With businesses shutdown everywhere due to the COVID-19 pandemic, insurance policy holders are looking closely at their business interruption language in order to seek recovery, and right they should. However, insurers generally feel that they stand on solid ground, as they consistently deny coverage to those asserting claims. In the wake of this difficulty, at least six states (as of the date of this writing) are introducing legislation that would require carriers to cover such business losses. Whatever the avenue to potential recovery, it is not too early for companies to start their calculations.
Policy holders are advised to start by checking their specific policy language and to preserve rights by submitting a timely claim. Coverage could be dictated by the general language concerning business interruption, as well as by specific exclusions or addenda. While we do not offer legal advice on coverage, we note the following hurdles:
- Business interruption policies generally require that the loss flow from physical damage to covered property. Litigants and courts have wrestled over factual circumstances under which such physical damage occurs. While carriers are asserting that this requirement is not met in this current pandemic, where there is not an obvious destruction of property by, for example, fire or hurricane, some courts have noted previously that there need not be structural alteration to the property. The limits of this policy language will continue to be debated in the courts.
- Many policies contain specific exclusions of losses caused by viruses and bacteria. Such exclusions have been quite common, since carriers faced millions of dollars of interruption claims as a result of the SARS outbreak in China in 2002-2003.
While insurers stand by their denials of coverage, legislation introduced in at least six states may change the landscape and force the insurance carriers to cover these business interruption losses, despite the presence of virus exclusions. Those states are Louisiana, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania. The various legislative initiatives differ in many respects. Some allow recovery only to companies of under 100 or 150 employees, or companies within the state; some specify varying dates to which coverage would be calculated retroactively; some set up funds, to be funded by broader segments of the insurance industry, from which insurers that pay on such claims can seek reimbursement. These initiatives have not yet been passed and are currently being debated within state legislatures, but it appears that relief is in sight in at least some states.
Aside from combing through their specific policy language, companies are advised to start their calculations in real time. It is possible that coverage could be available even where there is not a complete shut-down of the business for a period of time, but regardless of this issue there are considerations with respect to determining the incremental costs to be deducted from the lost revenues, which are, in nearly every case, less than all costs of the business and not always easy to classify. Failure to consider the proper costs could lead to an understatement of recoverable losses.
Working with a consultant to help assess the proper amount of business interruption losses during this time could be beneficial. If you have any questions regarding the calculation of business interruption losses, please contact Michael Kresslein at 240.364.2612.