COVID-19 and Business Interruption Insurance
The COVID-19 pandemic and resulting government shut-downs are severely impacting the operations of virtually all companies. Many businesses are turning to their business interruption insurance policies to determine if those policies provide coverage to mitigate the losses that such businesses are experiencing as a result of the current pandemic.
What is Business Interruption Insurance?
Typically business interruption insurance (“
BI
”) forms part of a business’s commercial property insurance policy. In general, BI indemnifies the business for any loss of business income caused by a partial or complete suspension of such business’s operations.
BI may provide coverage for income losses resulting from the following acts or events:
- physical loss or damage to the insured property (generally covered by all BI policies), and/or
- civil authority orders mandating closure of the insured property (less commonly covered by BI policies).
Certain businesses depend very heavily on a limited number of suppliers or customers to conduct their operations. It is useful for such businesses to also purchase contingent business interruption coverage (“
CBI
”). CBI is a supplement to the BI or property insurance policy and indemnifies the policy holder for any loss of income suffered by the policy holder due to disruption in the operations of the suppliers or customers of such policy holder.
When is coverage triggered under BI or CBI?
To establish a business interruption claim under BI or CBI, a business must prove that there was a disruption to the business and a resulting loss of income due to (i) a direct physical loss or damage to the insured property; or (ii) if the policy so provides, loss of access to insured property due to government mandated closure.
In addition to the above, business interruption insurance coverage may also be conditioned on the following:
- certain BI policies may set out a specific list of covered events (such as physical damages due to fire, natural disasters etc.) and will indemnify the policyholder only when physical damage and thus loss of income has been caused by one or more of such covered events.
- many BI or CBI policies specifically exclude from its coverage damages caused by virus or bacteria.
Would COVID-19 and the resulting government mandated business closures be covered under BI or CBI?
Many insurers have taken the stance that business disruptions caused by COVID-19 related circumstances are not covered under BI and CBI policies because:
- most BI and CBI policies contain a specific exclusion for damages caused by a virus,
- COVID-19 and related events are not covered in the specific list of covered events under the policy, and/or
- the government mandated closures are not pursuant to an event covered under the policies.
As the business interruption coverage language in the insurance contracts offered by different insurers varies, it is important to carefully review the specific language of your BI or CBI policy to determine the scope of coverage. However, we also highly recommend that you contact your insurance agent to ask about the business interruption coverage available under your policy and whether losses arising from the COVID-19 pandemic will be covered, even if your reading of the policy language leads you to conclude that no coverage is available under the policy.
Physical loss or damage under BI:
As stated above, BI typically provides coverage for direct physical loss or damage to the insured property. While a COVID-19 infection does not physically damage a property in the same way a fire or natural disaster would, certain courts have held that for the purposes of BI, property can sustain physical damage without experiencing structural alterations. Thus, a business which has to close for a deep cleaning of its premises due to the confirmed presence of COVID-19 infection on its premises, can likely successfully claim for BI. However, business closures due to mere fear of COVID-19 will not be covered under a BI policy.
Civil authority orders under BI:
Civil authority order coverage, if included in the BI policy, may cover any business disruptions caused by the current government mandated shut-downs, provided the reason for the government mandate is a covered event under the policy.
CBI:
Many of the business income losses are being caused by supply chain disruptions and such businesses are turning to CBI to mitigate such losses. In order to make a claim under CBI, the insured will have to establish all of the same facts as under BI, only such facts will have to be established with respect to third-party supplier’s/customer’s property.
Are the federal or state governments working on any proposed legislation which may require the insurance companies to provide coverage despite a specific virus exclusion?
Senator James Eldridge has sponsored a new emergency bill in Massachusetts, SD.2888, which if passed will provide that insurers licensed in Massachusetts may not deny a business interruption claim relating to COVID-19 due to COVID-19 being a virus. The provision will apply to all BI and CBI policies, even if such policy specifically excludes coverage for damages caused by a virus. This bill has been proposed as an emergency law, so that its move through the legislature is expedited.
Certain notable provisions from the proposed bill are as follows:
- the provisions of the bill would only be applicable to policies issued to insureds with 150 or fewer full-time- equivalent employees in the Commonwealth,
- insurer payouts for COVID-19 claims would be subject to any monetary limits and time limits set forth in the policy for business interruption coverage,
- if passed, the law would apply retroactively from March 10, 2020, and
- insurers required to provide coverage to insureds for COVID-19 related claims may apply to the commissioner of insurance for relief and reimbursement.
Similar bills have been proposed by the states of New Jersey and Ohio. The insurance industry is pushing back on these bills. It remains to be seen if these bills will ultimately be adopted by the respective state legislatures.
