Businesses across the country are shutting down or facing serious losses in income due to the Coronavirus epidemic. In the face of business closures and other disruptions, business owners are asking their insurance agents what protection their policies might have to carry them through this crisis. One of the areas these distressed business people are wondering about is Business Interruption coverage.
SMW has previously written about Business Interruption coverage, going to great lengths to explain this sometimes hard to grasp area of commercial insurance. If you own a business, you need Business Interruption (BI) coverage because it makes you whole – restoring you financially to a position as if you had not suffered any loss at all.
Business Interruption compensates you for lost profits. If your business burns down, you won’t have customers coming in and you won’t get paid. BI accounts for that shortfall and pays you for your lost net income and expenses that continue while you undertake reconstruction.
But…what if that catastrophic event is an epidemic? Does Business Interruption cover lost income due to Coronavirus?
Insureds are asking this question so frequently that the New York state insurance department just took quite an unusual step. On March 10th, the New York Department of Financial Services ordered all commercial property insurers regulated by the state to send each of its policyholders a “clear and concise” explanation of the Business Interruption coverage contained in their policies. Specifically, this explanation must explain the BI coverage in relation to COVID-19.
There are three specific areas of coverage that New York is requiring carriers to explain to policyholders to help them understand how they apply to the current pandemic. Those three areas are:
1. Business Interruption – Applies in situations where there is direct physical damage to the insured premises. The damage must be caused by a covered cause of loss.
2. Civil Authority – Applies when there is the threat of direct physical damage to property near the insured premises. Civil authority requires a governmental action, and the cause of the damage or impending damage must be a covered cause of loss under the insured’s policy.
3. Supply Chain or Contingent Business Interruption – This is coverage for your loss of business if your direct suppliers were to have a loss. If your main supplier has a fire and cannot supply you with your necessary products or materials, this coverage comes into play. This can also relate to the “supply” of people. Say you’re a pizza restaurant owner who depends on the next-door college campus for business. If that campus has a fire that closes all of its buildings, you will have coverage. Once again, the damage would be cause to property other than at the insured premises and would have to be a covered cause of loss under your policy.
Each of these coverages are challenging in their own right. But given the extra layer of complexity due to COVID-19, the carriers have their work cut out for them.
What is a Covered Cause of Loss?
After learning that business interruption is triggered when there’s damage by a covered cause of loss, you may be wondering: What exactly is a covered cause of loss? The ISO Commercial Property CP 10 30 04 02 Causes of Loss – Special Form says “Covered Causes of Loss means Risks of Direct Physical Loss unless the loss is: 1. Excluded in Section B or Limited in Section C”. You might think, “Great; it’s all covered!” But not so fast. The list of exclusions is long and includes such items as ordinance or law, Earth movement, governmental action, nuclear hazard, utility services and eleven other items. And that’s all before you get into the limitations or any other endorsements that limit causes of loss, as is the case with viruses and bacteria. In short, any time we get beyond the basic causes, such as fire and water, things get complicated.
This is one to watch, for sure. We will certainly keep an eye on any developments and will keep our readers posted. We will also monitor various coverage theories that emerge in lawsuits seeking to apply Business Interruption to COVID-19 claims.
If you have any questions about BI or other areas of coverage, don’t hesitate to check in with us.