Strategies for Businesses Seeking Insurance Coverage for Lost Profits
The coronavirus pandemic continues to take its toll across the country, shutting down schools, closing all but essential businesses, and threatening the physical and mental health of those who have contracted the virus, healthcare workers, and their families.
In addition to the strain the virus is placing on people’s health and well-being, it is also wreaking havoc on businesses and the economy, causing shutdowns that are resulting in massive income losses and business disruption due to mandatory business closures, disruptions in the supply chain, and people needing to forego ordinary activities that support business operations. As a result, businesses of all sizes are seeking coverage for losses under the business interruption protection clauses of their commercial insurance policies.
Many business owners are turning to their insurance carriers with questions about insurance coverage for lost profits due to business interruption. The extent to which those claims will be covered remains open for debate.
Commercial Insurance Policies Cover Lost Profits Due to Business Interruption
Most commercial insurance policies include businesses interruption coverage that is intended to cover lost profits. Typically, these policies cover lost profits that are the result of physical damage to the policy holder’s property, damage to a supplier’s property, or as a result of government activity such as an evacuation order. They commonly apply after a natural disaster such as a flood or a hurricane.
When it comes to insurance coverage for business losses as a result of the coronavirus, the question will be whether the virus caused physical damage, or whether a business can seek coverage because it was forced to shut down by a “civil authority.”
Business Interruption Coverage Often Requires Property Damage
Most insurance policies that include business interruption coverage will only cover losses caused by physical damage to the policyholder’s property or a supplier’s property. Without physical damage, coverage is usually denied.
Some businesses have claimed that the presence of coronavirus constitutes physical damage under the policy and that this physical damage has caused the business interruption and loss of income. Whether this strategy will prove successful remains to be seen.
Courts across the country have not settled on a uniform analysis to determine whether a business can suffer physical damage as a result of a pandemic. Some courts have found that the presence of contamination that makes a premises unfit for business use constitutes “physical damage” sufficient to trigger coverage.
Some specialized insurance policies, such as those for hospitals and businesses in the hospitality industry, expressly cover losses caused by ‘communicable or infectious diseases.’ However, these types of policies are usually only available to certain types of businesses. The typical business interruption coverage in a commercial insurance policy does not usually cover losses from this type of event.
Insurance Coverage for Lost Profits Due to Supply Chain Interruption
Because of unprecedented disruptions to the supply chain, many businesses are suffering contingent business losses - lost profits because of supplier shutdowns or lack of access to customers. While suppliers typically include manufacturers and distributors of goods, they could also include airlines, cruise ships, and public transportation systems that bring people to a business. Because these industries have largely been shut down or are suffering massive disruptions, businesses that rely on these suppliers may be able to seek business interruption coverage.
Business Interruption Due to Actions by a Civil Authority
Many commercial insurance policies provide business interruption coverage when a “civil authority” forces a business to shut down. While different insurance policies use different language, business interruption coverage due to shut down by a civil authority usually applies only when the shutdown is in response to a physical event.
In the typical case, insurance coverage for business interruption applies when a government shuts down a business in the wake of a natural disaster such as a hurricane or flood. Some policies may only cover a loss if there is physical damage to the business’s premises, while others cover losses without the requirement of physical damage to the policyholder’s property. However, in cases when physical damage to the policyholder’s property is not required to trigger coverage, insurance companies may require that the loss be a covered cause of loss.
Whether business interruption coverage will apply to lost profits due to a civil authority shutdown will likely turn on the language of the specific insurance policy.
Expect Insurance Companies to Deny Coverage for Coronavirus Claims
Insurance companies have countless tools in their arsenal to avoid or limit payment for losses caused by the coronavirus pandemic. They may deny coverage because there was no physical damage to a policyholder’s property, or claim there is no coverage for losses caused by a pandemic and any resulting shutdowns by civil authorities. Or, they may acknowledge that some losses are covered, but severely limit the amount of time that business interruption coverage applies, such as by only covering losses for the amount of time that it takes a business to decontaminate the affected property, ignoring the fact that even if businesses are open they are suffering staggering losses.
Insurance companies may rely on policy exclusions that deny coverage for damage caused by biological agents. Some may expressly exclude damage caused by diseases and may be so specific as to cover losses caused by a bacteria but not a virus.
Policy terms may limit the length of business interruption coverage to a certain number of days after the triggering event. And there will be disagreements over whether a business was forced to close or was closed voluntarily to prevent further spread of the disease.
Robenalt Law Is Here to Help Businesses Affected by the Coronavirus Pandemic
While national leaders stress the need to come together and support one another during the coronavirus pandemic, don’t expect insurance companies to readily cover the resulting business losses. If you are considering submitting an insurance claim for lost profits due to business interruption, speak to an attorney first.
Attorney Tom Robenalt understands the lengths insurance companies will go to deny coverage all too well. He started his career as an insurance defense lawyer where he saw first hand how insurance companies treat their policyholders and the tactics they use to increase shareholder profits, often at the expense of policyholders.
Tom Robenalt started his career as an insurance defense lawyer at a large firm in Cleveland. For the past 25 years, he has used that experience to help victims and their families recover from financial losses.
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