"Sorry We're Closed"
Dealing with Business Interruption
On March 11 th , the World Health Organization characterized the coronavirus as a pandemic. The effect on businesses continues to grow as exponentially as the virus itself as governments issue “shut down” and “shelter in place” orders. In response, businesses want to know whether their business interruption insurance protects them. The answer depends on the language of the policy and governmental response.  

Business interruption insurance or business income insurance coverage is a type of insurance that covers losses from direct business interruptions. The policy may cover payroll, rent and loan payments and utilities stemming from certain losses specified in the policy. 

The interruption, however, must be the result of direct, physical loss. A typical business interruption provision will cover losses resulting from a fire, lightning strike, or other natural disasters.  Courts have enforced exclusion clauses where the interruption and resulting economic loss is unaccompanied by a distinct and demonstrable loss of the physical use of the business property.  See generally, Am. Med. Imaging Corp. v. St. Paul Fire & Marine Ins. Co., 949 F.2d 690 (3d Cir. 1991).
After the SARS epidemic in 2002, the vast majority of business interruption policies were written to contain provisions excluding coverage for business interruption losses stemming from infectious disease outbreaks.  Since 2002, there has been scarce litigation on this issue.  However, when these infectious disease exclusions provisions have been challenged, they have been upheld by the courts.  See, Meyer Natural Foods, LLC. v. Liberty Mutual Fire Ins. Co.,   218 F. Supp. 3d 1034 (D. Neb. 2016) (upheld provision excluding business interruption loss due to e coli).  Thus, the general rule is that business interruption stemming from the current COVID-19 outbreak will not be covered by the policy unless the policy contains no such exclusion.

While the infectious disease exclusion has been upheld by the courts, the scale of the COVID-19 outbreak and its potentially devastating effect on the United States economy has resulted in a groundswell of support to try to keep small businesses afloat during the crisis.  With respect to business interruption policies, several states, including Delaware, have discussed reconstructing infectious disease exclusions in commercial policies as one measure to assist floundering businesses.

As evidence of the discussion in favor of disregarding the exclusion, a bipartisan group of 18 U.S. Congressmen wrote a letter to the leaders of the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Independent Insurance Agents & Brokers of America, and the Council of Insurance Agents and Brokers.  The letter was a plea to the insurers, requesting they retroactively recognize financial losses relating to COVID-19 under commercial business interruption coverage for policyholders during the state of emergency.
Recent pronouncements in Delaware suggest that state officials may be in line with taking similar measures. Delaware Insurance Commissioner Trinidad Navarro implored insurers in a recent bulletin to provide coverage for COVID-19 related business interruption losses.  “Throughout Delaware’s State of Emergency, many companies have had to close or reduce their business, and employees have been laid off or fired as a result,” Commissioner Navarro explained.  “After hearing from businesses and residents who were concerned about the choices they will have to make with limited finances, we ask insurers to help alleviate some of that stress and ensure that residents and business owners in this difficult situation can have the peace of mind that insurance provides throughout the duration of the emergency.”

Notably, New Jersey has recently taken up legislation to overturn these virus exclusions. On March 16, 2020, the General Assembly of the State of New Jersey introduced Bill A3844 which directs insurers to cover business interruptions caused by the COVID-19 outbreak. If passed into law, an insured “…may recover those losses from their insurer if they had a policy of business interruption insurance in force on March 9, 2020, the date on which the Governor declared a Public Health Emergency and State of Emergency...” The bill applies only to businesses with less than 100 eligible employees. Under the bill, an eligible employee is defined as any full time employee who works more than 25 hours per week. “The bill provides that every policy of insurance for loss or damage to property, which includes the loss of use and occupancy and business interruption, in force on the date of the executive order, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Governor’s executive order.” See, New Jersey Bill A3844

The bill further provides that an insurer may apply for indemnification to the Commissioner of Banking and Insurance for relief and reimbursement from funds collected and made available. The Commissioner of Banking and Insurance is to establish procedures for the submission and qualification of claims by insurers which are eligible for reimbursement. To date, the bill has yet to pass. However, the NJ House has passed the bill and now it is in front of the NJ Senate for discussion and vote before it goes to the NJ Governor. We are closely following any developments regarding the bill and will be sure to provide prompt updates as new information becomes available.

As of the date of this update, there was no statement from Pennsylvania Insurance Commissioner Jessica Altman relative to business interruption coverage and there is no pending legislation to address business interruption insurance.
In Louisiana, a lawsuit was filed seeking a declaration from the court that direct physical loss or even a civil authority shutdown extends to loss due to the coronavirus. The federal government is also weighing in on how to provide relief to businesses.

Now is the time to gather retrospective documents and maintain current documents to support a claim for losses related to the coronavirus. Such documentation for a three-year period should include:   


  • Monthly and annual profit and loss statements
  • Payroll records
  • Invoices and purchase orders
  • Budgets, forecasts, and projections
  • Key financial reports (revenues, production, payroll, and statistic reports related to the business)
  • Industry data, statistics, and communications
  • Documentation to support additional expenses

According to the Insurance Information Institute, a 2015 nationwide survey found that 66% of small businesses, generally identified as those with 50 or fewer employees, lacked business interruption coverage. After a catastrophe or other disaster, 40% of businesses do not reopen and another 25% fail within a year. Business interruption coverage can help protect a business and allow it to thrive.
We will keep you abreast of legislative and court developments.
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