More Questions Than Answers: Business Interruption Insurance and COVID-19
One of the many questions looming large early in the COVID-19 situation: will business interruption insurance cover economic hardship or losses related to the disruptive virus?
At this early point, there’s no clear answer.
First, there are three primary factors to remember during this time:
- Each business and claim will be handled differently based on insurance coverage in place.
- Policyholders need to review their policies and/or contact their brokers to see what coverage they have.
- Policyholders need to ensure they keep all accounting records, payroll records and other important documents (such as government notices of shutdowns) during the COVID-19 situation for use in filing a claim.
Now to look at what it takes to activate business interruption insurance coverage. Physical damage to a property normally triggers coverage, which means a business would have to prove COVID-19 somehow physically damaged property for this coverage to apply. An attorney for Oceana Grill in New Orleans already has filed suit trying to get a ruling that COVID-19 physically damaged the property by contamination but results from that are likely weeks or months out.
- a covered cause of loss, as described in the policy declarations, must be behind damage or loss of property;
- necessary suspension of operations during period of restoration; and
- actual loss of business income.
There may be some business income loss coverage available if businesses have “civil authority” clauses in their policy coverage. Civil authority coverage is triggered by the actions of a governmental entity preventing a business from operating. This type of coverage is not included in every policy and usually has other limits.
Insurance leaders are starting to weigh in on the matter, as seen in a March 18, 2020, letter from 18 congressmembers to the presidents and CEOs 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.
“Business interruption insurance is intended to protect businesses against income losses as a result of disruptions to their operations and recognizing losses due to COVID-19 will help sustain America’s businesses…” the congressmembers stated. “We urge you to work with your member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.”
Courts, however, have consistently upheld the requirement for actual physical damage and that a mere slowdown of income because of uninsured causes is not sufficient to trigger coverage. Suspension of operations is typically defined as the slowdown or cessation of business activities, or that a part or all of the described premises is rendered untenantable if coverage for Business Income “Rental Value” applies. Click here to read more on how business interruption insurance coverage is triggered.
The National Law Review expects hurdles in obtaining coverage based upon disruption from COVID-19. According to an article posted on the site March 18, carriers began to exclude viral or bacterial outbreaks from standard coverage after the SARS epidemic in the early 2000s.
The article goes on to say, “Coverage for COVID-19 related losses might depend on whether the policy provides business interruption coverage as a basic term of the policy, or as an endorsement. An endorsement will often provide broader coverage than the base policy because of the additional premium for the endorsement.”
Insiders Weigh In
Among the looming problems surrounding COVID-19 is the degree and duration of disruptions to business activity and daily life, William Lalor reported in a March 11 article for Risk Management. But BI provisions in COVID-19 cases raise more questions than answers, he added.
“The actual peril or situation giving rise to any claimed loss must be carefully identified. For instance, losses may be caused by pre-emptive or preventative measures, or ‘community-based’ measures such as “social distancing” rather than an outbreak or actual contamination of relevant property. They might also be caused by a supply interruption where actual contamination is a pending or hard-to-resolve question,” he wrote.
Policy language will dictate the availability of arguments to the effect that lost use may fall within the scope of coverage in the absence of physical loss or damage, for instance where access to an insured facility is restricted or prohibited, an argument often rejected where typical policy wording is at issue.
While policies may specify “civil commotion,” they do not typically extend to viral or contaminant causes such as COVID-19. Some insureds may have obtained “all risk” coverage triggered by all perils not excluded by the policy, which could encompass COVID-19. Lalor also noted that many policies, and ISO forms, specifically exclude coverage for losses caused by quarantinable disease, or by “contaminants” defined with sufficient breadth to include viruses such as COVID-19.
Other Possible Options
According to a February 18, 2020 article in Rick Management’s Monitor, companies may, if contracts allow, attempt to invoke force majeur clauses, which, according to international law firm Reed Smith, “excuse a party’s performance of a contract if an unforeseen event beyond its control prevents performance.”
To prepare for these complications, Reed Smith recommends companies:
- review their contracts to determine what, if any, rights and remedies they have as a result of the delayed performance of contracts due to force majeure;
- provide timely notice of a force majeure event;
- prepare for potential litigation concerning failure-to-supply issues and the application of force majeure clauses, including by taking (and documenting) reasonable steps to mitigate the impact of the novel coronavirus;
- update form force majeure clauses to take into account, to the extent possible, modern risks to contractual performance, including diseases, epidemics or quarantines.
Reed Smith also noted that if a company intends use a force majeur clause to avoid financial penalties for business interruptions as a result of COVID-19, they should “take (and document) reasonable steps to mitigate the impact of the novel coronavirus. While these steps may prove futile, they are essential predicates to mounting a valid force majeure defense.”
Richard P. Lewis, an insurance partner at Reed Smith, said during a RIMScast podcast, which can be found by clicking here, that depending on a company’s exposures, some options for covering losses include contingent business interruption coverage, event cancellation policy, supply chain insurance or travel insurance.
“The first big category would be first party insurance,” Lewis said in the podcast. “That would be property insurance and more specifically a first party or property insurance policies providing ‘time element coverage’ that is impacted by time, usually known as business income or business interruption insurance.”
Lewis also said that while property (like a factory that is shut down after the outbreak) may not have suffered actual physical damage, there could be legal precedent for claiming physical loss or damage “if the building can’t be used for its intended purpose.”
U.S. companies will be dealing with “contingent exposures, meaning the property affected is their customers’ or suppliers’ and not their own property.” However, Lewis said, if those companies have their own property, coverage is likely dependent on whether it was “closed by the order of a civil authority because of the actual presence of a virus and not the suspected presence of a virus.”
Finley T. Harckham, a shareholder at Anderson Kill P.C., was quoted in the Monitor article as saying these restrictions would likely trigger civil authority coverage, which many insurance policies contain.
The Ericksen Krentel team’s experience reviewing claims involving a variety of industries affords us the skills and depth of experience to provide you with a realistic and effective valuation of a business interruptions claim. That includes helping to obtain documents to support or refute a claim, reviewing the relevant documentation to form an initial assessment of the case and identify areas of loss. Click here to learn how we can help.
As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or our social media accounts at LinkedIn, Twitter or Facebook. We hope you will monitor these regularly.
About Ericksen Krentel
Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.
That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.
Learn more at www.ericksenkrentel.com.