The new coronavirus (COVID-19) outbreak has consumed individuals, families, and businesses all over the world. As COVID-19 becomes increasingly widespread, the disease is raising fears about the public’s well-being while also creating business interruption.
In recent weeks, many companies have shut down temporarily or forced to minimize staff. However, as many operations closed due to COVID-19 fears, there’s a growing question of whether or not business interruption insurance can help policyholders make up for lost revenue.
Insurance companies are preparing themselves for an influx of new claims across all lines of coverage. At the moment, many insurance carriers have already started begun denying COVID-19 claims by taking a narrow view of the “physical loss” or “damage” requirement, arguing that some structural damage to the property is required. However, policyholders should not necessarily accept an insurer’s initial denial of coverage.
Regardless of policy wording today, there are strong counter-arguments that are worth pushing back. In reality, future court decisions and government legislation will most likely influence insurance coverage for years to come.
Business Interruption Insurance
In the event of a loss, business interruption insurance provides coverage for income business would replace income in the loss of a disaster. It can also help pay for expenses like employee wages, taxes, rent, loan payments, and relocation expenses. Business interruption insurance coverage under property policy is triggered by “direct physical loss or damage”.
Two examples of Business Interruption coverage under a property policy include:
- Business interruption and Extra Expense(BI) – which covers a policyholder’s losses from having to shut down abruptly and additional costs incurred to keep the business operating.
- Contingent business interruption(CBI) – triggered when losses result from a covered peril of a policyholder’s dependent property.
For business interruption coverage to apply, there must be proof of “direct physical loss” to a property. (The policyholder’s property for business interruption coverage or the dependent property for contingent BI coverage).
If a business is required to close to avoid spreading a contagious disease, the direct physical loss requirement won’t be met if a business(or building) remains functional but yet closes due to fears of COVID-19. Under this interpretation, contagious diseases like COVID-19 would not count as a covered loss.
Although there may be situations of direct physical damage or physical loss to a property, it’s probably less frequent to have a direct physical loss rather than the norm. Even when the initial threshold of a direct physical loss is met, the policyholder could run into other problems depending on the wording of their policy.
Potential Exclusions
A commercial property policy’s business interruption coverage will often contain exclusions for property damage arising from bacteria, viruses, and other disease-causing agents. As with any loss, policy wording is critically important and could make all the difference when it comes to responding to claims.
From past epidemics, many insurance companies have incorporated exclusions claims for business-interruption losses relating to any “virus, bacterium or other microorganisms that induce or is capable of inducing physical distress, illness or disease.” If your policy has this exclusion, it can create an issue when addressing COVID-19-related losses.
Policyholders should review their existing coverage, speak with their insurance broker, and determine what precautions they need to take to control their losses.
Stay Informed and Be Prepared
At Rampart, we’re monitoring everything closely to see if the carrier’s coverage position changes due to government mandates, litigation, coverage allowances, or any other factors.
To be prepared, business owners should:
- Scrutinize existing insurance programs and policies to avoid potential exposures.
- Identify critical components and alternative sources for the continuation of business operations.
- Amend your contingency plan. Be prepared for being out of the office for a long time.
- Have procedures in place for responding to a claim
- Details on how the loss occurred & impact on the business
- Maintain records of all losses and expenses associated with the claim
- Identify the impact of loss on business associates(i.e., suppliers, etc.)
The world is shutting down and causing financial loss. Stay informed and be prepared.
In times like these, a qualified insurance professional will help you navigate difficult times. For more information, contact me today.
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Opinions expressed in this article are solely the author’s opinion. Not intended to provide the reader with legal or any other professional advice. Should you need advice or opinion, consult with a qualified professional to address your specific needs.