Can I file a business interruption claim in the case of COVID-19?

Small business with sorry we'e closed sign in the window
Apr 27, 2020
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Many small businesses are feeling the strain of temporary closures due to COVID-19. At Spur, we’ve been fielding a lot of questions about what sort of relief might be available to them beyond what the government is offering.

One common question is whether they can file a business interruption claim with their insurer. Business interruption coverage is often (but not always) offered as a sub-component of a commercial package policy. It sets forth a dollar limit that the insurance company will pay if the business is forced to close through no fault of its own. The issue here is that this coverage is usually tightly defined — it is designed specifically to cover a loss of business from a physical peril like fire, flood, or storm — and not a pandemic.

So far, insurance companies have denied coverage for COVID-19 caused closures. The Hartford website says: “Most property insurance includes business interruption coverage, which often includes civil authority and dependent property coverage. This is generally designed to cover losses that result from direct physical loss or damage to property caused by hurricanes, fires, wind damage or theft and is not designed to apply in the case of a virus.”

Travellers says: “Insurance for business interruption can provide coverage when a policyholder suffers a loss of income due to direct physical loss or damage to covered property at its location or another location. It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage.

Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms. Even if there has been direct physical loss or damage to property, your policy contains a number of exclusions that are likely to apply to business interruption losses. The most important exclusion to note is the exclusion for losses resulting from a virus or bacteria, which would include coronavirus.”

That said, there have been at least 14 different lawsuits filed seeking coverage — from large Indian Reservations to small bars (National Law Review April 21, 2020). And there are already another six insurance companies facing class action lawsuits (Business Insurance Magazine April 20, 2020). And while we are following this closely, none of this may matter.

After a long career in insurance, I’ve found that after “black swan” events — Hurricane Andrew, September 11, and Hurricane Sandy to name a few — federal, state and even local governments can change the rules. Whether by executive order or implied legislative action they can “create” coverage where none existed. September 11th was particularly notable in that terrorism claims (and acts of war) are almost universally excluded from coverage. And yet billions were paid out by the insurance industry.

Could something similar happen with COVID-19 losses incurred by businesses?

We’re seeing the first steps. In a recent letter, U.S. Rep. Pramila Jayapal (D., Wash.) asked insurance chief executives to justify refusals to pay out on “business interruption” and related coverages in policies held by small and midsize businesses (WSJ, April 18, 2020). Other representatives will likely follow suit — putting pressure on insurers to make payments — whether or not it was contemplated in their policies.

Donald Trump said recently he “would like to see the insurance companies pay if they need to pay.” The president said there’s “an exclusion” for pandemics “in some cases,” but “in a lot of cases, I don’t see it. You have people that have never asked for business-interruption insurance, and they’ve been paying a lot of money for a lot of years for the privilege of having it …and then when they finally need it, the insurance company says, ‘We’re not going to give it.’ We can’t let that happen.” (Market Watch, April 13, 2020).

Some economists have argued that insurers should pay and then be reimbursed by the federal government.

In all — it’s a cloudy and fast moving picture. And we’re unlikely to know until the economy does open up and shop owners and restaurateurs can get back on site and assess their true losses.

But let’s for a moment assume this is a possibility. What should a business owner do to be prepared to make a claim?

  1. Collect all records, especially showing that you’ve cleaned or remediated — some specific policy language allows coverage for “contamination”.
  2. Project your actual lost income — gross and net — for the full period you’ve been closed as well as any drop-off of business in the weeks leading up to any closure.
  3. Keep in mind that if COVID is declared a covered event, then usually any hit to your supply chain is covered as well.
  4. Keep track of all costs associated with the closing (and reopening) — loss of perishable goods, severance payments, increased training costs.
  5. Keep in touch with your insurance agent / broker. If things do change you will want to be among the first to file a claim — insurer resources are limited and this will be a multi-hundred billion dollar shock to their system as well.

We here at Spur are watching this carefully — and where we think we can offer helpful information we will.

Stay safe, be well, and we will get through this together.