Business Interruption Coverage for COVID-19

With thousands of small businesses under siege, insurance companies are facing increasing pressure to cover claims for business interruption related to the pandemic crisis. Insurance companies have thus far resisted the demands of business owners because they say their policies do not cover circumstances created by a pandemic. Most business interruption policies do not include specific language for outbreaks of disease, and, if they do, it is usually vague.

However, a growing chorus of critics, led by the President as well as federal and state lawmakers, are arguing that insurers need to step up to help small businesses in distress. Currently, several pieces of legislation that address the issue are working their way through Congress and several state legislatures.

Are COVID-19-Related Losses a Valid Claim?

At issue is whether the presence of the coronavirus on or near the policyholder’s property qualifies as physical damage or property loss, which is what typically triggers coverage. That is the core argument of plaintiffs challenging insurer denials in the courts.

Insurers argue otherwise and, practically speaking, if they were obligated to pay out on all pandemic-related claims, it would bankrupt the industry. According to the American Property Casualty Insurance Association, total COVID-19-related claims by small businesses could exceed 30 million, amounting to losses of $220 billion to $383 billion per month.

The Federal and State Governments Say That They Are

The issue of insurers’ obligations for pandemic-related losses could be laid to rest if bills currently winding their way through federal and state legislatures come to pass.

A bill establishing a Federal program to cover pandemic-related losses in the insurance industry has been introduced. The bill, titled the Pandemic Risk Insurance Act of 2020, would cover insurance losses in excess of $250 million up to $500 billion in a calendar year. Insurers would be required to pay an annual premium for the reinsurance coverage.

Not willing to wait through the partisan machinations of the U.S. Congress, several states have introduced their own measures to incentivize insurers to cover business loss claims. The Louisiana legislature has proposed two bills that would require insurers to cover COVID-19-related claims back to March 11, 2020, retroactively for the duration of the declared state of emergency.

In addition, Louisiana has proposed a bill that would allow insurers to participate in a business compensation fund that would administer all claims. In exchange, insurers would be immune from claims of bad faith made by claimants seeking compensation from the fund. Other states proposing similar legislation include New Jersey, New York, Ohio, and Massachusetts.

Meanwhile, as the Federal and state governments continue to push forward with their legislative solutions, an increasing number of businesses have taken to the courts to fight the battle themselves. Most of the plaintiffs, who have joined together as groups from different industries, are alleging breach of contract and bad faith denial of insurance. The final outcome for these cases could take years.

Prepare Now for Loss Recovery

In anticipation of legislative solutions or even a favorable court ruling, businesses should prepare for loss recovery through thorough documentation. Not only will you need to document your business finances with tax returns, financial statements, bank statements, sales forecasts, invoices, contracts, receipts, inventory records, and payroll records, you will also need to document your losses, which can be much more involved.

In addition to substantiating the loss of sales and customers, you will have to document sales trends and business cycles leading up to and after the crisis. You must also be able to document the steps you took to mitigate losses.

A business policy expressly covering viral contamination or a pandemic is more likely to succeed on a claim for coverage than a business whose policy expressly excludes coverage for viruses.  Whether a policy will provide coverage will depend upon the actual language of the policy and the specific circumstances giving rise to the claim.  Businesses should therefore review their policies to determine their rights.

We feel that given the current climate in federal and state governments, if you have business interruption service you should file a claim.  It may be denied upfront, but if the law changes you would not want to miss out on a potential award by not having a claim in to your insurance company.

Please contact us if you have questions or need assistance in the documentation and claims process to help ensure you attain the appropriate coverage.