Businesses are in crisis over the Coronavirus. Many have been shut down, whether by lack of employees and customers or by governmental order. Some of our business clients have asked whether they have coverage for income losses (a/k/a “Business Interruption Insurance”) resulting from business closures and/or supply chain disruptions during the pandemic.
The short, not particularly helpful answer is “It Depends.” The slightly longer answer is: “There’s probably no coverage for general income losses under most policies, but there are potential exceptions under some policies and for some categories of income loss.”
In this alert we address the slightly longer answer and identify some of the potential exceptions. This alert may be helpful in understanding where your options lie, or in evaluating loss of income coverage options for your business in the future. However, there is no substitute for a specific evaluation from your counsel.
One reason for the inability to be definitive is that Business Interruption Insurance comes in many different forms. The insuring provisions, exclusions, and other provisions are not standardized and require careful analysis.
Historically, the most common form of insurance for business property (buildings and contents) was so-called “Fire Insurance.” This kind of coverage became largely standardized by state statute, with Massachusetts leading the way in 1873. Such fire policies originally only provided coverage for a single peril – fire — and the insurer paid the cost to repair or replace the physical property (building and contents). Eventually property insurance expanded to cover other perils and other damages, including the economic losses suffered by a business under defined circumstances.
Today most businesses carry either a standalone property insurance policy, (providing coverage to the property owner for buildings and contents and, in many instances, loss of business income) or a commercial package policy (which includes those coverages and third party liability coverage). The limits of each coverage, including for principal loss of business income coverages, will usually be listed at the front of the policy (the Declarations pages), although a number of additional or supplemental loss of income coverages and their applicable limits may be included in the body of the policy. Each such coverage should be considered separately against your current circumstances to determine the existence and extent of any coverage.
Most principal business income coverages are limited to income losses that result from a fire or other covered physical loss to the insured building or contents. Typical language imposing such a physical loss requirement for business interruption looks like this:
We will pay for the loss of Business Income you sustain due to the suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a covered cause of loss.
These two requirements (caused by direct physical loss to covered property and caused by a covered cause of loss) make it unlikely that many business income losses resulting from coronavirus impacts will be covered, because such impacts — closures due to government orders and/or for business reasons — do not ordinarily involve a physical loss or damage to the insured’s property. Even if these requirements are met, many (but not all) business interruption coverages in property policies have applicable explicit exclusions for losses caused by viruses, and/or closures ordered by the governments.
These limitations will preclude coverage of business income for many, if not most, insureds. However, it is critical to carefully examine the applicable provisions of your policy to confirm that the limitations exist and are applicable to your specific circumstances. Other more general exclusions, such as for losses resulting from pollution, may also be asserted by insurers. Moreover, while virtually every business is already impacted by coronavirus, the nature and precise causes of business income losses are evolving and such causes must be carefully considered before ruling out a viable business interruption claim.
A final word about principal business interruption coverages: In the past few decades, with the rise in globalization, the length of supply chains has expanded, and the impacts of a disruption to one business on other businesses have become important and insurable. Such coverages are sometimes known as contingent business interruption, and in the recent years of “soft” markets for insurers, many competed by expanding coverage, and narrowing or eliminating exclusions. This heightens the need for a careful review of your policy and your circumstances.
This same competitive environment has led many insurers to include additional or supplemental coverages for specific circumstances. Such coverages are often subject to a sub limit well below the principal business income coverage. They may not require physical injury to covered property or be subject to exclusions applicable to the principal business income coverage. These specialty coverages include event cancellations insurance, coverage for income losses you suffer because of your business depends on another business, and coverages for government-ordered closures in limited circumstances. While the limits of such specialty coverages may be a fraction of the principal business income limits, (e.g. in the tens of thousands vs. hundreds of thousands or millions), they may provide a valuable source of income to buffer some of the impacts of the coronavirus on your business.
Please contact Joseph Sano in our insurance and reinsurance practice group at firstname.lastname@example.org if you have any questions.