Business Interruption Insurance and Covid-19

We have received a number of inquiries recently regarding business interruption coverage in light of the Covid-19 stay-at-home orders. Business interruption coverage, also called business income and extra expense insurance, replaces income lost and expenses paid in the event of a disaster that causes a business to close or cut back its operations.

Please note that focus of this post is business interruption coverage offered under traditional businessowner policies. Some policies, particularly those issued to supply chain businesses, offer extended coverage for infectious diseases. Further, contingent business interruption coverage may cover any loss caused by a disruption in the supply chain. If you are unsure as to coverage available to your business, we recommend that you have your policy reviewed by a lawyer familiar with property insurance claims.

The property and casualty insurance business took a licking following the 2002-2003 SARS pandemic. Even though most business interruption policies required claims for financial losses to be directly related to a “physical” loss to the insured’s property by a covered cause of loss, some courts found coverage in policies intended to exclude purely financial losses. Given the amount of deep cleaning every business is now required to undertake as result of Covid-19, an argument that the “damage to physical property” requirement has been met.

In the years since SARS, many carriers have included virus and bacteria exclusion riders in their policies. As shown on the linked example, coverage is completely excluded for damage caused by “…any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease.” However, according to Jane Cunningham, of Harris-McKay Insurance in Anniston, “Not every carrier has adopted the virus and bacteria endorsement. You really have to check the policy.”

One clever client pointed out that his business’s losses weren’t caused by a virus, they were caused by Governor Ivey. In the Spring of 2020, the Governor’s Office declared a state of emergency as a result of the threat caused by the coronavirus. The order was later amended to require the closure of all businesses and facilities not deemed to be essential. A question then emerges if losses caused by stay-at-home orders might be covered.

Many, if not all, business owner policies provide extended coverage for business interruptions caused by the actions of civil authorities that prevent businesses from operating at their usual locations. An order to shutter all but “essential businesses” by the Governor of the State of Alabama certainly satisfies the coverage condition described above. However, the vast majority of policies further require that the civil authority action closing the business be due to (a) a direct physical loss or damage to (b) some physical location other than the insured’s location, (c) but within 100 miles of it, and (d) resulting from a covered cause of loss.

It seems quite likely that insurance companies will deny claims for losses directly related to the disease based on coverage exclusions. Because many legislators – if not legislatures – are averse to letting multi-billion dollar industries off the hook, retroactive coverage legislation has already been introduced in many states, including New Jersey, New York, Pennsylvania, Louisiana, and South Carolina.

Because the premiums have not been collected for Covid-19 coverage, insurance industry opposition to legislative retroactive virus coverage is expected to be fierce. Not one to miss out on future premiums, many carriers are planning on offering extended virus coverage on future policies.

In addition to losses caused by business interruptions, other forms of coverage such as event cancellation insurance, travel insurance, and blocked access to industrial sites insurance may be implicated by Covid-19.

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