Business Interruption Insurance: Funding Lost Profits from COVID-19

Don’t take no for an answer – file notice of a claim now

Many businesses invest in insurance coverage for lost profits and extra expenses arising from a disaster. Known as business interruption insurance, the coverage is usually attached to a larger property and casualty policy or comprehensive commercial package.

There is little question that such a policy would cover a fire at a manufacturing facility or wind damage from a tornado. The claim amount would, in theory, restore the business to the profit it would have earned had the disaster not happened and would reimburse the business for the extra costs necessary to remain in operation during recovery. The claim amount would cover a period of restoration from the date of the event to the date of full recovery. Further, the final settlement would cover fixed costs, profits less saved costs, and extra expenses.

Granted, a global pandemic such as COVID-19 is a bit of a different scenario for policy owners.

Insurance is a contract between the insured and the insurer; and it covers what the contract says it covers. Most events are relatively routine with a long history of successful underwriting of the risk and reserves for payments known and available. Then a catastrophic event such as COVID-19 happens, and controversy is rampant.

The controversy is fueled due to:

• Losses are potentially huge and could be catastrophic to the insurance industry, which is reluctant to pay, and
• Coverage is often determined in the courts after the incident or by legislation and regulation at the state and federal levels of government.

Carrier Funds and Financial Assistance

There is a massive pool of carrier funds that could potentially be tapped to help pay the cost of the pandemic to businesses. There’s also a growing sentiment that this pool should be tapped whether or not coverage is explicit in the insurance contract. Businesses should first read their policies – it is possible they are covered—as communicable diseases were specifically written into some policies through major brokers in the last few years. However, most businesses will find themselves in the controversy for now.   During this review, also note protection arising from supply chain disruption, contract performance, and presence of force majeure clauses. Seek experienced legal counsel to assist in the review.

State Legislation and More to Address Business Interruption Coverage

The New Jersey legislature is considering a bill to mandate payment of business interruption coverage for businesses with less than 100 employees. Mayors in many jurisdictions specially cited physical damage from COVID-19 in their orders for mandatory shutdown. On March 18, a bipartisan letter from Congress was sent to several insurance associations requesting that carriers pay claims (payments that may be backed by the Federal government), applying a broad interpretation of coverage for the virus.

Oceana Grill in New Orleans and French Laundry in California have already filed legal actions against their carriers to pay claims for their mandated shutdowns. State regulators in Ohio, Massachusetts, New York, and California have asked carriers to produce data and experience to assist in their decision-making on this subject.

Impact to the Industry

The American Property Casualty Insurance Association estimates that paying business interruption claims will cost the industry $220 to $383 billion per month. It is also estimated that there is a pool of $800 billion of insurance reserves to cover this amount. There is speculation that a Victims’ Fund similar to what was established after the events of 9/11 may be a partial answer, whereby the insurance industry along with government will provide general assistance.

In other words, stay tuned.

Defining a Disaster for Insurance Coverage

According to Risk Genius (a consulting firm that digitally reviews insurance coverage), 80% of business interruption policies are silent on whether a virus and ensuing pandemic classifies as a disaster. Silence can be interpreted as no coverage – or not. Government ingress/egress, meaning business shut down, is generally listed in policies and covered. Places of public accommodation shuttered by government mandate or curfew likely have a strong argument for coverage. Businesses shut down voluntarily may not have as strong an argument.

What to Expect as COVID-19 Pandemic Continues

While we do not know how this controversy will be solved, we do know there are arguments on both sides, a huge amount of money at stake, and political will to help businesses through this crisis. As well, there are judges and lawyers ready to adjudicate this matter, state regulators who will act, and legislatures that will enact laws. It is possible that business interruption claims will be paid without regard to contract language, and businesses should therefore not take no for an answer from their agents just yet.

We recommend filing a notice of claim immediately (if you believe you qualify) so that you do not miss potential benefits due to lack of a timely notice. This should be done in consultation with an experienced attorney in coverage matters. Start preparing now to file a supportable claim by establishing special accounts and procedures to track extra expenses such as clean up, refunds, contract penalties, new hiring, and more.  Financial information should also be up to date. Finally, engage forensic professionals to organize, prepare, and document the claim over the entire claim period.

For more information, visit our COVID-19 Resource Center.

Mary has in-depth experience as an expert witness in insurance matters and in the preparation of business interruption claims. She worked extensively on issues surrounding the 9/11 tragedy. Sikich’s Forensic & Valuations team provides claims preparation services to help your business during difficult times. Contact our team for more information.