Business Interruption and COVID-19

March 15, 2020 Lauren M. Reynolds COVID-19

Business owners should review their commercial insurance policies for business interruption coverage.

The coronavirus (COVID-19) has resulted in numerous Arizona businesses incurring substantial monetary losses, or being closed for an indefinite amount of time. This has left many business owners wondering whether it will be possible to recover any of the revenue that has been, and will continue to be, lost as a result of such closures.

One avenue of potential recovery that every business owner should explore is coverage through the business’s property and/or general liability insurance policy. Such policies may include an endorsement or rider providing for business interruption insurance. Depending on the language included in such an endorsement or rider and the specific situation of the business, there may be a claim to be made for certain losses incurred as a result of the COVID-19 pandemic. Notably, the language of each policy will vary on a policy-to-policy basis. The summary provided below may therefore vary depending on the particular language of your policy. It is suggested that businesses review their specific policies and consult local attorneys regarding the viability of their claim(s).

What Is Business Interruption Insurance?

Business interruption insurance serves the purpose of offering protection of revenue a business would have received, absent the occurrence of a covered event that has resulted in the business ceasing operations in whole or, under some policies, in part. The diminishment of business alone, however, even as a result of a covered event, is not usually sufficient for such a claim. Similarly, ceasing operations, in whole or in part, voluntarily, is not usually sufficient. Therefore, businesses shutting down as a result of orders by the federal or state government would have a more viable claim under business interruption insurance than businesses voluntarily shutting down as a result of guidelines set out by federal or state governments.

Does the COVID-19 Pandemic or Government Intervention Constitute a “Covered Event?”

Most policies will include definitions of both “covered” and “excluded” events that inform the business as to when its policy will cover a loss. Therefore, whether the COVID-19 pandemic or government intervention resulting from the COVID-19 pandemic constitutes “covered” events depends on the language of the individual policy itself.

Is Physical Damage to or Loss of Physical Property a Prerequisite to Making a Claim?

Recovery under a business interruption insurance policy generally requires physical damage or loss to property. For most businesses, this will be an additional hurdle to coverage. Some businesses might be able to argue that the presence of COVID-19 in the workplace constituted physical damage to property. Whether that argument will be successful, and the lengths to which a business will have to go to prove that damage, are currently unknown. Businesses that cannot demonstrate actual presence of COVID-19 on premises will have difficulty arguing that the COVID-19 pandemic, generally, caused physical damage or loss to property.

Some courts have, however, found coverage under a business interruption insurance policy appropriate absent traditional forms of physical damage or loss to property in special circumstances. One example has been that, when the policy includes language allowing for coverage where access to the business premises is denied by a civil authority, some courts have found the prerequisite of physical damage not to be necessary.

Courts have not yet considered whether coverage is appropriate, absent physical damage or loss to property, in connection with the COVID-19 pandemic, the resulting government intervention, and the losses incurred as a result. It is likely that this will be litigated in the near future.

How Will the COVID-19 Pandemic Affect the Application of Business Interruption Insurance?

The COVID-19 pandemic and its effect on businesses will inevitably result in litigation regarding the terms of business interruption insurance coverage and will likely provide a variety of interpretations and outcomes throughout the country.

There also may be some state legislative intervention. At least one state is already considering legislation that would require insurance companies to recognize the claims of certain businesses under business interruption policies, even if the policy allows the insurance company to outright deny coverage. Whether such proposed legislation will become law, survives the legal attacks it is bound to encounter, or be considered by other states is yet to be seen.

What Action Can Be Taken Now?

Although there is much uncertainty as to the application of business interruption coverage to these circumstances, there are steps that can be taken now to put business owners in a better position to understand whether they may have a claim under a business interruption insurance policy.

First, it is important for business owners to have their insurance policies reviewed to determine (1) what potential claims the business may have for coverage, and (2) what the deadlines are for making such claims, as set out by statute or the policy itself.

Second, based on those potential claims, business owners must act pursuant to the policy in order to avoid becoming ineligible for coverage.

Third, business owners should maintain the business’s books, records, expenses, and earnings projections from prior to, during, and after any cessation of business operations. These records can be used to determine and help establish losses potentially covered under a business interruption insurance policy.

Finally, business owners should take steps to mitigate damages or minimize any losses the business may be incurring, as insurance policies often require that businesses undertake such action.