The short- and long-term impact of the coronavirus is anyone’s guess. Never before has the United States experienced such a significant interruption of business – and of everyday life. There are more questions than answers, each of which has potential implications, especially when it comes to insurance coverage. Many policies spell out limits and exclusions, but few anticipated this atypical interruption of everything from supply chains to vacations. To help companies navigate the uncertainties of the impact of the Coronavirus (COVID-19) outbreak on their business, below is information that we’ve gathered about business interruption insurance.
Businesses, large and small, could experience an interruption to their business due to the COVID-19 outbreak. Many will seek relief through their business insurance, specifically through policies that cover business interruptions. For businesses that have interruption insurance, the threshold for recovery generally depends on a series of factors:
- The property must sustain direct physical loss or damage
- The loss or damage must be caused by or result from a Covered Cause of Loss
- The loss must be quantifiable
- The waiting period (deductible) must be satisfied which is typically between 24 to 72 hours; if not taken care of, coronavirus lives for up to 4 hours in the air and 1 to 3 days on surfaces, depending on the surface
In general, a property policy requires direct physical loss or damage to property by a covered cause of loss to trigger coverage for property damage or business interruption (including civil authority and dependent property coverage). Most property insurance includes business interruption coverage, which protects against loss of income resulting from the interruption of your business operations. However, business interruption coverage is only triggered by a covered cause of loss that causes direct physical loss or damage to property and may be subject to various exclusions such as pollution and/or virus and bacteria.
Can a Virus which triggers a Pandemic Cause Property Damage?
Contagious viruses generally do not cause physical damage to property. Damage requires physical harm generally evidenced by changes in the physical characteristics that require repair. The presence of a virus on a surface or in the air does not change the physical characteristics such that repair is required. Thus, without property damage, business income coverage does not respond.
Does Action by a Civil Authority Trigger Coverage?
Typically, action by a civil authority is covered only when that action prohibits access to the described premises and provided both of the following apply:
- Access to the area immediately surrounding the damaged property is prohibited
- The action of the civil authority is taken in response to dangerous physical conditions resulting from the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property
In addition, the waiting period (as discussed above) still applies and coverage typically lasts for a period of up to four consecutive weeks from the date on which the coverage began or when your limit is exhausted, whichever is greater.
What About Operations Contingent on Other Businesses?
This coverage is referred to as “dependent properties” and/or “contingent business income”. Examples include:
- Buyers (Recipient Locations)
- Suppliers (Contributing Locations)
- Providers (Manufacturing Locations)
- Drivers (Leader Locations)
Basically, the same criteria discussed above apply and as such coverage would not respond.
So far, we know of only two states, New York and New Jersey, that have responded to the question of business interruption coverage due to the coronavirus pandemic.
- New York – Requiring every insurance carrier to communicate with every policyholder with a business income policy and explain if they have coverage for the event and to what extent
- New Jersey – Proposing a bill that would require every insurance policy that provides business income coverage to pay for business income lost due to COVID-19
Will other states seek to intervene? We don’t know yet but will continue to monitor and communicate out, when information becomes available.
For coverage to be applicable under the typical business interruption policy form, it appears the following will be necessary:
- The courts ignore the meaning and reality of property damage;
- The courts ignore the pollution, virus and bacteria exclusions; or
- The government intervenes
The scope of coverage ultimately depends upon the specific language of each insurance policy. If you believe that your business has sustained a business interruption loss due to coronavirus, please contact your Risk Advisor immediately so that we assist you in reviewing the circumstances and if requested, file a claim on your behalf.
Clients are advised to retain financial records demonstrating the negative impact to business income and all receipts related to business extra expenses incurred during the response to pandemic. While it is uncertain how or if business insurance policies will respond, should local, state or federal aid packages become available to businesses, aid may be contingent on the ability to demonstrate the loss of income or expenses incurred during crisis recovery.