INSIGHT: Business Interruption Insurance Wording Is Key to a Covid-19 Claim

April 10, 2020, 8:01 AM

What seemed unthinkable a short while ago has become commonplace as businesses, large and small, temporarily cease or curtail operations as a result of Covid-19. Regardless of industry sector, business interruptions can cause significant loss of income and unforeseen costs.

So what can be done?

Help Your Clients Evaluate Insurance Coverage for Losses

Some businesses may have direct coverage for communicable diseases, while other businesses may be able to receive financial relief for the Covid-19 disruption through their business interruption insurance (also known as business income insurance). Many businesses have this coverage as an endorsement to their property insurance policies.

Business interruption insurance can also include coverage for contingent business interruption, which covers insureds for losses sustained due to a customer or supplier’s own loss or damage, and interruption due to civil or military authority or loss of ingress/egress, which could occur if access to the insured’s business is restricted or prevented.

Business interruption insurance typically covers situations where a business is unable to operate in the normal course due to physical loss or damage and is generally thought of in cases where there is tangible loss such as a fire; but what about viruses such as Covid-19?

It is possible that some insurance companies may seek to deny coverage based on the absence of actual physical damage. While certain businesses may rightly be denied coverage for Covid-19 disruptions based on the terms of their policies, others will need assistance from their attorneys and advisers to prove that their claim is valid.

Insurance experts generally agree that coverage will likely depend on the exact wording of the insurance policy, including whether there are specific carve-outs for viruses.

Broadly worded insurance policies often act in favor of the insured. This has played out in litigation as courts have determined that dangerous bacteria or gases have made premises “uninhabitable,” which constituted physical loss or damage under the insurance policy at issue (Gregory Packaging Inc. v. Travelers Property Casualty Co. of America)

This “uninhabitable” condition would seemingly apply to businesses closed due to Covid-19 as well. A business setting is a potential hotbed for Covid-19 contamination; with regular and close interaction among employees, customers, and surfaces, the virus might inhabit surfaces such as desks, tables, door handles, and computers, among countless other items.

Certainly, the highly contagious nature and means of transmittal for this virus have caused businesses to become temporarily “uninhabitable” for some duration of time. The clearest example of this is that the governmental authorities in many states and cities have ordered all nonessential businesses closed and implemented operating restrictions for certain essential businesses.

These circumstances may cause businesses to sustain losses and many businesses may not be able to continue operating at all if their employees are not physically present on site.

Once it has been decided that insurance recovery is an available remedy to offset the business’ losses, the next step is identifying the type of relief available.

Relief Available Under Business Interruption Insurance

Business interruption insurance allows an insured to be reimbursed for certain losses and expenses incurred from the inception of the interruption until it re-establishes normal operations, known as the period of restoration, or for a certain period of time, such as 30 days after the interruption.

The types of reimbursable losses and expenses include:

  • loss of income the business would have earned had it been operating uninterrupted; and

  • extra expenses the business would not have incurred but for the interruption.

After isolating the exact coverage period and the type of reimbursable losses and expenses covered by the insurance policy, attorneys and their clients should consult with a financial expert who can assist in quantifying the business’ losses and expenses.

Financial Experts Can Assist in Quantifying Losses and Expenses

A vital part of the claim submission process is quantifying the loss of income and the extra expenses incurred by the business. Submitting claim amounts that are backed by comprehensive and supportable calculations will be crucial in getting the claim approved and paid timely.

Financial experts can assist by providing an objective, critical analysis of the business’ position, including identifying and quantifying all losses, through financial modeling and analysis. They can also assist in proactively identifying and documenting the types and amount of extra expenses incurred because of the interruption. Maintaining important information contemporaneously will reduce the time and effort required to assemble the required information at the time of claim submission.

Ultimately, insurance coverage and relief for the disruption caused by Covid-19 will vary widely by client and insurance policy. The process of determining coverage and calculating actual loss and expense is complex and businesses often need professional legal, accounting, and financial expertise to accurately assess their position.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kevin Bandoian, CPA, is a partner in New York, and Christina Orrico, CPA, is a director in Los Angeles at Resolution Economics LLC, an economics, statistics, forensic accounting, and economic damages consulting firm with offices in Los Angeles, Chicago, Washington, D.C., and New York. Resolution Economics assists counsel and clients with complex financial issues, including those arising in litigation, investigations, mergers and acquisitions, and insurance claims.

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