If you’re a business owner impacted by the COVID-19 pandemic, it’s time to review your business interruption insurance policy, even if excludes viruses.
Chances are it won’t be an easy read. Business interruption insurance, BII for short, is a complex, highly technical topic that’s spurring a flurry of questions right now. In the U.S. Census Bureau’s recent pulse survey of American small businesses, 31.4 percent of respondents expect it will take at least six months before they are able to return to their usual level of activity. BII could be a vital lifeline for them in the meantime.
Does My Insurance Policy Cover Business Interruptions?
For those unfamiliar with the intricacies of BII, a bit of background may help. A BII policy typically doesn’t stand alone. It’s attached to a firm’s property and casualty insurance policy as a rider. Designed to cover interruptions that force a company to cease operations temporarily, it’s often fraught with exceptions and language that begs for interpretation.
Your first instinct might be to consult your insurance agent. While this is a logical place to start, it’s helpful to know the language. Marsh, a global risk management firm, defines the key terms:
- Actual loss sustained – BII covers the actual loss you sustained as a result of direct physical loss or damage to your property by a peril not otherwise excluded from the policy. Be aware there is a dollar limit to the policy.
- Business income – Usually, the carrier is liable for the reduction in net income that results from suspending operations due to a physical loss at your premises. Business income includes the net income that would have been earned or incurred, including payroll, if business had not been interrupted.
- Period of restoration – Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs. It ends when the property should, with reasonable speed, be repaired or replaced. The policy does not necessarily expire at the end of the period of restoration. You can buy a policy extension covering up to 720 days.
- Service interruption provides coverage for your company’s direct physical loss, damage or destruction to utilities that serve you. Insurers often impose limits on distance from your business. They tend to exclude perils like earthquakes and overhead utility lines.
- Contingent business interruption coverage is designed to cover your business resulting from loss, damage or destruction of property owned by others. This includes direct suppliers of goods or services to your company and/or direct receiver of goods or services you manufacture or provide. Note that the relationship must be direct. This can create an unfortunate gap in coverage if your business relies on multi-tiered supply chains.
- Leader property is coverage for direct physical loss, damage or destruction that is not owned by you. Typically, the property is located nearby and attracts business to your company. Examples would include a nearby amusement park, casino, mall or destination retail store.
- Interruption by civil or military authority coverage is for the actual loss you sustain when access to your property is specifically prohibited by order of civil authority. For instance, by the governor or Congress.
What Does Business Interruption Insurance Cover?
BII is also known as business income insurance. That’s because it replaces the income your business would have earned if the damage to your property had not occurred. It typically covers:
- Lost profits
- Employees’ wages
- Loan payments
- Temporary relocation costs
- Rent or mortgage payments
- Taxes
- Retraining employees on new equipment
- Expenses over normal operating costs like renting equipment
Business Interruption Claims During COVID-19
In hindsight many business owners wish they had invested in BII prior to the COVID-19 outbreak. For some small businesses with a thin profit margin, it’s an expense they can’t afford.
Determining the cost is tricky because it’s typically sold as part of a package. Rarely are two policies the same. This makes it difficult to comparison shop. Factors that impact your premium include business size, higher coverage limits and geographic location. Costs range from $500 to $3,000 per year.
That brings us to today’s COVID-19 environment. What’s the chance that your insurer will cover any or all of your losses while you were temporarily closed? Well, it’s complicated. This issue reached a watershed point in 2003 during the SARS outbreak. From that point forward, many insurers specifically excluded viruses and diseases from their BII policies.
Common Challenges with Business Interruption Insurance Claims
Nevertheless, there is increasing pressure on insurance companies to retroactively assume some of these COVID-19 losses, according to DBRS Morningstar, a global credit ratings firm. If insurance companies are forced to cover business interruption losses beyond the original policy limits, it would threaten the solvency of the industry on a global scale. It would hurt its liquidity and access to capital. The end result could be downward pressure on the financial strength ratings of insurance companies, the firm said.
As a business owner, however, you may have politics and the court system in your favor. First, courts have disagreed with insurers on strict interpretation of the policy language and tend to side with business owners when the line is murky.
As a plus, many states are considering laws to force insurers to pay COVID-19 losses. These include New York, New Jersey, Massachusetts and Ohio. Others are in deliberations. However, insurance trade organizations like the American Property Casualty Insurance Association and the National Association of Insurance Commissions have released statements opposing these laws.
The Tennessee Department of Commerce and Insurance has distributed guidance calling on insurers to offer flexibility to their customers during this time. Carriers should work with policy holders who have concerns about their ability to pay premiums on time. Carriers across all lines of business should explain options to maintain continuous coverage. This includes grace periods, late fees, non-sufficient funds fees and installment fees.
Contact Our Morristown Insurance Dispute Lawyers Now
If your agent’s interpretation of your BII claim is not encouraging, don’t despair. Realize that the firm may not have current knowledge regarding COVID-19 coverage. Other perspectives should be sought.
If you believe you may have a legitimate BII claim, contact The Terry Law Firm to represent your interests. We understand the challenges of small businesses and are well versed in insurance law.
Contact us now to review your policy to see if you could have a case.
