As the COVID-19 pandemic unfolds, many business owners face serious hardship and unprecedented economic losses. In an effort to recover these losses, owners are looking to their commercial insurance policies to see if coverage provides relief for loss of profit and extra expenses incurred due to the outbreak.
In general, business interruption policies require that direct physical damage be the underlying trigger for various available coverages. Debate and legal disputes over what constitutes physical damage and whether COVID-19 falls into the definition of physical damage are likely to ensue. However, in this evolving situation there is currently no clear guidance from insurers or courts on coverage interpretation.
Based on the nature of losses a policyholder incurs, certain coverages may exist and, depending on the policy wording, they may extend to COVID-19-related losses. Manuscript policies, which have customized wording drafted for an insured to fit the business’s unique risks, are more likely to have coverage in the event of a pandemic; traditional policies with one-size-fits-all wording are more likely to exclude atypical events.
Business interruption coverages include:
- Event cancellation insurance
- Interruption by civil authority / Prevention of ingress/egress
- Infectious disease and other non-physical damage endorsements
- Contingent business interruption
Event cancellation insurance
Event cancellation insurance insures against the cancellation, postponement, abandonment, etc. of a scheduled event such as a concert, conference or sporting event. These policies are often all-risk policies that have exclusions for specific causes or threats including communicable diseases. However, policy wordings vary greatly and we expect to see claims arise related to COVID-19 for this type of coverage. The coverage will be similar to business interruption insurance in that it covers loss of net profit and extra expenses related to the event cancellation or postponement. Given the uncertainty over how long the COVID-19 pandemic will continue to impact the ability of events to be rescheduled, we expect that the majority of events will be cancelled and not postponed. Having events cancelled as opposed to rescheduled will likely result in an increase in the severity of claims for loss of profit related to the event as no “make-up” revenue will be earned at a future date
Interruption by civil authority / Prevention of ingress/egress
Interruption by civil authority covers the insured when denied access to the premises where they operate their business as a result of an order made by a government or civil authority. The order must be a result of physical damage of the type for which the policyholder is insured. Further, the indemnity period (period losses can be claimed) on this coverage is often limited from two to eight weeks. Although widespread government orders have shut down businesses globally and would appear to trigger this coverage, having the underlying cause related to physical damage may be a barrier that prevents many policyholders from making successful claims.
Prevention of ingress/egress is very similar, but with somewhat wider application. It includes the inability to access the business premises for reasons other than an order by civil authority. It also often includes cases when physical damage has not yet occurred, but a threat of physical damage exists.
Again, the particulars of the policy wording is key, which may provide some policyholders the ability to make claims under one of these coverages.
Infectious disease and other non-physical damage endorsements
Non-physical damage endorsements that cover business interruption are not very common in traditional commercial policies. However, if included, they may trigger coverage for business interruption losses. When non-physical damage endorsements are included in a policy it is typically because the specific risk could have a high impact to the business operated by the policyholder; accordingly, they insure against a specified event such as 2020 South by Southwest or the 2020 Olympics.
Coverage for infectious disease is relevant to COVID-19. This coverage could take a variety of forms and may be related to the contamination or presence of a disease at the insured’s premises and, as a result, loss of access to the business premises by an order of civil authority. If the infectious disease endorsement identifies only specified diseases, COVID-19 is unlikely to be included due to its recent discovery. If the policy is an “all risks” or broad form infectious disease endorsement, then coronavirus would likely be included. These types of endorsements are highly dependent on the policy wording and should be reviewed in detail by a coverage expert to determine if a claim can be successfully advanced.
An interesting development in the United States is taking place in New Jersey, where the state legislature is considering a bill to require insurers to pay COVID-19 business interruption claims expressly excluded by a policy “virus” exclusion. Although the intention is to help business owners recover their losses, we believe there are significant issues with the practical application of this type of legislation; there may be unintended far-reaching consequences beyond insurers’ financial exposure within the state of New Jersey. Consequences may include difficulty in handling an overwhelming number of claims with unknown processing times, a knock-on-effect in other states where similar legislature may be advancing and the financial ability of insurers to pay these claims without significant government funding.
Contingent business interruption
Contingent business interruption insurance provides coverage for loss of profit or extra expense to an insured when one of their customers or suppliers is shut down due to an insured loss (typically direct physical damage) which has a direct impact on the insured’s operations.
Since the business closures relating to COVID-19 are wide reaching, if an insured’s primary policy does not cover business interruption losses, it is not likely that the contingent business interruption would apply. However, if the insured’s business impacts are primarily due to a customer or supplier that is shut down, the policy wording may be considered broad enough to consider the current situation with COVID-19.
How business interruption insurance policies will respond to the COVID-19 pandemic is evolving. Although at this time there appears to be limited opportunity to submit claims, it is advisable to consult with a claims professional and understand the coverages your policy may afford and how the claims process works.
If you are advised that your policy will respond to any of the above noted coverages then it’s important to know how a claim is measured, which analysis is performed by forensic accountants and what documentation you may be required to provide to prepare a supportable and defensible claim.