March 17, 2020

Can business interruption coverage help with losses during COVID-19? | Legal Analysis

Many businesses have already begun to feel the devastating effects of the coronavirus (COVID-19) outbreak. To help soften the blow, companies may benefit from reviewing their business interruption coverage policies.

Business interruption coverage can help pay for continuing and ongoing expenses including payroll, rent, and other expenses that don’t stop, even though the business’ source of revenue has.

But what is happening now is more than a physical damage scenario. If you look throughout the streets of New York City, there is no physical damage that can be seen. But, the loss is great and it continues to grow. The damage is real.

So, would business interruption coverage apply during this pandemic?

Unfortunately, there are no reported cases in the United States regarding business interruption coverage in connection with human infectious disease epidemics or pandemics that we can look to for guidance. The biggest obstacle companies will face when trying to activate their business interruption coverage will be whether or not COVID-19 caused any direct physical loss to their business.

It is accurate that standard business interruption policies typically include an endorsement excluding viruses and epidemics. Keeping in mind that coverage language varies depending on the insurer and the coverage negotiated, the following is a sample insuring provision for business interruption coverage:

This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.

So if the insurance recovery expert in your operation is seeking recovery based on the pandemic, their answer will be simple: No coverage. But that is not the end.  

The businesses in New York have may not have been physically damaged by Corona, it is argued; they have been damaged because they were forced to close down by the civil authorities.  

Case Study:

Take a look at Sloan v. Phoenix of Hartford Insurance Company, 46 Mich. App. 46, 207 N.W.2d 434 (1973). In that case, the court interpreted the civil authority provision as not requiring physical damage to property to trigger coverage.There, owners and operators of movie theaters made a claim for business interruption coverage following a curfew ordered by the Governor of Michigan in response to widespread riots. The policy provided:

1. This policy covers against loss resulting directly from necessary interruption of business caused by damage to or destruction of real or personal property by peril(s) insured against during the term of this policy, on premises occupied by the insured and situated as herein described.


7. Interruption by Civil Authority. This policy is extended to include the actual loss as covered hereunder, during the period of time, not exceeding 2 consecutive weeks, when as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.

What else can businesses do?

In addition to Business Interruption by Civil Authority coverage, your recovery advisor should also check to see if you have Contingent Business Interruption coverage. 

Contingent business interruption provides protection against lost earnings that are the result of a third-party supplier or distributor shutdown whose interruption directly impacts the company’s ability to produce a product or provide a service.  This is especially helpful to hotels, restaurants and food vendors located next to a popular draw such as a theme park, professional sports venue or other attractions.

One more thought with respect to the physical damage requirement: If an individual contracted COVID-19 on the company’s premises, there will be a strong case to make that those individuals being on your premises and contaminating them with the COVID-19 is an actual, physical loss. When the property becomes unusable because of that type of event that it constitutes direct physical loss. Another options is turning to endorsements within a policy that provide for communicable disease coverage. If you have that in your policy, it typically won’t require direct physical loss, it will only specify certain diseases. 

It is crucial that knowledgeable eyes review the business interruption policy before accepting a NO COVERAGE position.

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