Business Interruption Insurance & COVID-19: What Does It Cover?

The COVID-19 pandemic led to unprecedented shutdowns that affected businesses all over the state. Shops, restaurants, salons, and bars that had once greeted hundreds of customers per day were faced with a fraction of their original customer base or, in many cases, laws that prevented in-person operations at all.

Fortunately, some business owners have insurance coverage that can compensate for the income losses they suffered due to the COVID-19 pandemic. If your business carries commercial property insurance, you may have this coverage as part of your insurance package: business interruption insurance.

What is Business Interruption Insurance?

Business interruption insurance is designed to cover businesses for any financial loss they may suffer when a covered, outside disaster prevents the business from operating. It is often sold as part of a larger commercial property insurance package. Business interruption insurance usually covers (a) physical damage to business property, as well as (b) loss of income and overhead expenses resulting from a “physical loss or damage to” business property.

This may extend coverage for business losses caused by the coronavirus shutdown.

What is Covered Under Business Interruption Insurance?

What is covered and when coverage applies depend on the actual language of each particular policy. In general, however, business interruption insurance covers lost profits and overhead due to a suspension or slowdown of business operations.

Analyzing whether a business loss is covered requires asking two questions.

• First, is there a covered loss? Business interruption insurance typically requires the loss of business income resulting from some “loss or damage” to business property. The risk that led to the loss must be covered.
• Second, is that loss subject to any exclusions?

Risks covered by business interruption insurance may or may not include:

• Fires
• Wind damage
• Falling objects
• Lightning
• Theft

Other insurance plans will cover other natural disasters, such as earthquakes or flooding.

Other Forms of Business Interruption Insurance

There are more specific forms of business interruption insurance as well, often available as an add-on to your existing policy. These include:

• Contingent business interruption insurance. This coverage typically protects against losses resulting from disruptions in the supply chain, such as a loss of business income due to the inability to obtain materials from a supplier, or the inability to ship products to a client. The business disruption usually must be related to physical damage to the supplier’s or customer’s property by a “covered peril.” 
• Ingress/egress coverage. Ingress/egress coverage applies to business interruptions that result from the inability to access the company’s location. For example, ingress/egress coverage may apply when your store is located in a mall that has closed down, preventing access to the business location.
• Civil authority coverage. Similar to ingress/egress coverage, civil authority coverage typically applies where business is interrupted due to a government order denying access to the business property. Looking back at the previous example: if the mall where your store is found is shut down because of a government order, the loss may trigger civil authority coverage.

As with the other coverage extensions, ingress/egress and civil authority coverage typically require that the inability to access the property be a result of such “loss or damage” to some other property.

A common misconception—usually relied on by insurance companies—is that business interruption insurance is only triggered where the loss of income results from some physical damage to property. While each insurance policy is different, as a general rule, physical damage to insured property is not required to trigger business interruption coverage. Rather, typical insurance policies only require a “physical loss” of business property, which some courts have interpreted as including the inability to access the business property for reasons other than physical damage.

Other Insurance That Can Provide Coverage

In addition to business interruption insurance, there are several other types of insurance that could help ease the financial burden on businesses.

• Event cancellation insurance covers organizers of public events against losses incurred from cancelled events.
• Key person policies may cover losses to a business resulting from the inability of a key employee to perform work. A business may also be the beneficiary of life insurance policies on key employees or owners. 

The explanations detailed here only scratch the surface of this topic. For a more in-depth explanation, it is best to contact our insurance attorneys so they can review your specific policy coverage in greater detail.

So What About COVID-19?

To be sure, if your business was shut down in order to clean an active COVID-19 contamination, there is a “physical loss” for purpose of interruption insurance.

However, such active contamination may not be necessary. The government order shutting down uncontaminated businesses in order to slow down the spread of COVID-19 arguably qualifies as a “physical loss” since it prevents customers from accessing the business premises.

As noted, having a business loss which results from a “physical loss or damage” is only the first step of the analysis. To be covered, the loss cannot fall within one of the many exclusions from coverage.

Possible COVID-19 Exclusion From Business Interruption Insurance

When it comes to the COVID-19 shutdowns, insurance companies may argue that the exclusion most likely to apply is one for losses due to a “virus” or “microorganism.” These exclusions are common in business interruption policies, but vary from policy to policy. Typically these exclusions bar coverage for any business loss that arises due to a virus or other microorganism.

With respect to the COVID-19 shutdown, a key question for insurance coverage will be whether the losses were caused by the virus, or by the government order shutting down businesses. 

Insurers are expected to take the position that the shutdown, and resultant losses, were all caused by the virus and are excluded. However, there is an equally compelling argument that the exclusions should only be limited to situations where the business is shut down because of an active contamination. As the vast majority of businesses in the United States have not had an active contamination, we believe that the exclusion does not apply and the losses should be covered.

Because this is the first time in modern history that the United States has completely shut down its economy to address a pandemic, no legal precedent for addressing this issue exists. Given the billions of dollars at stake, we anticipate that insurers will uniformly deny all business interruption claims on the basis that either there is no covered event (i.e. no “loss or damage” to property), or that one or more exclusions apply. This issue will ultimately be decided by the courts.

Call PARRIS For Business Insurance Help

Determining whether COVID-19 related losses are covered under one or more insurance policies is a complex process. Policies are usually hundreds of pages long and use specialized language, the interpretation of which is subject to numerous legal rules.

Companies should act quickly to assess their coronavirus-related losses and review their available insurance policies. They should promptly notify their insurers of losses, as some policies may contain strict reporting deadlines.

PARRIS insurance attorneys have decades of experience recovering millions of dollars from insurance companies. PARRIS Law is offering free consultations to California businesses financially impacted by the coronavirus shutdowns. We will review your policies at no cost, and advise whether you may be entitled to compensation from your insurance company. To start your free case consultation, call PARRIS at (661) 485-2072 or email contact@parris.com.