Business Interrupted: Insurance Considerations in an Infected World.


Businesses throughout the nation are struggling to survive in the new environment of closures, social distancing and lock-downs. The loss of income is catastrophic to the business owners and employees alike.  One potential source of funds is through business insurance, a source probably never intended for the claims now being made.

The American Property Casualty Insurance Association estimates losses of $431 billion per month from businesses with 100 employees or fewer. This is an amount that vastly exceeds collected premiums, placing insurers in the position of potential insolvency if  all anticipated claims are paid. 

Not surprisingly, carriers have been flooded by claims for lost income.  Insurers, in turn, have been denying claims quickly, often with no investigation.  Carriers are encouraging insureds not to make the claims, based on expected  denials based on common policy exclusions.

After multiple complaints, California Insurance Commissioner Ricardo Lara issued a notice to California carriers, directing them to stop discouraging claims; fully investigate all claims made; provide all necessary forms and information to submit a claims; accept or deny claims within 40 days of receipt; and document all portions of the claim accepted or denied, unless the claim is fully denied. 

What is a business to do if it has experienced shut-down related losses, and what can the business expect to recover through an insurance claim?  The issue is so new that clear answers are not yet known. However, each insured should review the possibilities as they pertain to each individual situation and policy.

Even with an uncertain outcome, all viable claims should be made.  The insured should contact its insurance agent/broker and make the claim without delay. The claim must be acknowledged within 15 days.  The carrier will ask for details of the loss and financial information. The insured must cooperate in every way, responding to all reasonable requests. 

There are many policies issued to different types of business.  Almost every business has coverage for property damage.  Some have coverage for business interruption.  Some have coverage for losses due to governmental orders or laws. The nature and amount of available insurance benefits first depends on what the policy says and how the language is interpreted.

An insurance policy is a contract.  Its terms will be enforced, based on the mutual understanding of the parties:  the insurance company and the insured.  If there is an ambiguity in the policy language or intended meaning of that language, the courts will interpret the meaning, based upon a number of factors.

Most business policies include coverage for losses due to property damage. A property damage claim typically requires direct physical loss or damage to property.  The confirmed presence of the virus might be considered a direct physical loss.  There is no California case law that settles the question, but some analogous cases suggest a favorable outcome on that issue. A business closure without confirmed virus on the premises, but as a precaution against the virus may not constitute direct physical loss, precluding coverage under this theory. 

If the requirement of direct physical loss is met, policies must then be examined for exclusions. Most policies have some form of a virus, bacteria and contaminant exclusion.  Application of this exclusion is already being challenged in newly-filed lawsuits. 

Many policies include business interruption coverage.  A condition to coverage may be a direct physical loss or damage to the premises. Apart from that hurdle, coverage may be limited to only the period and cost required to repair, in this instance clean and decontaminate, the damaged premises.  If there is coverage under this section, it is likely limited in scope and amount.

Contingent business interruption insurance may also exist for some businesses. This coverage type covers lost profits resulting from covered property damage suffered by upstream or downstream suppliers, distributors or customers.  It may also apply to “feeder” businesses, such as hotels and restaurants supporting large resorts, sports areas and similar venues. However, the requirement of physical loss or damage must still be met, and coverage is always subject to exclusions. 

Another potential for coverage rests in the civil authority provisions found in some policies. This coverage applies to financial losses arising from actions and orders of civil authorities that prohibits, impairs or prevents access to the business or premises. When there is a legal order prohibiting the conduct of business, this benefit may be available. When an area is not under orders, and only under an advisement or recommendation of distancing, the civil authority requirement is seemingly not met. 

Civil authority coverage usually requires actual physical damage within a certain geographic distance from the insured.  Assuming viral presence, or the threat of the virus is considered physical damage, a potential for coverage may exist.

Some carriers sell contagious disease coverage. The coverage usually limited, with sub-limits that apply only cover the costs associated with decontamination and cleaning, and the losses suffered during the time the business is closed for that purpose. It is unclear whether this coverage applies to extended periods of closure, especially if there is no confirmed viral presence at the business.

There are standard policy exclusions found in most policies that will affect any coverage determination.  They include viruses, bacteria, microorganisms, communicable diseases, mold, seepage, pollution and contamination.

The current situation is one of complete uncertainty.  Economic losses are enormous and continuing.  Every source of relief must be explored.  Stone Dean can review your policy and assist in shepherding you through the claims process, with the goal of maximizing your loss recovery.

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