By Stephanie Raimbert
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What is business interruption insurance?
All around the U.S., many small businesses have suffered major losses as a result of the COVID-19 pandemic. Although some have received some relief from the federal Paycheck Protection Program (PPP), many others have been left out and are suffering. Some are even entirely out of business. Business owners are now wondering whether their insurance policies can provide any relief from these monetary losses. Sometimes, businesses have a way to recover some of their losses within the language of the benefits provisions of their commercial insurance policies. This type of coverage is called “business interruption insurance.”
What is business interruption insurance? The insurance company pays money to the small business to cover economic losses, including replacing lost income and paying for extra expenses that the business sustains, when its operations are interrupted or affected by a covered peril. The interruption must result from an event or occurrence that the policy covers. Business interruption insurance coverage (sometimes called business income coverage) is generally found within a business owners’ insurance policy or commercial property insurance.
Typically, commercial property policies provide coverage for business interruption losses that result from “direct physical loss or damage” to the insured premises. According to the National Law Review, some policies also extend “civil authority coverage,” which provides coverage when access to a business is prohibited by governmental order due to physical damage within the vicinity, whether or not the business itself is damaged.
Covered occurrences typically include theft, fire, wind, falling objects or lightning. This insurance policy may differ from contract to contract, so be sure to read your business insurance policy so you know which events or occurrences your insurer covers. Typically, under standard business interruption policies, five conditions are required for a recoverable business interruption loss: 1) physical damage, 2) to insured property, 3) caused by a covered peril, 4) resulting in quantifiable business interruption loss, 5) during the period of time it takes to restore the damaged property.
Business interruption coverage may help reimburse you in two ways:
For lost income from the destroyed merchandise (minus expenses you may have already paid, such as shipping).
Your pre-loss earnings are the basis for reimbursement under business interruption
coverage. Lost earnings, also known as the actual loss sustained, are typically defined
as revenues minus ongoing expenses.
2. For extra expenses if you must temporarily relocate your business because of the
fire (for example, the cost of rent at the temporary location).
How can business interruption insurance help small businesses during COVID-19?
Small businesses might find that collecting from their insurers near impossible because insurers are arguing that losses from the COVID-19 pandemic don't fall under covered events. This is because business interruption insurance generally will only pay when there has been a physical loss (such as a fire) to the premises of the building, and are not designed to cover communicable diseases such as COVID-19. In other words, business interruption (BI) insurance policies typically only trigger if there’s direct physical loss to property; they do not cover virus and bacteria.
However, according to Petro Zinkovetsky, founder of NYC-based Zinkovetsky Law Firm, agents and brokers are unintentionally doing their commercial clients a disservice by advising them not to file BI claims, despite the almost inevitable denial that claimants will receive from carriers. Zinkovetsky says that if policyholders file a BI claim within the strict First Notice of Loss (FNOL) timeframe, then “at least they reserve the right to dispute the insurance company’s position” at a later date.
Business Interruption: Physical Damage And Civil Authority Issues
According to Law.com, during this COVID-19 situation, businesses that have been declared “non-essential” by the government have been forced to close their doors. However, many insurance policies have a civil authority provision, which pays the insured small business when a civil authority (i.e., the governor or mayor) issues an order preventing access to the business. Law360 maintains that civil authority coverage is intended to apply to situations where access to an insured's property is prevented or prohibited by an order of civil authority that was issued as a direct result of physical damage to other premises in the proximity of the insured's property. However, this means that coverage under other civil authority clauses is triggered only by physical loss or physical damage to property adjacent to the insured’s own property. Civil authority clauses can also vary in whether they are triggered by government orders or governmental action.
There are a few common requirements to trigger coverage under most civil authority clauses: (1) loss of business income caused by an action (or order) of civil authority; (2) the action of civil authority must prohibit access to the insured’s property; (3) the action of civil authority prohibiting access to the insured’s property must be caused by direct physical loss of or damage to property other than (or adjacent to) the insured’s property; and (4) the loss or damage to property other than (or adjacent to) the insured’s property must be caused by or result from a covered cause of loss. Unfortunately, it is unlikely that the stay-at-home orders will trigger civil authority coverage because evidence suggests in the orders that they were issued for health reasons rather than because of property damage.
According to Forbes, business owners have claimed that the virus can be present on surfaces in their office or store, and are therefore directly physically damaging it. However, courts are far from resolving this dispute. Claims based on civil authority clauses are also being denied because police have not physically closed off spaces, which is typically required for a successful recovery under this coverage. In other words, small business owners might not be able to claim a business interruption under the civil authority coverage, as a state’s shelter-in-place order to combat the spread of coronavirus does not count as one.
Fortunately, as of May 18, 2020, eight states, including New York and New Jersey, have already introduced legislation that would force insurers to retroactively cover COVID-19-related business interruption claims expressly excluded or uncovered. The president also mentioned BI coverage issues in a press conference on April 10, 2020, indicating that some action may be taken on a national scale.
Given the circumstances, the best approach is to submit a notice of claim for business interruption. This preserves the right of the policyholder to recover in the future without prejudice, and the more voices legislators hear, the better.
What can business owners do now?
What should business owners do right now as the nation waits to see exactly what kind of financial support, if any, insurance companies will have to provide them because of the pandemic? Based on a report from Gallagher, there are three steps that small business owners should consider taking which involves filing a claim for business interruption.
The first step is to review your business insurance policy carefully to determine exactly what it does and doesn't cover. If you can't find a copy of your policy, call your insurer to request one.
Once you have a copy of your policy, pay close attention to what types of losses it covers. Also, look for any exclusions or limits. You might ask your attorney to review your policy for you as well. Asking a legal professional to keep an eye out for anything that might limit or exclude losses related to the COVID-19 pandemic is a good idea, as there might be terms that you missed that are related to the issue.
The next step is to start building your case for an insurance payout. Recordkeeping and documentation are extremely important, especially during this time. Document how COVID-19 has impacted your business. If the pandemic has forced you to shut your business during a state lockdown or has resulted in a 75% drop in income, document this for your insurer. If your customer base has decreased because of the pandemic, document this, too. Collect any documents, such as receipts and income statements, that help prove the financial pain that COVID-19 has brought to your business.
If you are spending or have spent extra money on your business because of the pandemic, document this, too. You might have had to boost cleaning efforts at your business. Maybe you've had to increase the security measures protecting your business as it sits shuttered. This all costs money, money that you've had to spend because of the virus and resulting shutdown. Again, collect any documents that show how much you've spent to keep your business safe or partially operating during the pandemic.
Finally, the most effective and efficient way to report a claim is to directly contact your insurance company about your policy, even if you think the company will reject it. By filing now, you'll meet any notification deadlines that your insurer might have in place. This way, if a state or federal law forces your insurer to pay up for COVID-19 losses, you won't have to worry about having missed a filing deadline.
Just because the insurer tells you that there is a virus exclusion in the policy, it does not mean that your insurance company will not be able to recover some of their damages. There usually is civil authority coverage in the policy and a lot of restaurants have spoilage coverage in their policies, and so on. It is not clear whether the virus exclusion will be enforceable or not. There has not been any legislation passed yet or any precedent set because a lot of legal cases have been filed, but they haven’t yet been ruled on. So, there are a lot of unknown variables here, which means small businesses still have a chance of recovering some of their damages if they file a BI claim. GO FOR IT!
Bottom Line
The COVID-19 pandemic has exposed the vulnerability of businesses. With viral outbreaks becoming more frequent, the market for pandemic insurance is likely to grow. In response, the insurance industry must find new ways to fulfill their critical purpose to provide protection, according to Ernst & Young Global Limited. We expect leading insurance companies and reinsurers to expand not only specific coverage for pandemics, but also loss prevention and risk advisory services that will allow them to significantly upgrade their core value proposition, especially for small businesses across the nation. Essentially, if you have business interruption insurance, you should check with your insurer promptly to see if your policy covers any of the damage you have sustained during the COVID-19 crisis. The bottom line is that a business owner should ultimately try to file a business interruption claim even if their policy doesn’t cover the virus situation because they can preserve a claim for a later date once the pandemic is over, when there is a better chance of relief for their small business.
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