COVID-19 AND BUSINESS INTERRUPTION INSURANCE

The 2019 novel coronavirus (COVID-19) is causing significant illness and mounting personal anxiety. It is also causing severe economic damages, with company after company, including restaurants, bars and shops, closing throughout the country to weaken the pandemic’s spread. The President has signed two pieces of federal legislation designed to lessen the financial burden on individuals and businesses: President Passes Coronavirus Stimulus Legislation and The Families First Coronavirus Response Act (H.R. 6201).
To avoid further economic pain, many businesses will turn to insurance policies which they purchased to cover business interruption losses. Whether such policies cover economic losses from the COVID-19 pandemic will depend on the policies’ specific coverage and exclusion provisions.
Business losses can encompass a variety of losses, including lost income, business closure, supply chain disruption, and employee health costs.
Traditional commercial property insurance policies usually include two types of coverage relevant to economic losses as a result of the COVID-19 pandemic. Business interruption coverage insures against losses resulting when the insured’s business operations are directly affected by an occurrence. Contingent business interruption coverage insures against indirect losses, such as disruptions in an insured’s supply or customer chain.
In a traditional commercial property insurance policy, business interruption claims are triggered by a physical loss or damage to property. However, the COVID-19 pandemic does not cause “property damage,” as that term is customarily defined in property insurance policies. Under this construction, most commercial property insurance policies would not cover business interruption losses stemming from the outbreak.
Structural damage to property, however, has not always been an absolute requirement for coverage. Under some policies, proof that contamination, such as from bacteria, gases, and fumes, have rendered a property temporarily or permanently unusable or uninhabitable, may support the conclusion that a physical property loss exists.
Nonetheless, after the SARS epidemic in 2003, the major insurance companies revised many policies to exclude health-related epidemics from their policies, either by limiting coverage or adding exclusions. Some policies, for example, specifically exclude coverage for virus agents, biologic pollution, contamination or biologic agents.
A limited number of commercial property insurance policies do contain specific coverage language which might provide restricted coverage, usually with low limits, in circumstances such as the COVID-19 pandemic. Such a policy, for example, might include a clause expressly covering losses from “interruption by communicable disease.” Alternatively, a policy might provide coverage for losses from an order by a “competent federal, state or local civil or martial authority” which restricts access to or orders the closing of a particular business.
Even if coverage is unlikely, it may be advisable to make a claim under your commercial property insurance policy for your business losses resulting from the COVID-19 pandemic. Any claim must be filed by the deadline, and in the manner, required in your policy. You will want to determine the specific date upon which your losses began which, depending on your circumstances, may be before the pandemic was formally announced by the World Health Organization on March 11, 2020. Any claim should be supported by documentation of specific claimed losses, if known at the time of filing. If you contemplate filing a claim, you should gather payroll records, profit and loss statements, revenue statements, expense statements, and prior years’ tax returns, to submit to the insurer and compare with your business’ current and future economic circumstances. You should also gather and submit documentation regarding business closings, order cancellations or delays, lost income, increased expenses, and any other evidence you have or subsequently obtain regarding your business’ claimed losses.
The business interruption insurance coverage issue is at the heart of most small and medium sized businesses’ current financial concerns regarding COVID-19. The recent Federal stimulus legislation did not provide for business interruption payments, as opposed to possible loans and employee retention loan forgiveness. This is a fluid situation, and proposals are beginning to be made to make up for the fact that many, if not most, insurance policies will not provide coverage for COVID-19-related losses due to coverage limitations to physical property damage.
The Wisconsin Commissioner of Insurance appears to be attempting to remedy some of the disruptions caused by the COVID-19 pandemic. The commissioner has posted notices on its website regarding insurance related to the pandemic. One urges insurers to be flexible with insureds having difficulty timely paying premiums. Another is a basic one-page guide to business interruption insurance in relation to COVID-19. The document notes that most such insurance requires physical property damage, but does suggest that a claim be filed if any uncertainty exists as to coverage. Another orders insurers who provide commercial general liability coverage to restaurants to notify their restaurant insureds that hired and non-owned auto coverage is available if requested, and to provide such coverage if requested. It also prohibits the denial of a claim under a personal auto policy, which generally does not cover commercial usage, solely because the insured was engaged in delivering food on behalf of a restaurant impacted by the restaurant closure.
Other states are attempting to take action to aid insureds under business interruption policies. Legislation has been introduced in Iowa, for example, to require commercial property insurers to provide business interruption coverage for COVID-19 related losses, which would, effectively, retroactively legislatively amend policies to do so. The New York Commissioner of Insurance has required insurers providing business interruption insurance in New York to provide detailed information regarding the numbers, terms, limitations and premiums of their business interruption policies. While no purpose was stated for this action, especially given New York’s devastating suffering from the pandemic, the state may take some action regarding these policies’ limitations after reviewing the submitted information.
In addition, 36 trade associations have written a joint letter proposing that the federal government establish a “Covid-19 Business and Employee Continuity and Recovery Fund” to direct federal funds to businesses disrupted by the pandemic. The proposal, which does not include a dollar amount for the proposed fund, would provide for a federal administrator who could enter into contracts with “interested businesses” to distribute money to impacted businesses and their employees. Although business interruption losses are not explicitly contained within this proposal, it does show the extent to which businesses are lobbying the federal government over the pandemic’s financial impact. No one knows what will happen with these proposals, or what if any action the federal or Wisconsin governments will take regarding business interruption policies and losses. We expect that the uncertainty of this situation will continue during the upcoming weeks and months.
Commercial property insurance policies vary among insurance companies and among client industries. The terms of each policy will be determinative as to whether coverage exists for a company’s losses. Contact FOS to discuss your business’ specific policy in the COVID-19 context. And please contact FOS with any questions you may have regarding COVID-19 or any legal issue. We are here for you and your business.
Be well.