Business Interruption Insurance

What is Business Interruption Insurance?

An insurance policy providing compensation for lost income and increased expenses resulting from the interruption of normal business operations caused by damage to the business property. The question is whether businesses suffering financial losses due to widespread coronavirus-related shutdowns will be eligible for compensation through a business interruption claim.

The nature and extent of coverage provided by business interruption insurance depends on the specific wording of the interruption insurance policy. Generally, this type of insurance will cover short-term financial loss arising from the interruption of a business’ operation as a result of physical damage to the business premises or covered equipment. In some cases, the coverage is extended to include prevention of access to the premises or financial loss resulting from interruption to a supply of essential goods and services (i.e. supply chain coverage). The purpose of business interruption insurance is to restore a business to the same financial position it would have been in had the interruption not occurred. Standard business interruption insurance policies typically include one or more coverages designed to protect policyholders against reduced earnings and extra expenses resulting from damage to the business property or the property of others on whom they may depend for their business. These coverages may include:

• Business income – This insurance covers income losses when the business suffers a necessary interruption of operations due to a direct physical loss or damage from a covered cause of loss.
• Extra expense – This insurance covers the costs associated with relocating business operations and equipping and operating out of temporary quarters due to property damage on the business premises.
• Civil authority coverage – This extends coverage to business losses resulting from an interruption of business operations in cases where local, state or federal authorities prohibit access to the business premises as a result of covered damage to other property.
• Supply chain coverage (contingent business income) – This extends coverage to businesses that suffer income losses resulting from an interruption of business operations due to covered property damage sustained by a key supplier or customer.
• Ingress/Egress – This extends coverage to business losses resulting from an interruption of business operations occurring when physical access to the premises is hindered by property damage resulting from a covered cause of loss.

Economic Losses Stemming from COVID-19

Due to government-mandated business closures that state and federal authorities began implementing in March to slow the spread of COVID-19, businesses across the country were forced to close their doors and sustain a significant loss of income. Given the extent of the economic loss caused by the COVID-19 public health crisis and the government shutdown orders, business owners should be able to recover financial losses under the civil authority coverage or supply chain coverage clause of their business interruption insurance policy. Unfortunately, these clauses generally contain a property damage requirement and the decision is split as to whether this type of coverage applies in cases where businesses were ordered to shut down by the government to prevent the spread of COVID-19 or became uninhabitable or nonoperational because of contamination or the threat of contamination during COVID-19. Attorneys across the country are currently reviewing claims by business owners whose businesses were shut down due to COVID-19 and determining whether the presence of the virus or the threat of contamination might constitute some form of property damage and thus trigger business interruption coverage.

Business Interruption Insurance Exclusions

Many business interruption insurance policies include specific exclusions, such as loss arising from property damage caused by an earthquake or another natural disaster. The problem U.S. business owners are facing during the COVID-19 crisis is that insurance companies are claiming that coronavirus-related losses are excluded from business interruption policies, and that even if they weren’t, coverage would still be denied for claims arising from COVID-19 because the virus did not cause physical damage. Even policyholders who don’t have an exclusion for losses caused by “viruses or communicable diseases” in their interruption insurance policies are being denied coverage.

New Legislation May Force Insurers to Pay COVID-19

Interruption Claims The COVID-19 pandemic continues to have significant economic consequences for businesses across the United States and a key concern that business owners will face in the coming weeks and months is whether all or a portion of their coronavirus-related financial losses will be covered by insurance. Because many standard businessowners, commercial property and commercial package policies do not provide business interruption coverage for losses resulting from coronavirus-related shutdowns, insurance companies are under pressure to pay business interruption losses from COVID-19 despite what their policies say. Some states are considering legislation that would force insurers to pay coronavirus-related business interruption claims that are not currently covered. New York, Louisiana, Massachusetts, Ohio, Michigan, South Carolina and Pennsylvania have each proposed a bill requiring insurers to cover otherwise-excluded business interruption claims arising from COVID-19. In the meantime, the COVID-19 business interruption litigation continues to grow.

Lawsuits Over Denied Coronavirus Business Interruption Claims

March 2020 – One of the first COVID-19 business interruption lawsuits is filed by the owners of a restaurant in New Orleans, who claim that their interruption insurance should cover damages from COVID-19.

March 2020 – The owner of several Michelin-starred restaurants files a lawsuit in California alleging that his insurer owes coverage for business interruption and property damage claims stemming from COVID-19.

April 2020 – Two restaurants in Miami file a putative national class action lawsuit, declaring that “the COVID-19 pandemic and the corresponding response by civil authorities to stop the spread of the outbreak triggers coverage, has caused physical property loss and damage to the insured property, provides coverage for future civil authority orders that result in future suspensions or curtailments of business operations.”

April 2020 – A national putative class action lawsuit is filed by a Fort Lauderdale restaurant, alleging that the stay-at-home orders issued by Florida Governor Ron DeSantis “were issued in response to dangerous physical conditions and caused a suspension of business operations on the covered premises.”

April 2020 – A Pennsylvania-based restaurant owner files a lawsuit seeking coverage under an “all risks” policy for business interruption, contamination, extra expenses and civil authority due to the coronavirus pandemic and government shutdown orders.

April 2020 – President Trump indicates in a press conference that he would be supportive of requiring insurers to pay business interruption claims arising from the COVID-19 outbreak, in some cases.

April 2020 – A law firm files two COVID-19 business interruption class action lawsuits in a Pennsylvania state court.

April 2020 – A group of law firms file six class action lawsuits against insurers in federal courts across the country, on behalf of businesses seeking interruption coverage for coronavirus-related losses.

April 2020 – A company that runs an Alabama-based restaurant sues its insurer for lost revenue due to food service-related restrictions put in place during COVID-19.

April 2020 – A dental office in Illinois files a federal lawsuit against its insurer, claiming that business interruption coverage should have been triggered when the office was forced to close after state authorities classified elective dental work as nonessential.

April 2020 – A lawsuit is filed in Florida by a dive shop, claiming that mass contamination and closure due to civil order constitute the requisite physical damage for business interruption insurance.

April 2020 – An insurer faces a business interruption lawsuit filed in state court by a nonprofit theater company in Indiana, which claims that the forced loss of use of its facilities “fits easily within a ‘direct physical loss.’”

April 2020 – A restaurant in Wisconsin files a class action lawsuit demanding that Society Insurance provide coverage for business losses sustained as a result of business closure orders put in place by Governor Tony Evers to stem the spread of the novel coronavirus.