BI insurance covers loss of business income and other reasonable and necessary expenses incurred when you have to suspend business operations from physical loss or damage to the insured property.
Whether the standard language in these policies provides you with coverage during the current coronavirus pandemic is a question that has not yet been addressed by the courts. However, it is a good idea to examine the terms of your policy to determine whether it might be worthwhile to file a claim.
1. See if your policy has an endorsement excluding BI coverage resulting from virus or bacteria.
A common endorsement on BI policies nullifies any coverage under your policy for pandemic losses that might otherwise exist. For example, this endorsement may state:
We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.
A provision like this might mean that there is no coverage for claims related to the current pandemic.
2. Understand what “direct physical loss or damage” means.
Standard BI coverage typically only covers “direct physical loss or damage” to insured real or personal property. While structural damage from something like a tornado is covered, coverage for the loss of business operations during a pandemic is not as clear.
Courts widely agree that physical loss or damage may occur in a variety of situations that makes the insured property unfit for human occupancy or other use. This might include asbestos, mold, or chemical leaks. These are dangers occurring directly on the insured property itself, and many courts categorize them as sufficient to qualify as “direct physical loss or damage.” It is unknown whether a business that experiences loss of business income from having an employee test positive for the virus would have BI coverage, but this situation may qualify as a direct physical loss or damage under most policies.
While losses due to an employee with COVID-19 might qualify as a direct loss, for most businesses, the current coronavirus pandemic has likely had an indirect effect on business. For example, the state may have deemed your business “nonessential” during the pandemic, forcing you to close. Alternatively, a business permitted to remain open in a limited capacity during the pandemic may still lose income from clients or customers—either because of the reduced operations or because of the general slowdown in the economy caused by the pandemic.
Some courts have held that, under a standard BI policy, direct physical loss or damage does not include “indirect losses,” such as loss of use from a mere threat of damage to property, lack of access to property, or lack of power to the property. Therefore, unless you had a policy with extended coverage provisions, it is unlikely that your standard BI policy would apply.
3. Check to see if you have extended coverage.
While standard policies may not cover indirect losses from pandemic, many policies have extended coverage that broadens BI coverage. The terms tend to be very detailed and apply in limited situations, so it is important to check your policy carefully.
There are two common categories of extended coverage that do not typically require direct physical loss or damage. These policies are likely the best chance at securing BI coverage for indirect losses during this pandemic:
• “Supply chain” extended coverage broadly covers losses arising as a result from disruption in a supply chain. For example, your business may require a product from a supplier to do business, but that supplier’s business has been interrupted or completely stopped due to the pandemic. This form of extended coverage would extend BI coverage to your business’s subsequent delayed product or service.
• “Trade disruption” extended coverage covers loss of earnings, extra expenses, and contractual penalties incurred as a result of a delay or a disruption of the business’s trade. This form of extended coverage is often triggered when roads or borders are closed. During a pandemic, trade disruption extended coverage is likely to apply if the government closes all roads or borders to an area under a quarantine lockdown.
If you have either of the above extended coverages, you may be able to recover for indirect losses from the pandemic.
There are other forms of extended coverage, such as “civil authority,” “ingress/egress,” “contingent business interruption,” or “stock throughput” coverage. Generally, these provisions still require direct losses, so it is difficult to predict whether BI coverage under these terms would apply for indirect losses from the pandemic.
The specific terms of your property insurance policy will dictate whether your BI insurance covers you during this pandemic. We recommend you contact your insurance agent to discuss any questions you have about your policy and coverages. And of course, we are here to help if you need our assistance in filing a claim.
UPDATE–May 1, 2020
Our original April 9 post above discussed that some policies have specific virus and bacteria exclusions and also discussed the difficulties of proving “direct” damage when the government shuts down a business due to virus concerns. Since then, many businesses have had their claims denied, and we are beginning to see litigation regarding these policies. At this point, many legal proceedings are class action lawsuits. Most appear to be policyholders without the virus and bacteria exclusions who have nevertheless been denied coverage. Other class actions involve policies with the virus and bacteria exclusions and are seeking judicial determinations that the government shutdown caused the losses, so coverage should apply.
In addition to the class action route, some businesses are proceeding individually in court. For example, Peg Leg Porker, a Nashville-based barbeque restaurant, has sued its insurance carrier for denying its BI claim during the pandemic. In its complaint filed on April 20, 2020, Peg Leg alleged it experienced physical loss and damage directly from the virus and that the insurance company wrongly denied coverage.
According to Peg Leg Porker, a person infected with COVID-19 visited the premises, making contact with the tables, trays, utensils, restroom, business offices, and other aspects of the restaurant. This created a dangerous condition on the property, rendering it untenantable. In other words, part of the restaurant’s legal theory is that the virus itself caused the property damage. This makes it a direct cause of loss that should be covered under the “all risk” policy, because there is no exclusion for damage caused by a virus or bacteria.
The restaurant also raised the legal argument that the various state and local orders mandating that restaurants cease dine-in services caused damage that is not excluded under the policy. Finally, Peg Leg Porker alleges that the insurance carrier systematically decided to deny all BI claims arising from the pandemic without an evaluation of the claims.
Policyholders are not the only ones bringing claims. At least one BI carrier has filed federal litigation in California asking a court to declare that its policy does not cover business losses arising from the pandemic. On April 20, 2020, Travelers Casualty Insurance Co. of America sued one of its customers, a small law firm. Travelers’s asks that the court declare whether the coronavirus pandemic can be considered “physical loss or damage” under the client’s BI policy. The results of this case will be one of the first to interpret BI coverage in the context of the pandemic.
These cases are in the early stages of litigation, and it may be some time before the courts issue opinions that can provide more clear guidance about BI insurance and the pandemic. We will continue to update this article as needed.