Business Interruption Coverage and The Coronavirus Pandemic

The Covid-19 pandemic is causing business closures, supply chain disruption, and income losses to businesses large and small in the Commonwealth. The emergency order issued by the Governor on Sunday limiting gatherings of all types to less than twenty-five persons and banning all on-premises consumption of food or drink at bars, restaurants, or establishments brings home how this devastating virus will affect business income.

Businesses will naturally ask agents if they have any insurance to help them cope

Any businesses affected by shutdowns and shortages from the Covid-19 pandemic will naturally ask their agents if any of their insurance policies might offer them any relief. The most direct and likely coverage would appear on any business interruption coverages included in commercial property, business owner policies, commercial multi-peril policies, and specialized multi-peril policies.

Agents answering these coverage questions may find this summary of business interruption insurance and the Covid-19 pandemic’s business interruption losses useful. Also, the summary below about the New York Department of Financial Services requiring all property insurers doing business in New York to provide a benefit statement on business interruption insurance and Covid-19 to insureds may also provide some useful information.    

The most relevant coverage that insureds might believe applies is business interruption

Business interruption coverage added to a commercial insured’s property or business owner’s policy can provide substantial additional benefits in the event of a covered loss. Three of these coverage forms are:

• Business Interruption Insurance
• Business Interruption & Extra Expense Insurance
• Civil Authority Business Interruption Coverage

The first coverage, business interruption, is supplemental coverage for commercial property insurance. If a business suffers a property loss such as a fire to its business premises, property insurance will pay for the business property loss. Without this additional coverage, a business must fend for itself financially until it can resume operations.

The purpose of this coverage is to protect the prospective earnings of the insured business but only to the extent that they would have been earned if no interruption had occurred. However, all business interruption policies require specific calculations and financial record reviews to determine what amounts will put the policyholder in the same position they would have been “but for” the insured event.

Business interruption policies require a recoverable loss have five criteria: (1) physical damage, (2) to the insured property, (3) caused by a covered peril, (4) resulting in a quantifiable business interruption loss as defined in the policy, (5) for the time it takes to restore the damaged property.

Usually, the additional coverage is tied to the underlying property damage coverage because only business interruptions or income losses resulting directly from physical loss or damage to the insured property will be covered.

Extra expense coverage is intended for businesses that cannot allow their operations to cease because of damage to their premises. These businesses have been described as those “that [would] suffer a permanent loss of customer goodwill as a result of even the temporary curtailment of operations.” For businesses needing extra expense, insurance continuity of service is key to their success.

Extra expense insurance meets this need because it reimburses the insured for costs in excess of normal operating costs reimbursable under business interruption coverage that are required to keep the business going while repairs to the business premises are in the works.

The civil authority coverage, depending on the form, will have an insuring agreement that provides, “[The insurer] will pay for the actual loss of Business Income [the insured] sustain[s] and necessary Extra Expense caused by the action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”

This coverage requires, like the other two coverages, Business Interruption, and Extra Expense coverage, that a property suffers a direct physical loss. However, the property is one that is not a described premise of the policy

The direct physical loss requirement, Covid-19 closure orders, and coverage suits

The overriding coverage issue concerning business interruption losses resulting from the consequences of the Covid-19 pandemic is the ‘direct physical loss’ provision found in the business interruption coverages. A business’ closure or material loss of income caused by employee sickness, customers refusing to patronize the business location, or for restaurants and pubs, an order to cease on-premises services do not constitute a direct physical loss to the insured property.

Depending on the policy form, other conditions or exclusions may also apply. Also, depending on the policy form, broader coverage may apply that benefits the insured.

Notwithstanding this physical loss condition precedent for coverage to apply, doubtlessly, some insureds and plaintiffs’ counsel will seek to litigate coverage theories to establish coverage. The losses projected from the Covid-19 pandemic might force some companies to roll the dice on coverage litigation if only to stave off bankruptcy.

Some plaintiff law firm websites already have had articles hypothesizing that Covid-19 coverage might exist if a business had to cease operations because its premises had become contaminated with the Covid-19 virus. On Monday, a New Orleans restaurant filed a lawsuit against Lloyds of London claiming it had suffered property damage “because the coronavirus contaminates surfaces, it is property damage.”

Almost certainly, other coverage theories will emerge in lawsuits. These suits will likely claim that perceived ambiguities in policy language require coverage under the contra insurer rule that construes policy ambiguities in favor of insureds. The ultimate decision on whether any insureds can breach the “direct physical loss” requirement must await the court decisions on coverage that undoubtedly will follow when the Covid-19 pandemic abates.

The questions from insureds over business interruption coverage for Covid-19 losses have caused one state insurance department to take extraordinary action.

New York requires insurers to explain business interruption and Covid-19 coverage, if any, to insureds

The relationship between business interruption coverages and Covid-19 losses is viewed very seriously by at least one regulator.  On March 10, 2020, the NYDFS ordered all commercial property insurers it regulates to send each policyholder a “clear and concise explanation of benefits… suitable for policyholder review.” The explanation of benefits will concern the policyholder’s business interruption coverage and Covid-19.

Per the NYDFS, the explanation to policyholders should include all relevant information, including, without limitation:

• What type of commercial property insurance or otherwise related insurance policy does the insured hold?
• Does the insured’s policy provide “business interruption” coverage? If so, provide the “covered perils” under such policy. Also, indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.” Also, describe what type of damage or loss is sufficient for coverage under the policy.
• Does the insured’s policy provide “civil authority” coverage? If so, please describe what type of damage or loss is sufficient for coverage under the policy. Also, describe any relevant limitations under the policy. Also, explain whether a civil authority prohibiting or impairing the policyholder’s access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.
• Does the insured’s policy provide “contingent business interruption” coverage? if so, describe what type of damage or loss is sufficient for coverage under the policy. Also, provide the “covered perils” under such a policy. Also, indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”
• Does the insured’s policy provide “supply chain” coverage? If so, is such coverage limited to named products or services from a named supplier or company? Also, indicate whether the policy contains a requirement for “physical damage or loss” and explain whether contamination related to a pandemic may constitute “physical damage or loss.”
• For each instance of coverage described above, please provide the applicable waiting period under the insured’s policy. Also, indicate whether the amount of time coverage remains in effect once it becomes active for a given incident.

The NYDFS has also required the insurers that have issued business interruption coverages to provide it with detailed information on these coverages. The information supplied by the carriers may become part of the public record, and potential fodder for coverage lawsuits.

Agency Checklists will keep you posted.