Business Interruption Insurance and COVID-19

The question on everyone’s mind regarding COVID-19 that we have spoken to over the last few weeks, is “does my business interruption cover this?”

Business interruption insurance policies are governed by contract law and the coverages and exclusions may vary from insurance company to insurance company, as well as from business to business. In other words, commercial insurance policies have unique terms, conditions and exclusions that are not uniformly applicable to every business. Business interruption coverage is typically triggered under a commercial insurance policy when a covered risk causes direct physical loss or damage to the insured’s premises resulting in the need to shut down business operations.

For example, if a fire damages a veterinary hospital and the business cannot operate during repairs, business interruption coverage could be available subject to the terms and limits of the businessowner’s particular policy. Business Interruption was designed to replace the lost net income and ordinary payroll so the business can stay afloat during the shut-down, otherwise known as the “period of restoration”.

A business interruption insurance policy should clearly list or describe the types of events, commonly known as perils, that it covers. Perils that are not listed or described in the policy, or that are specifically excluded in the policy, are generally not covered. These excluded perils are typically risks that are too great to be underwritten at an affordable price. For example, insurance policies generally contain exclusions for loss or damage caused by war, nuclear accident and radiation. The potential loss costs from such perils are so great that providing coverage would jeopardize the financial solvency of insurers and many businesses could not afford the premium costs to cover such catastrophic events even if they were covered perils. Global pandemics like COVID-19 usually fall into this category of risks or perils that are not covered. Business interruption policies were generally not designed or priced to provide coverage against communicable diseases, such as COVID-19, and therefore usually include exclusions for that risk.

Some commercial policies may provide business interruption coverage when a business is shut down due to an order by a governmental or civil authority. However, for coverage to apply, most insurance policies still require a direct physical loss from a covered peril as the underlying cause of the business shut down or closure. We see this every year in Florida. Often, when an evacuation is ordered due to an approaching hurricane, a business will experience a forced shut down. Even though wind may be an included peril, if no damage occurs to the building or personal property, the business policy will not engage.

Now, not to get ones hopes up, but sometimes carriers will provide coverage where the did not have to. It’s extremely rare, so we understand if you were not aware that actually has happened. But, 9/11 was considered an act of war.  Every carrier that provided property coverage to any business in the twin towers or even the many carriers that insured the buildings that were damaged on that fateful day, could have easily excluded the event under the terms of those policies (war is excluded). The insured industry quickly realized that the optics of denying the claim could result in a fallout of confidence far greater than just the cost to rebuild the towers. We were knocked down as a country and we needed the right leadership and teamwork to stand back up, dust ourselves off and engage this new reality.

But, insurance companies can not bare the burden of insuring against the international policy of one Presidential administration to another. As such, they agreed to cover many of the losses that 9/11 created in New York; however, that deal had strings attached. As a result, insurance carriers charge “terrorism premium” on every workers compensation policy you find to this day. Many business policies offer you the ability to exclude the coverage if you like, but they will quickly charge you money if you include it. And even if another 9/11 comes to our shores, the U.S. government is still going to be responsible for paying for a majority of the damages. But, its one thing to cover buildings in New York City and an entirely different conversation with respects to covering 3-6 months of loss revenue for every business in the U.S. after the first major pandemic in 100 years.

Nevertheless, insurance policies can be different and it is important for all business owners to discuss their insurance policy coverages, exclusions, coverage limits and applicable deductibles directly with their insurance professionals such as agents, brokers or employees of the insurance company.

We sincerely hope that everyone stays safe and healthy.