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Business Interrupted

March 31, 2020

By now the COVID-19 pandemic has impacted most people’s lives significantly. And it’s bringing about more changes than just kids staying home from school and people working remotely. As the coronavirus spreads, so do the concerns of individuals and business owners. Companies are seeing business slowdowns, incurring revenue losses, experiencing disruptions in the supply chain, and/or closing due to the need to disinfect or employees becoming sick.

The voluntary and involuntary business closings due to the pandemic is causing insurers and insureds to explore the possibility of insurance coverage under Business Income insurance policies. Many small and medium-sized businesses carry some form of business income (also known as business interruption) coverage. It is typically not a stand alone policy, but part of an overall property/casualty policy. The coverage helps replace lost income and pay for expenses when a business suffers an impact by a covered loss, such as a natural disaster or fire. Depending on the type of policy, coverage is limited to certain types of disruptions and exclusions. Generally, the business owner’s policy addresses loss of income from a direct physical loss to an insured’s property by a covered peril.

Many will seek relief through their business insurance, specifically through policies that cover business interruptions. However, will coronavirus-based disruptions trigger coverage? In 2003, many insurance companies were hit hard by the Severe Acute Respiratory Syndrome (SARS) outbreak. Mandarin Oriental International Ltd. received $16 million from its insurers to pay for business interruption losses due to SARS. In a SARS-related case, the Court of Final Appeal ruled the insurance company’s liability was limited to the amount of disruption caused after the contagious disease was “required by law to be notified to an authority.” This “trigger date” limits the amount of payment a carrier has to pay to the insured. On January 8, 2020, COVID-19 was included in the Prevention and Control of Disease Regulation 2020 and the Prevention and Control of Disease Ordinance, making it a notifiable disease.

After the SARS outbreak, companies quickly updated policies to exclude certain types of disasters – specifically communicable diseases.  As a result, today, while many policies do have business interruption coverage, a number of these policies exclude compensation for communicable disease. The only coverage that pays for such losses are specifically pre-negotiated.

Specific riders must be negotiated and accepted at the time the policy goes into effect. However, there may be limitations on the amount of recovery an organization can realize. A trigger event may be outlined in the policy and may be required from a qualified agency to begin the disruption period. This could include a closure to sanitize facilities or protect employees or consumers. Organizations impacted by coronavirus — and carry communicable disease coverage — may still have to wait for an appropriate authority to inspect and certify their facility. A second order from that authority may be needed to lift the closure.

Even with communicable disease coverage, many policies limit the amount of recovery to physical costs (cleanup) and exclude loss of revenue due to the outbreak. For a business to obtain full coverage for business disruption due to a communicable disease, they will need to purchase “contingent business interruption coverage” that specifically includes loss of commerce caused by disease as well as other disasters. Unlike general business disruption coverage, this special clause or rider to a policy would address the lost revenue an organization experiences during the disruption. This could include the following:

  • Loss of business income due to disruptions from customers and costs to clean and sanitize.
  • Helping keep business keep afloat until things improve after disruptions to the supply chain for vendors and distributors.
  • Losses due to proximity. For example, foot traffic near a museum or a restaurant located near a theater could be a major source of revenue. For these organizations, a shutdown of the proximal location could create a major disruption in revenue. Continent business interruption coverage could address these losses until the situation has returned to normal.

Whether these claims will be covered due to coronavirus depends on several factors—beginning with the terms and conditions of the specific insurance policy and the circumstances surrounding the alleged loss. Additionally, there is an evolving legislative response to the coronavirus by federal and state governments addressing possible benefit payments as an alternative to insurance coverage for coronavirus-related business losses. There are presently bills pending on a federal level that could provide businesses and individuals monetary relief from coronavirus-related losses. The New Jersey legislature has proposed a bill that would require insurers who provide business interruption coverage to address such losses even when virus-related losses are excluded or limited. Many of the legislators are setting aside funds for the carriers to be reimbursed. At the moment, it is difficult, if not impossible, to predict coverage outcomes for claims due to the coronavirus. However, one thing is sure, many business owners will be looking to business interruption insurance to cushion the blow.

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