If your company is like virtually every other company, it has seen its business operations disrupted by the ever-evolving COVID-19 global pandemic, with no clear end in sight. Financial losses are likely mounting, be they lost income due to decreased productivity, diminished demand for goods or services, supply chain disruptions, canceled business travel, etc., or the extra expenses incurred in minimizing those losses.
Some of those losses may be recoverable under your company’s business interruption insurance, but unfortunately, heavy pushback from insurers will undoubtedly occur. Therefore, it’s important to understand how your company’s specific insurance program functions and the
roadblocks your company most likely will face.
Below are our answers to some frequently asked questions we’ve been fielding about business interruption insurance that your company may find useful. Or skip ahead to the end, where we set forth our checklist of practical ways to protect your company’s insurance coverage.
1. Does my company have insurance coverage for its coronavirus-related business interruption losses?
Most companies carry some form of business interruption coverage. In addition to standard business interruption coverage (BI) for when your company cannot fully conduct business for a period of time, there is also contingent business interruption coverage (CBI) for losses your company sustains as a result of disruptions in its supply chain of customers and suppliers. Typically, both BI and CBI are found
in commercial business property insurance policies.
Unfortunately, we expect that most insurers will decline coverage based on at least two major roadblocks contained in many policies (in addition to whatever other terms, conditions and exclusions insurers may ultimately attempt to use to avoid coverage). First, the vast majority of policies require “direct physical damage” to property as a prerequisite for triggering business interruption coverage. Second, many policies have an exclusion specifically targeting losses caused by viruses.
2. Is there any way around these roadblocks?
As an initial matter, property policy language can vary somewhat, so we cannot emphasize enough the importance of reading your company’s specific policy language, including its endorsements. It is possible your company’s policy doesn’t have an unambiguous requirement for “direct physical damage,” and perhaps it has no virus exclusion or the exclusion is favorably ambiguous.
Assuming your company’s policy – like most policies in the market – does have one or both of the roadblocks mentioned above, there is unfortunately no easy practical solution. While we have identified some compelling coverage theories, it is a near certainty that your company’s insurer will take a rigid coverage
position and attempt to reject all creative arguments. That’s because with nearly every company in the U.S. sustaining business interruption losses, the coronavirus pandemic poses an existential threat to many property insurers. Consequently, insurance companies will feel great pressure to avoid setting precedents by negotiating any claim that is not clearly and unambiguously covered by an insurance policy.
Indeed, insurers have already drawn their line in the sand. In response to a letter from a bipartisan group of U.S. House of Representative members urging the insurance industry to cover business interruption losses stemming from the coronavirus pandemic under traditional property insurance policies, four insurance industry trade organizations emphatically rejected the
request, jointly responding that “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”
Consequently, even if sidestepping the roadblocks is theoretically possible, it likely will require coverage litigation to obtain an insurance recovery.
3. Doesn’t my company’s policy also cover business interruption losses resulting from civil authority orders like the ones various states and local authorities have issued?
Many business property policies do contain coverage
for business interruption losses resulting from an order of a civil authority prohibiting access to property. However, like with the business interruption coverage discussed above, for many policyholders we are expecting a difficult journey to recover such losses from an insurer.
As with standard business interruption coverage, many of these also require direct physical damage as the basis for the civil authority order, and insurers will likely argue the orders are being issued primarily to prevent physical damage rather than to remedy it. Undoubtedly, insurers also will challenge whether many of the recently issued orders actually prohibit access as opposed to merely limiting and conditioning access, especially given that so many companies can operate in a virtual
space as if they had remained open in their normal brick-and-mortar space. Similarly, insurers may challenge whether companies that closed or limited their operations should have done so if they could have qualified as an essential business exempted from a given order.
One other challenge to know about civil authority coverage is that it sometimes is sub-limited, meaning it may be specifically limited in dollar amount or scope.
All that said, civil authority policy provisions can differ from one to the next, and not all civil authority coverage provisions contain the “direct physical damage” prerequisite or sub-limits, so again, it is important for
your company to read its specific policy language.
4. If my company’s prospects for securing insurance coverage in the immediate future look bleak, is there any other relief available?
Federal and state governments are hard at work seeking solutions. The ideas being pursued range broadly, including making loans readily available, offering loan relief, providing direct payments to businesses or their employees, and giving tax relief. Indeed, the $2 trillion stimulus deal tentatively reached by the U.S. Senate and the White House and awaiting approval by the U.S. House of Representatives may ultimately provide some aid toward mitigating business
There are even legislative efforts underway to pass laws requiring insurance companies to pay business interruption claims regardless of their policy language or to negotiate deals with insurers whereby governments will backstop the insurers at some level in return for the insurers effectively loaning their claim adjustment infrastructure to the government. However, insurers most likely would challenge any legislation mandating actions by insurance companies as unconstitutional and tie the process up in the courts for years to come.
The upshot is that it is far too early in the process to adequately predict how this will play out, but we
are optimistic that when the dust settles there will be some mechanism via insurance or government aid where your company will be able to submit a claim seeking some level of assistance in mitigating its business interruption losses.
5. As a practical matter, what should my company be doing now?
Here’s a checklist of prudent steps we suggest. Notably, this is not intended as legal advice, because each company’s situation will vary, including based on the specifics of its insurance program. Please know that our policyholder coverage lawyers stand ready to help your company with any or all of the following.
Locate all business interruption coverages and read them. As noted above, most standard and contingent business interruption coverages are housed in commercial property policies. That’s not the only place it can live, however. For example, some companies purchase bundled packages containing various first-party loss coverages and third-party liability coverages, with their business interruption coverage folded in. Depending on the nature of your company’s losses, there could even be some business interruption coverage in places like event cancellation or cyber insurance policies. Equally important to locating the coverages is that someone needs to read them carefully, whether it’s your company’s risk manager, a designated employee, insurance broker, or outside insurance policyholder coverage counsel. This is mission critical because, as noted
above, not every business interruption coverage is the same, including variations among the specific language triggering coverage, the dollar limits, the covered time periods, and the types of losses covered.
Know your company’s entire current insurance program. While we have focused on business interruption losses here, the radical uncertainty of the world we currently face means that your company may encounter any number of coronavirus-related losses and risks, both first-party and third-party. For example, your company may see workers’ compensation, employment practices, bodily injury, business litigation, breach of fiduciary duty, or even cyber losses and claims stemming from coronavirus-related issues. Consequently, you should make sure your company has a list of every current insurance policy it has, including property, business travel, event cancellation, directors and officers (D&O), workers’ compensation, employment practices (EPL), commercial general liability (CGL), excess, and cyber liability. Further, make sure either
your company or its broker has a complete copy of all policies – including endorsements – close at hand for when they are needed.
Know and comply with all notice provisions. Insurance policies explain how and when a policyholder must give notice of a loss or claim to the insurance company. Failing to comply strictly can result in a self-inflicted – and often irreversible – total and potentially catastrophic waiver of coverage rights. Importantly, sometimes simply knowing about circumstances that may give rise to a loss or claim is enough to trigger a duty to notice an insurer. If your company has questions about whether it should report an actual or potential loss or claim to any of its insurers, those questions should be prioritized and presented promptly to your company’s insurance broker or outside policyholder coverage counsel.
Know and comply with all statute of limitations provisions. State legislatures typically limit the number of years for bringing breach of contract claims, including those by policyholders against insurance companies. However, sometimes insurance companies shorten those statutory periods via an insurance policy term. Multiple courts have enforced those shorter time periods, which can sometimes be far shorter than the statutory period. Consequently, it is important for your company to identify and calendar any such deadlines, especially given that not all companies will rush to make insurance claims at this point in time given the uncertainty surrounding how insurers and governments will proceed.
Track all losses. If your company decides to submit an insurance coverage claim to one of its insurers, make sure to provide all information about your company’s losses that is required by the insurance policy’s terms, and then be responsive to further information requests from your insurer. Even if your company decides to hold off and not submit a claim to its insurer at this point – again, making sure not to run afoul of the notice and statute of limitations policy provisions noted above – it’s important that your company track its losses in a detailed manner. In doing so, read your company’s insurance policies’ loss provisions so that if someday your company does make a claim – whether to an insurer or to a government entity – your company won’t be back at square one reinventing the wheel. If your company would benefit from
assistance, consider retaining a public adjuster or loss valuation expert, or consult with your company’s insurance broker or outside coverage counsel.
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