Business Interruption Insurance in the Age of Covid-19

By Don Dagenais

A large number of businesses are now closed because of the sheltering orders resulting from the Covid-19 pandemic, and a result there are enormous business losses being accumulated almost everywhere. Aside from cutting expenses and dipping into reserves to keep the basic bills paid, what can businesses do?

One possibility is business interruption insurance. Most, but not all, businesses carry some form of business interruption insurance as part of their regular insurance packages. The question is whether the insurance covers businesses losses arising from the current pandemic situation.

Many business owners are getting a straightforward “no coverage” response from the insurance companies or brokers with whom they speak. However, that may not be the correct answer, for there are several types of business interruption insurance and different policies have different wordings for their exclusions. There are no “standard forms” for such policies.

Has the Business Suffered a Loss?

The first question to ask is whether the business has suffered a “loss” which triggers the policy.  Of course the business has suffered a loss – an inability to sell its products or services, the resulting loss of income, perhaps an inability to receive shipments of necessary components or ingredients needed for manufacture or assemblage, possible claims for breach of contract —  and so forth.  But the question is whether this kind of “loss” is the kind covered under the policy. 

Most commercial property policies insure against “all risks of direct physical loss of or damage to” the covered property (or some variant of that language).  So the issue in an age of Covid-19 is whether the virus is a “direct physical loss.” Clearly tangible, overt physical damage is covered. But is this physical damage?  Some are arguing that the virus is a physical invasion of the body, thus causing physical damage (just look at hospitalizations for proof of that), which makes normal economic activity impossible. The insurance company may take a different view. 

The policy may define some of these terms, which may help with the interpretation. Also, the question of whether the business has been directly affected, e.g. whether employees have actually tested positive for the virus and/or have been hospitalized, may be relevant. Those businesses suffering direct consequences of the virus may have clearer claims than those businesses whose employees have not tested positive, but which are nonetheless closed because of governmental decrees. 

Also, consider the use of the word or in the above-quoted language. The policy language may cover direct physical loss or damage to the property.  If this is the language, the insured has an argument that there has been “damage” to the business because of the stay-at-home orders, lack of customers, inability to receive deliveries, etc. even if there might have been no actual physical damage.

Contingent Business Interruption

Many insurance policies have a second kind of coverage called “contingent business interruption” insurance. This is coverage for the interruption of the business caused by your inability to secure essential supplies from third parties such as suppliers, or your inability to provide services or goods to your customers. 

Sometimes this coverage is worded as coverage for business interruptions arising out of “civil or military authority.” For example, suppose there is a governmental order decreeing that you cannot have any access to your business (a typical non-virus example would be an area of the city closed because of riots, water main breaks, or unavailability of electricity due to a flood or tornado). Or suppose that because of governmental orders you do not have access to your customers (such as when you can have access to your place of business but the customers cannot get there).

The Amount of Insurance

Once your policy is reviewed for whether there is a “loss” or coverage under contingent business interruption provisions, the next question is to see what the coverage amount is. Some policies, although they have one of these coverages, have special sublimits of insurance applicable to these kinds of claims. In other words, the business may not enjoy the full amount of insurance for these particular losses. Of course, each policy should be examined separately as these provisions differ widely.

Is the Loss Excluded by the Policy?

Once we get past the question of whether a “loss” under the policy has occurred, and, if so, what the insurance coverage limit is, the next question to ask is whether the policy has an exclusion which removes the coverage anyway. Insurance policies commonly “giveth” in the insuring provisions, then “taketh away” in the exclusion clauses.

Some policies specifically exclude losses from “communicable diseases” or from “viruses.” Some exclude losses based on “micro-organisms” or “flu-variants.”  Here, the science may come into play. Is the Covid-19 virus a variant of the “flu”? Is it a “micro-organism”?

Keep in mind that your particular policy may not contain such an exclusion, or if it does, it may be worded in such a way that at least affords you an opportunity to make an argument that the exclusion does not apply.

It is well established that an insurer has the burden of showing that an exclusion applies. Therefore, the best course is to file the claim and, if the insurer claims an exclusion, insist that the insurer demonstrate that an exclusion, if present, is applicable to the Covid-19 epidemic.

In making the claim, it is important that the insured business not “give away the store” by using such a phrase as “flu” or “micro-organism,” because using such terminology may in effect be an admission that the losses fall within an exclusion. The best practice is simply to refer to the Covid-19 epidemic and draw no conclusions on your own as to exactly what that is.

Check with your Lawyer

As is so often the case with complex legal issues, a business manager is best advised to provide copies of the policies to their attorneys and have the attorneys conduct this analysis. There could be significant sums involved, and this is no time to be your own lawyer.

(Notes: The author is grateful to Kim Winter and Noah Nash of Lathrop GPM, a law firm with home offices in Kansas City and Minneapolis, for providing much of the information for this article.  Nothing in this article is intended to constitute legal advice, and no attorney-client relationship is established by means of the publication of this article or any reader’s review of it.)

About the Author

Don Dagenais, J.D. practiced in the field of commercial real estate law for 43 years with the firm of Lathrop Gage (now known as Lathrop GPM) in Kansas City, Missouri, where he served at various times as the chair of the Real Estate Department and on the firm’s Executive Committee.

He is a graduate of Grinnell College (Iowa) with a degree in economics and from the Cornell Law School in New York. His career included representation of real estate developers, landlords, tenants, lenders, borrowers, title insurance companies, property management firms and many other types of clients in the field of real estate.

Don has closed commercial real estate transactions in over 40 states plus several foreign countries. He spoke at continuing legal education classes for over 20 years, sponsored by the Missouri Bar Association, Kansas City Metropolitan Bar Association and a number of other sponsors.

He was active in the property law divisions of the Missouri Bar and the American Bar Association and authored several articles in local and national publications in the field of commercial real estate.  He has been an adjunct professor at the UMKC School of Law since 2014 and at the Bloch School of Administration since 2016.

Photo by Matthew Waring on Unsplash

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