As economic losses resulting from the impact of COVID-19 continue to mount, many business owners are inquiring about the availability of Business Interruption insurance as it pertains to COVID-19-related shutdowns. The purpose of this article is to highlight the key considerations involved in answering this question.
How is Business Interruption Coverage Triggered?
Business Interruption (Business Income) coverage is intended to cover a policyholder’s actual loss of income due to a suspension of operations that results from “direct physical loss of or damage to property at the described premises,” with the direct physical loss being caused by a “covered peril.” In other words, the coverage as generally written is intended to cover lost income that results from the loss of or damage to property (for example, the insured’s facility)by a “covered peril” – i.e. fire, water damage, or some other covered cause of loss. Obviously, there are valid questions as to whether a shutdown resulting from the COVID-19 pandemic and associated government order would be interpreted by insurance companies to meet these criteria to trigger coverage. Further, many Property policies include express exclusionary language surrounding “loss due to virus or bacteria” – which is basically intended to unambiguously rule out the possibility that a virus could be considered a “covered peril.” In short, many/most insurance companies are taking the position that COVID-19-related shutdowns do not meet the necessary criteria to trigger Business Interruption coverage.
This is a complex topic – a good article that dives further into the detailed coverage implications involving Business Interruption insurance can be found at the following links:
Please note, the intention of this commentary is not to discourage business owners from submitting claims of this nature, but rather to soberly highlight the challenges that exist when attempting to file a claim of this nature.
Obviously, businesses across many industries are being severely impacted by COVID-19, so as insurers are signaling that Business Interruption coverage is not (or may not be) available for the reasons outlined above, some policyholders and their attorneys are exploring the option of bringing lawsuits arguing that coverage should apply. The nature of these suits differ from situation to situation, however so far most seem to argue that the threshold of “direct physical loss” is met, or does not apply to business interruptions due to the intervention of a civil authority. How these efforts will pan out remains to be seen, and the result of litigation surrounding this topic will likely inform other carriers’ responses. Some detailed articles highlighting specific legal actions can be found at the following links:
In response to the exclusionary language mentioned in the text and articles above that may preclude Business Interruption insurance from responding to these claims related to COVID-19, many state legislatures have introduced proposed legislation that would literally force the insurers to afford coverage for these coronavirus-related Business Interruption claims, regardless of any exclusionary language. As of this post being published, there were bills of this nature being considered in New Jersey, Ohio, New York and Massachusetts. From the Massachusetts bill, which can be found at the following link (https://malegislature.gov/Bills/191/SD2888):
SECTION 1. (a) Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, notwithstanding the terms of such policy (including any endorsement thereto or exclusions to coverage included therewith) which includes, as of the effective date of this act, the loss of use and occupancy and business interruption in force in the commonwealth, shall be construed to include among the covered perils under such policy coverage for business interruption directly or indirectly resulting from the global pandemic known as COVID-19, including all mutated forms of the COVID-19 virus. Moreover, no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.
(b) Subject to (i) any monetary limits of the policy and (ii) any maximum length of time set forth in the policy for such business interruption coverage, the coverage required by this section shall cover the insured for any loss of business or business interruption until such time as the emergency declaration issued by the governor, dated March 10, 2020, and designated as executive order number 591, is rescinded by the governor.
(c) This act shall apply only to policies issued to insureds with 150 or fewer full-time-equivalent employees in the commonwealth, and which are in force on the effective date of this act, or that become effective prior to the date on which executive order number 591 is rescinded by the governor.
Per the Massachusetts bill, the insurers would then have the ability to recover from a pool of assessed funds, paid for by assessments made by the insurance commissioner against these same insurance companies. While obviously legislation like this is well intentioned, there are many that are rightfully questioning whether it is constitutionally feasible for the government to interfere like this in private contractual relations; further, many point out that the costs associated with forcing the insurers to bear this financial burden will simply result in financial instability at the insurance company level and/or increased premiums to the public at large. Good commentary on the New Jersey bill can be found at the following link: https://www.jdsupra.com/legalnews/new-jersey-legislature-considering-bill-23908/.
Finally, the following article highlights a recent estimate by the American Property Casualty Insurance Association that Business Interruption losses nationwide would cost the insurance industry $220-$383 billion per month if they are forced to afford coverage; this is in an industry that has a total industry-wide surplus of about $800 billion.
There are many questions that exist as to how Business Interruption claims resulting from the coronavirus pandemic will be handled by the insurance industry. What’s clear at this point is that the exclusionary language cited by insurers does exist – whether it will serve its intended purpose (from the carriers’ perspective) remains to be seen.