COVID-19 and Business Interruption Insurance
Published April 3, 2020
The COVID-19 pandemic has had a huge impact on the economy, leaving many businesses with a loss of income. While some companies might have property insurance (which may include business interruption coverage as an add-on or rider), and may have purchased specific contingent business interruption (BI) insurance, these policies are underwritten by seasoned risk management professionals with policies typically covering property damage, loss of revenue and associated other costs due to unforeseen circumstances outside the control of the business owner/operator.
BI coverage can be purchased by itself, but more often, it is packaged with a commercial policy or business owners’ policy. BI generally covers lost business income and additional other expenses following an event which causes businesses to shut down or become idle. As with most insurance policies, careful attention to detailed policy wording, understanding what risks are insured and what risks are excluded from coverage is important. Keep in mind that the complexities of intertwined response with the evolving COVID-19 on both the state and national level, it is very difficult at this time to predict coverage outcomes due to claims form coronavirus.
For those businesses who have BI insurance and are who are seeking reimbursement of costs due to the COVID-19 pandemic, there are several hurdles to clear:
- Do your policies cover the effects of a viral or bacterial based pandemic? The absence of a specific exclusion does not create coverage; rather, coverage is created initially by the policy coverage language and agreement. Is there express wording in the policy that covers “all risks”?
- Do your policies contain exemptions for damages from viral and biological agents and outbreak?
Many property and BI policies will have an exemption clause to exclude coverage of claims related specifically to viral outbreaks and diseases (such as COVID-19). Some policies could also contain sub-limits for viral outbreaks or have waiting periods before coverage is triggered. Exclusions are included in a policy simply to reiterate, clarify or amplify that certain exposures are not covered in order to prevent or minimize misunderstanding or litigation.
- Do you have proof that the damages are specifically insurable?
If a business can first clear the coverage and any exemption hurdles, businesses must also prove that the damages are specifically insurable.
Most BI policies cover damages related to physical BI – such as a fire burning down a portion of the business occupancy and forcing closure of the business for a period of time. In the case of COVID-19, it may be extremely difficult to prove that the damages caused by COVID-19 are physical and therefore covered under the policy.
Under first party property insurance policies, the event that triggers coverage is property damage, and without property damage, there will be no lost profits under a first party property policy. Insurance carriers may argue that the virus exists for a short period outside the body and that all that is needed to eliminate the property damage is cleaning.
Current science indicates that COVID-19 does not survive more than 4 days on most surfaces; if left untreated the virus “self-destructs” and the damage is thus temporarily impaired or temporarily unfit for a particular purpose and thus suffers no real long-term damage.
Keep in mind that generally the burden of proof is on you, the policyholder, that an insured provision under the policy has been triggered. Preventative measures are generally not covered under policies; it is typically only after the damage has occurred that coverage is triggered.
- For hotels and other service organizations, do you have specific event cancellation and event postponement insurance that provides coverage for your business interruption (cancelled meetings, cancelled functions, etc.)?
- Does the policy contain language covering the prohibition of access, governmental/civil orders to restrict access (or cease normal operations) or imminent peril provisions that would trigger coverage under the insurance policy (often these orders also need proof of physical damage at or near the insureds business location)?
Insured businesses will find out how important it is to read the precise language of the policy and not to focus on the generalized coverage. Many insured businesses are finding early on in their diligence that closure of premises or denial of access is not generally a result of damage, rather it is to prevent the spread of COVID-19 from property surfaces and congregation in large groups.
Legislature and Coverage
Typically, under standard business interruption policies, a covered loss is physical damage to an insured property caused by a covered risk resulting in quantifiable business interruption loss during the period it takes to restore the damaged property under the policy timelines.
Seven states have introduced and attempted to pass legislation in the past several days that would require insurers to cover COVID-19-related business interruption losses on a retroactive or retrospective basis (even if the original BI insurance policies specifically excluded losses caused by pandemic).
New Jersey, Ohio, Massachusetts, New York, Louisiana, Pennsylvania, and South Carolina have been asked to put these legislative efforts on hold while the National Association of Insurance Commissioners (NAIC) works with federal legislators to develop solutions.
Insurance policies are underwritten and priced in such a way that if carriers would be required to retroactively pay these “unfunded” claims (i.e., pay claims for which the carrier had received no premium previously), it would create substantial solvency risks for insurers – including the inability to pay other types of claims as well as overall capital deficiency and even bankruptcy for the insurance carrier.
As the NAIC, state and federal legislators attempt to come to an agreed solution for these types of matters, companies are encouraged to complete the following tasks:
- Read and understand your current insurance policies. Know the specific exclusions, conditions, strict notification requirements and provisions contained in the policies and understand how potential legislation could impact them. Take time to review your policies with attorneys, brokers and agents to get a full understanding of what is covered.
- Measure and capture costs associated with the business interruption. Lost revenue and increased overhead specific to COVID-19 costs should be tracked, to the extent actually known, and be estimated based on significant facts & circumstances to the best of management’s ability. Some additional tips:
- DON’T change your basic accounting practices.
- DO track your normal ongoing costs separately from costs related to COVID-19 disruptions and put plans and policies in place to track identifiable COVID-19 costs.
For example, document your economic opportunity costs of lost revenue from sales orders being cancelled (often a non-ledger manual process) and also the direct costs of lost productivity and time. Utilize your accounting system to track specific COVID-19 costs in separate accounts. This can be used to help support your assessment of lost costs/revenues if a potential claim is warranted, while also supporting the impacts to your business that can be used as part of any CARES Act filings (such as SBA loans, etc.) or for discussion with lenders and owners.
- Generate revenue and replacement revenues to the best of your ability to reduce the overall business loss.
For example, restaurants that cannot offer sit down service should continue to take orders for delivery and takeout to the extent possible considering the human and HR side of the equation as well.
- Payroll lost – you want to pay your employees but cannot resulting in a layoff or furloughing. Document the wages paid for productive time versus non-productive time in which wages continued to be paid.
- Keep a daily journal of events effecting your business – for example: directives from federal, state, and local officials and any actions you took because of those directives, and the resulting financial impacts.
- File a claim with the insurance carrier directly (after consulting with our agent) or via your broker/agent to preserve your rights under the policy if you believe coverage for damage and lost profits due to COVID-19 is applicable to your business under existing policy language. Discuss with your broker/agent what the downside is to filing a claim under your property/BI/umbrella coverage related to the COVID-19 impacts.
- Have your legal counsel advise you on whether they believe any one of your policies extend coverage for your business in order to build out your position to support your claim.
Business interruption insurance carriers will more stringently scrutinize claims coming in during this pandemic outbreak, and as such, additional documentation that would be useful for you to compile would be:
- Monthly detailed income statement for the past two years (February 2018 – present), including general ledger details of those statements.
- Payroll registers by pay period for the past year (February 2019 – present). Ensure these include the number of hours and the dollars paid.
- Daily detailed information during the state of emergency period – from the date your business was first impacted to present:
- Payroll paid for productive/nonproductive time due to COVID-19 and drops in demand
- Cancelled contracts, Sales trends to support your assertion of the amount of lost revenue, etc.
Discuss your losses, your policy coverage document, and the process for filing a claim under the terms of coverage with your broker/agent and your legal counsel for their interpretation and guidance. Accurately reflected summaries of lost revenue, operational expense burdens, etc. of business interruption claims can hopefully reduce denials of suspicious submissions and result in a fair claim payout to you.
Additionally, consider the long range impacts upon renewal of your policies, as many insurers realize that the insurance market is not able to cover the magnitude of potential losses incurred and believe that the Federal government will need to respond to these new and expanded coverages, just as it did with TRIA and Federal Flood coverage.
We’re Here to Help
MCM CPAs & Advisors can provide education about what the insurance carriers will be expecting to see with a claim submission, and the types of red flags they will be looking for in filed claims. For more information, contact firstname.lastname@example.org a member of MCM CPAs & Advisors COVID-19 Solutions Group will be in touch.