COVID-19: Business Insurance

By: Ben Michaelson

March 25, 2020

Whether declared “essential” or not by your own state government, all businesses have been interrupted in a massive way. This leaves many business owners and executives looking for help in all the typical places, including insurance coverage. Like the rest of us, you are likely hopeful that insurance coverage will help mitigate your losses during these challenging times. Unfortunately, in almost all scenarios, the initial response from the insurer will likely be “no.”

Lending his industry insight to us for this article is Bruce Murray. Bruce is a Senior Vice President and Practice Leader at Peoples United Insurance Agency in Hartford, Connecticut and helps clients with their risk analysis and insurance coverage needs on a national level. Bruce points out that, “It is not likely that most (if any) traditional policies will provide coverage for loss incurred as a result of Covid-19.” However, our advice is that insureds should not let this be a foregone conclusion, but should instead properly prepare to make a claim (more on that in the practical takeaway advice, below), and then, in the event of a denial, a decision can be made whether or not to seek judicial intervention.

Bruce explains that:

“The problem is not with the insurance products themselves, in that all of the coverages are well designed to provide business income and extra expense reimbursements to larger commercial entities and actual loss reimbursement to smaller business entities. The issue going forward will be the language giving rise to the ‘trigger’ which generally requires physical damage to make a loss an insurable claim. While every policy is different, and must be read carefully for any coverage determination, across the industry and regardless of the company, business income losses resulting from Covid-19 appear to be excluded because no direct physical damage has occurred. Communicable disease is not a covered peril.”

The insight provided by Bruce is in fact the general position taken by courts when forced to make a decision on such matters.  The United States District Court for the District of South Carolina recently considered whether business interruption insurance covered losses caused by an evacuation order issued in preparation for a hurricane.  The court analyzed both the insurance policy before it, and other cases involving “civil authority orders coverage.”  A civil authority order coverage provision in a business interruption insurance policy covers “situations where access to an insured’s property is prevented or prohibited by an order of civil authority issued as a direct result of physical damage to other premises in the proximity of the insured’s property.”  Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., No. 4:19-cv-00693-SAL, 2020 U.S. Dist. LEXIS 31081 (D.S.C. Feb. 24, 2020).  The court determined that the civil authority order in question related to a future threat to both physical property and the health, safety, and welfare of residents, rather than to actual damage or destruction that had occurred.  The bottom line was that “without a nexus between the issuance of the civil authority order and the damage to an adjacent property, there is no coverage.” The Second (CT, NY, and VT Federal Courts) and Eighth Circuits (AR, IA, MO, MN, NE, SD and ND Federal Courts) have held in a similar fashion.

As you consider your ability to make claims against insurance, you should be considering all types of coverage that may be available to you directly as the purchaser of a policy and those that may be available to you through the purchase of a policy by other persons, such as policies that name you as an additional insured. Generally, your thoughts are likely to immediately turn towards business interruption insurance coverage.

Business interruption insurance covers the losses that a business suffers after a disaster. Coverage may include lost income and additional expenses incurred during the continuation of the business after the disaster. The coverage under such a policy is generally due to a disaster related closing of the business facility or due to the rebuilding process after a disaster. Accordingly, the focus of this coverage is how the policy defines “disaster.” The reason that the initial insurer response is “no,” as stated above, is that most policies require a direct physical loss or damage to your property to trigger coverage (think fire or flood, not sickness or a “non-essential” declaration).

Other potential areas of coverage include supply chain coverage (if your loss is due to a supply disruption); ingress & egress coverage (if the loss results from the inability to get in or out of your facility); civil authority order coverage (if the government has caused the inability to continue normal operations); and event cancellation coverage (if the cancellation of a specific event causes loss) among other coverages. As with business interruption insurance, coverage under such policies will hinge upon the language of the policy itself, with most requiring an actual physical damage as the underlying cause. Further, some insurance policies may even specifically exclude claims based upon “… viruses, communicable/infectious diseases … pandemics,” as we have already experienced with some clients.

As always, we look for arguments and glimmers of hope for your benefit. In those regards there are two things to be aware of:

First, several states are now proposing that commercial insurance companies be forced to provide business income loss coverage despite the exclusionary contractual wording that requires a physical damage because many see the insurance industry as the having the best data and process in place provide relief to the commercial and business segments in our society. While this is NOT yet in place, should these states become successful in these efforts, we can expect that the individual states and or the federal government would need to reimburse the insurance companies to avoid their challenge to the mandated coverage. Without that government funding, any such obligation will surely be the source of significant dispute and litigation by the insurance companies to avoid coverage – with business claims hanging in the balance. Please remember that any such required coverage is speculative and conjecture at the moment, and we all still await government and insurance company action in these regards. However, knowing that this is even possible should make you think about what you should be doing now (second plug for the practical take away, below).

Second, for future claims (not current Covid-19 related claims unless you happen to have this coverage – which most do not) it is possible, if not likely, that insurers will supply new products that would provide coverage for pandemic type losses and allow for coverage without a physical loss. Specifically, in early February of 2020 (before Covid-19 became the pandemic we known today) Bruce met with Dr. Gunther Kraut and Leigh Hall of the MunichRE Pandemic Disease Underwriting team in NYC (which has had such a product since 2017) and advises that, “If a business had coverage in place before the pandemic outbreak, Covid-19 would be a covered risk which would provide coverage including loss of business income after a 15-20% self-insured loss threshold was met.” Much like the spike in event cancellation coverage in 2003 / 2004 after SARS, we may see more about such coverage after Covid-19. This optional coverage would eliminate the physical loss requirement in the event of a pandemic, and provide coverage according to the policy provisions.

The practical takeaway is this: as always, it is important to review your policy language as you consider making a claim for insurance coverage. Should you require any assistance in reviewing your polices, we are here and ready to help. Whatever you do, and even if you do not plan to make a claim at this time, please be sure to maintain records to track any lost business income and extra expenses incurred to maintain continued operations, including the following:

• • Tax returns for the last two years.
  • Detailed Income Statements for the last two years.
  • Current Budgets—projections vs. actual results.
  • The date of loss (which could be your state’s shut down advice or directive).
  • Documentation of contracts lost due to Covid-19.
  • Orders cancelled due to Covid-19.
  • Historical production cycle data.
  • Do not admit, agree, or make any statements in writing or otherwise that indicates coverage does not apply.
  • Make a full and complete claim for coverage under the policy in a timely manner.

All of these items will be required to make a proper claim at the right time to have a chance to receive coverage. If you need any assistance with your policy or your claims please let us know.

Be well.