Business interruption insurance (also known as business disruption insurance) is part of many property damage policies and intended to compensate for lost revenue and related lost profits when a business has to unexpectedly halt or reduce operations. To the extent suppliers or customers are affected, contingent business interruption or leader property insurance may apply (leader property insurance provides coverage when a business is negatively impacted by the closure of an unowned property that would otherwise generate customer traffic to the insured). Many policies also include coverage for interruption to property access by civil or military authority. In the current environment, many businesses have been mandated by government authorities (i.e. civil authority) to close or significantly curtail operations in hopes of minimizing the spread of the coronavirus (COVID-19).
Marsh, one of the largest insurance broking and risk management firms, describes a typical business income insurance clause and definition of business income as follows:
“We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.”
“Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
Generally, business interruption insurance will consider:
- Lost customers and revenues, less the incremental cost of servicing such revenues
- Fixed costs that continued in spite of the business shut-down, such as (i) rent, other occupancy costs and (ii) salaries of personnel who continued to be paid
- Additional expenses of operating your business on a temporary basis or otherwise minimizing the loss that would be incurred
While it is quite obvious that the current coronavirus is disrupting supply chains, production and productivity for a majority of businesses, the existence and extent of coverage is policy specific. The main application of business interruption coverage is usually related to property damage caused by a natural disaster, such as a hurricane, tornado or flood, but is potentially available for any non-excluded peril. Coverage for orders of civil or military authority may also be triggered by the current environment of various and evolving government mandates for self-quarantine, shelter in place, and halting of onsite gatherings and activity for all non-essential businesses and workers.
According to an article in Risk & Insurance Magazine entitled “Breaking Down Business Interruption: How Insurance Can and Cannot Mitigate Coronavirus Losses”, by Finley T. Harckham, a senior litigator specializing in complex insurance coverage claims, one must consider “whether the mere presence of the virus can cause or constitute property damage and whether such damage played a role in the loss of income”. Mr. Harckham notes that (i) the effect of coronavirus in the air or on surfaces is similar to other circumstances where the courts have found property damage occurred and (ii) the definition of supplier for contingent business interruption has the potential to extend beyond contractual relationships:
“In analogous circumstances, courts have found that the presence of harmful substances at or on a property can constitute “property damage” that triggers first party property coverage.
In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.
In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.
A strong argument can be made from this case law that property damage has occurred in places where the virus is present.
New property damage can be introduced into an area by the same or additional infected people over time, which could strengthen the argument that places where large numbers of people congregate suffer ongoing property damage, no matter how long a single spore can survive there.”
“Importantly, the “supplier” whose property damage triggers contingent business interruption coverage may not be limited to the manufacturers or distributors of goods.
It could be the airline, cruise ship or subway that brings customers to your business. To qualify as a “supplier” it is not necessary that the policyholder have a supply contract with the third party.
For example, in Archer — Daniels Midland Co. v Phoenix Assurance Co, (S.D. Ill. 1996), the court held that the policyholder, a food processor, was entitled to contingent business interruption coverage because of property damage sustained by the Army Corps of Engineers, which operated the flooded Mississippi River boat channels, and farmers who lost crops that would have indirectly been sold to the plaintiff through intermediaries.”
Once any entity has identified a loss in business income related to the coronavirus, it should examine its coverage. Notably, after the Mandarin Oriental International Ltd. recovered $16 million in business interruption losses when its Asian hotels suffered room cancellations and decreased food and beverage sales related to the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS), many insurance policies began excluding communicable diseases from standard policy language. As a result, a negotiated rider specific to communicable disease might have been required at policy inception to establish coverage. Other international SARS-related business litigation, New World Harbourview Hotel Co. Ltd & Ors v ACE Insurance Ltd & Ors , set forth a trigger date for damages as the date the infectious disease was required by law to be notified to an authority even if the disruption began earlier. A waiting period is often also established in policy language.
An entity making a claim should be cognizant of reporting obligations to its insurer so that deadlines are not missed. In the case of a complex and long-lasting loss, a business cannot quantify its full loss immediately. Nevertheless, a policy will contain claim time limits which may be as little as 30 days. Extensions are often granted for major losses, but such extensions should be formally requested.
Assuming coverage, one should take affirmative efforts to document the nature of damage and mitigation efforts, track out of pocket expenses, and work with an independent advisor to reliably document and calculate lost income over the relevant period. Notably, fees for claim preparation are frequently covered by business interruption policies, subject to policy sub-limits.
A claim should also anticipate typical carrier responses, such as:
- The length of time pertaining to the claim is outside what is covered by the policy. This can become complicated as a consequence of possible different policy periods existing for direct versus contingent business interruption or the other types of claims described above.
- The business failed to mitigate its losses, causing a longer claim period that is covered by the policy. This becomes a factual question, but the determination needs to consider resources available to address the situation and not ideal conditions.
- The losses have not been properly documented and supported by necessary accounting records.
- There was no business interruption because there was not a complete cessation of the business. This usually involves a narrow reading of the policy by the insurance company.
- The shut-down was caused by some decision by the business rather than as a direct and sole cause of the insured event.
These claims require careful documentation and analysis to fully compensate for your business loss. See Business Interruption Best Practices for additional recommendations.