Does business interruption insurance cover coronavirus (COVID-19)?
Businesses crippled by the government-mandated shutdown issued to slow the spread of the highly contagious coronavirus that causes COVID-19 are turning to their insurance agents. They are counting on their business interruption insurance to pay bills, replace lost income, and cover payroll. However, many are being told that the one disaster their policy does not cover is temporary closure due to a pandemic.
What is business interruption insurance?
Business interruption insurance is one of the core coverages in a business owner’s policy, offering businesses a lifeline in the event of a disaster.
A business owners policy typically includes three or four core coverages:
- Commercial property insurance provides coverage for building, equipment and inventory.
- General liability insurance helps cover any medical expenses or bodily injury.
- Crime insurance protects against fraud, theft or forgery.
- Business interruption insurance, also called business income insurance, helps cover bills and payroll in the event of a disaster that forces the business to temporarily close.
What is covered by business interruption insurance?
Business interruption insurance can cover the following:
- Profits that would have been earned, based on prior months’ financial statements.
- Fixed costs like operating expenses, based on historical costs.
- Moving expenses if the business must be moved to a temporary location.
- Commission and training costs for operators of machinery replaced by the insurer.
- Reimbursement for reasonable expenses beyond fixed costs.
- Civil authority ingress/egress, meaning coverage is provided if direct loss of revenue is caused when a government authority orders the closure of business, such as in the event of a curfew.
For example, if a fire breaks out in a restaurant, commercial property insurance will pay to replace inventory damaged in the fire as well as any damage to the building. Business interruption insurance, on the other hand, helps pay bills, replace lost income, and cover payroll while the restaurant is temporarily closed for those repairs. Other events covered by business interruption insurance include wind, hail, vandalism or damage to your building or equipment. However, damage caused by flood, earthquakes, or broken glass are typically not covered.
How is business interruption insurance calculated?
According to the International Risk Management Institute, Inc. (IRMI), business interruption insurance is calculated based on a formula that takes into account the number of hours or days operations are shut down; the quantity of goods normally produced or sold per unit of time used during the shutdown; and the value of each unit of production, typically expressed in profit. This formula is subject to change by specific policy language.
Does business interruption insurance cover coronavirus shutdowns?
Whether a policy provides business interruption coverage for coronavirus shutdowns depends on the language of the policy and its exclusions.
Following viral outbreaks in the early 2000s, like SARS and MERS, the insurance industry added exclusions to their commercial property and business interruption insurance policies to preclude coverage for losses related to viral outbreaks.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Two days later, on March 13, 2020, President Donald Trump declared the COVID-19 outbreak in the United States a national emergency, beginning March 1, 2020.
Following the announcement, acting on guidance from the White House, states and local governments began ordering nonessential businesses to close, and prohibiting eating and drinking at restaurants and bars to limit the spread of COVID-19, the highly infectious respiratory illness caused by the novel coronavirus.
Small business owners turned to their insurance agents seeking relief from their business interruption insurance only to be rejected.
Insurance companies claim that the standard business interruption claim does not cover claims related to government-mandated shutdowns due to a viral outbreak or even a pandemic. Agencies claim that the shutdown is unrelated to the shop’s commercial property insurance and, as a result, it is not covered by business interruption insurance.
Coronavirus business interruption insurance lawsuits
Businesses are filing lawsuits against their insurers seeking coverage under their business interruption insurance for loss of income, cost of cleaning, and other damages suffered during the COVID-19 shutdown.
A complaint filed by the owners of the Oceana Grill in New Orleans, a city hit particularly hard by the COVID-19 outbreak, claims their all-risks policy issued by Lloyd’s of London does not contain an exclusion that applies to a viral pandemic and covers business losses due to civil authority.
Congress urges insurance industry to cover COVID-19 business interruption claims
On March 18, 2020, members of the United States House of Representatives issued a letter to the CEOs of four major insurance trade organizations urging them to cover business interruption claims related to the COVID-19 shutdown, adding that it would “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”
Those organizations included:
- The American Property and Casualty Insurance Association
- The National Association of Mutual Insurance Companies
- The Independent Insurance Agents & Brokers of America
- The Council of Insurance Agents & Brokers
The CEOs rejected this notion in their response:
“Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. … The proposed retroactive application legislation would fundamentally change the agreed-upon transfer of prospective risk-of-loss exposure to coverage for a known and presently occurring loss, something the parties did not agree to, the insurer did not rate for, and the policyholder did not pay for.”
States crack down on insurance industry over COVID-19 business interruption claims
On March 16, 2020, New Jersey introduced legislation designed to alter the terms of insurance contracts to require insurance companies to assist businesses in the state impacted by COVID-19.
Since then, other states have begun to follow suit. As of March 27, 2020, similar bills are pending in Ohio, Massachusetts and Pennsylvania to require insurers to provide business interruption coverage for COVID-19 losses.
Ohio’s house bill, introduced by Representatives Jeffrey Crossman and John M. Rogers, states:
“Every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption … shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.”
How to file Coronavirus business interruption insurance denial claims
Many businesses have suffered losses as a result of the Coronavirus, COVID-19. Most all businesses have a form of “Business Interruption” coverage that is designed to cover losses due to unforeseen circumstances out of the control of the business. This virus is a prime example of an event that may trigger this type of coverage.
However, insurance companies are already denying coverage for this type of claim. Obviously, the insurance contract language of each policy governs the coverages, but in many cases the insurance companies are denying coverage despite that the policy actually provides coverage. We are actively pursuing these cases already with our clients who received a denial communication from their insurance companies. Dee Miles, Head of our Consumer Fraud Section, Rachel Boyd and Paul Evans are spearheading this litigation for our firm. They would like to talk to you about any potential claims.
Contact us for a free consultation regarding your business interruption insurance claims.