Business Interruption Insurance and COVID-19
The COVID-19 pandemic and the various measures designed to contain its’ spread has had an unprecedented impact on the business community. Many businesses, such as those in the hospitality sector, have had to cease or drastically curtail operations with uncertain prospects for a restart. Not-for-profit organizations are seeing fewer donations at a time when many are seeing a higher demand in services due to the human toll of social isolation. Businesses on the other end of the spectrum that have been able to continue uninterrupted are certain to be impacted in the future due to the economic slowdown. Suffice it to say that the vast majority of organizations have had some level of negative impact in the past two months that will continue in the near future.
Business Interruption insurance has been a frequent topic in recent weeks as a possible avenue for organizations to recover lost profit and pay for continuing expenses. There have been a number of high-profile lawsuits against insurance companies for denying these claims. A recent and local example is the lawsuit by Legal Seafoods against their insurance carrier for a claim denial. Insurance policies vary in the scope and range of coverages so it is impossible to state that all of these types of claims should be covered or denied. However, we believe that the majority of these claims face difficult prospects for recovery.
Business Interruption (also known as Business Income) is a coverage commonly found on commercial property insurance policies. In some cases, there is a specified limit while other types of policies designed for smaller businesses are written on an “actual loss sustained” basis for a 12-month period. The coverage is designed to allow a business to recover continuing expenses (payroll, rent, leases, taxes, etc.) and lost profit when it sustains a covered property loss that results in a shut down or curtailment operations. An additional component called Extra Expense is often included with Business Interruption. Extra Expense addresses the additional costs a business sustains over and above normal operating expenses that are required to expedite recovery. A shut down required by “Civil Authority” is a common feature that can extend coverage when a municipality mandates that a business close due to some form of physical damage in the nearby proximity (i.e. gas main explosion). In all cases the coverage trigger is a covered property loss such as fire, wind, vandalism, or collapse.
There are several challenges for Business Interruption claimants but two of them stand out. The business closures or curtailments have been primarily due to government mandates designed to minimize or slow the spread of a virus. In most cases there was no physical damage or direct contamination requiring the business closure. Secondly, most policies contain a specific exclusion for a virus. Exclusions for communicable diseases and viruses were almost universally added starting in 2006 as a result of SARS and have been reinforced by other outbreaks such as H1N1 and Zika. The primary reason for these types of exclusions is that an event or series of related events impacting millions of individuals and businesses throughout the country at the same time period is “uninsurable”. It is estimated that the monthly impact for COVID-19 is in the $250 to $350 billion range. By comparison, the aggregate insured loss from natural disasters was $52 billion in 2018 for the full year.
Legislation has been introduced in a number of states, including Massachusetts, designed to compel the insurance industry to pay for Business Interruption losses due to the COVID-19 related shut downs. These legislative actions will be contested on constitutional grounds that will likely draw out for years. Perhaps a solution can be developed that is similar to how Congress and the insurance industry responded to the September 11th attack. From purely an insurance point of view, the attack on September 11th was an unforeseen tragedy that generated more than $40 billion in losses in addition to the human toll. Human and economic losses continue with high levels of cancers for first responders that worked on recovery at World Trade Center. Congress and the insurance industry developed the Terrorism Risk Insurance Act that allowed insurance companies to absorb the initial $200 million in claims associated for a single terrorist event with the Federal government taking on the excess.
We have spoken with many of you over the past few weeks regarding this issue. We encourage any of you with questions on this issue to reach out to us. Some of you have decided to file claims and we are certainly willing to discuss and assist others that might be contemplating the same action. Situations are unique and policy conditions can differ. We wish all of you a speedy recovery from the recent events and, above all, good health.