Most businesses have basic property and casualty insurance to cover the cost of repairing or replacing property damaged by a casualty, catastrophe or other hazard. Many prudent businesses choose to extend their property insurance to additionally guard against the financial losses that might accompany these insured events. Known as business interruption (BI) insurance, such policies insure a business against the loss of profits and the added expenses that an interruption might cause its operations. In recent weeks, policy holders have been outraged to learn that insurance companies have been routinely denying BI claims for losses associated with the Covid-19 pandemic.
Many lawyers and insurance experts have been quick to say that BI coverage is generally not available for virus or epidemic based claims, citing the common industry practice of expressly excluding coverage for virus or epidemic related losses. They further point to a three-part test which BI claims must often satisfy, that: (1) the claim arose from the occurrence of an insured hazard at or near the insured’s property; (2) the event caused physical damage to the insured’s property; and (3) the claimed loss arose from that damage.
This traditional analysis sees a BI claim as a simple extension of hazard coverage provided by the underlying property and casualty policy. If you insure your building against fire and have BI insurance, when the building burns down, your casualty insurance will cover your rebuilding costs and your business interruption coverage will compensate you for the lost profits and added expenses which you suffer during the rebuilding period.
It is likely that many businesses which suffer losses from business interruptions during the Covid-19 pandemic will not be able to meet the traditional test. A retailer may be able to show the dramatic reduction in its sales is attributable to its customers’ abiding by recommended social distancing practices, but it is unlikely to be able to show that an insured hazard occurred at or near its business premises. An otherwise busy – but now empty -- restaurant may blame a government order limiting it to take-out services, but it may not be able to show that an insured hazard physically damaged its property. And a non-essential business which simply sends its work force home under a stay-at-home directive will likely not be able to show its losses arose out of an insured hazard.
There is good reason to suspect that insurance companies are alarmed by the potentially catastrophic level of BI losses that their policy holders have experienced and will continue to suffer. The American Property Casualty Insurance Association has estimated that small business losses from this crisis could rise as high as $220 Billion to $363 Billion per month and that there could be as many as thirty million small business claims.
Insurance companies have reportedly been routinely denying recently filed BI claims. More alarming is news that insurers have been proactively, if discretely, encouraging their agents to deny BI claims. In response to this latter threat to coverage, a national association of independent insurance brokers and agents has issued a bulletin reminding agents that they are not licensed to, and therefore should not make, coverage determinations or deny claims.
Fortunately for policy holders, there are multiple reasons to hope for better coverage outcomes:
- BI coverage is provided under many different policy forms and coverage is often subject to many different exclusions and endorsements. Even “standard” forms can vary from policy to policy. The actual wording may help you. The availability and scope of BI coverage generally depends on: (i) the actual wording of the insurance policy, (ii) the precise circumstances of each loss, (iii) the nature of the BI claim, and (iv) an extensive body of court decisions interpreting insurance policy language. Expert advice and guidance through the claims process is crucial in order to help support the presentation of winning claims. Even if insurers issue summary denials of claims, those denials are not necessarily the last word.
- The wording of policies is dense, nearly incomprehensible in places, and - not infrequently – ambiguous. Rules of construction and interpretation have evolved from court decisions into settled law in many states that ambiguities are to be reasonably interpreted in a way that provides coverage to the insured. Courts will generally interpret “insuring clauses” broadly (i.e., in favor of the insured) and the language of “exceptions or exclusions” narrowly (i.e., against the insurer). Thus, in a contested case, it is the court and not the insurer who decides what policy language means. There is a path to overturn an insurer’s denial of coverage.
- To say that the presence of a virus or epidemic exclusion in a policy will likely bar a pandemic related claim is a gross over-simplification. If, for example, a BI claim is based on losses resulting from a stay-at-home directive (that is, it does not claim any contamination of its business premises), a virus or epidemic exclusion should be irrelevant.
- Some states are moving away from the traditional model of requiring a covered BI claim to be tied to actual physical damage in the three-part test discussed above. In Massachusetts, for example, a court has found “physical damage” to an insured’s property can exist if the essential functionality of the insured’s physical property is lost. Thus, the denial of access which results from a government-issued closure order may be a sufficient loss even when there has been no tangible damage to property. This is another example of a court ruling that BI policy coverage can be broader than asserted by the insurer.
- A few strategic test cases have been filed in multiple state courts across the country by lawyers for policy holders. One seeks a ruling that a stay-at-home directive triggers BI coverage, while another seeks a ruling that the presence of Covid-19 contamination on the surfaces of its furnishings and equipment amounts to physical damage of that property. Many insurance coverage lawyers expect these cases to have a bellwether effect for BI policy holders.
- Intense concerns about uncovered BI losses have run so high that there are now proposals before Congress and many state legislatures to mandate broader BI coverage under existing policies. These proposals are intended to force insurers to pay Covid-19 claims regardless of policy provisions that would otherwise exclude coverage.
If you are suffering business interruption losses and think you have insurance for those losses, or if you have already received a denial on a recent BI claim, please send us a copy of your policy (and, if applicable, denial letter), and we will review it without charge.
Bill Rodgers and Al DeNapoli, Tarlow Breed Hart & Rodgers, P.C., Boston, MA, and
Michael Childress, Chicago, IL and Los Angeles, CA contributed to this article. Mr. Childress is of-counsel with the firm Kabateck LLP and his national practice is focused on protecting and enforcing the rights of insured parties.
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