As the coronavirus (COVID-19) outbreak evolves, businesses face growing uncertainty as to how this pandemic will affect their operations long term. This is especially true when you consider that many organizations—including bars, restaurants, entertainment venues, retailers and manufacturers—have had to close their doors or cease operations as a result of COVID-19. Not only has this severely affected their ability to serve their customers, but, for some, it has also led to indefinite disruptions—disruptions that could affect their bottom line.
Because of the unprecedented challenges COVID-19 brings, many businesses are turning to insurance, like business interruption insurance, for help. In the event of a loss, business interruption insurance provides coverage for income a business would have earned had it been operating normally. It can also help pay for expenses like employee wages, taxes, rent, loan payments and relocation expenses.
However, these policies are complex, and protection for losses stemming from COVID-19 is typically not included. This Coverage Insights highlights characteristics and types of businesses interruption insurance, examining how the policies may or may not cover the outbreak.
Designated Perils
Under most business interruption insurance policies, coverage is only available if the loss in question stems from a covered peril. In many cases, covered perils include common interruptions like natural disasters, equipment damage, and vandalism.
This means that, if the insurance policy requires a specific loss (e.g., a fire or earthquake) and the loss in question does not qualify or is not stated explicitly, coverage may not be available. For the vast majority of businesses, COVID-19 will not constitute a designated peril, and business interruption insurance will not respond to losses.
Further, business interruption claims may arise from multiple causes, including both covered and uncovered perils. In these instances, the availability of coverage will depend on the policy language and any applicable laws regarding concurrent causes. Once again, coverage for COVID-19-related losses is unlikely.
Direct Physical Losses
Business interruption insurance is typically triggered by direct physical loss or damage. Under this interpretation, contagious diseases like COVID-19 would likely not count as a covered loss. This is especially true as it relates to mandatory or voluntary closures stemming from the human-to-human transmission of infectious diseases where a business’s physical location is still habitable.
However, some argue that COVID-19 can contaminate physical objects like HVAC systems or assembly lines, which in turn would force businesses to cease operations. In these scenarios, business interruption insurance could provide some protection. Still, most policy interpretations will make coverage unavailable. What’s more, most policies exclude coverage for viruses and other health crises altogether.
Civil Authority Coverage
In some cases, policies may extend business interruption coverage for losses that arise from civil authority orders. This essentially means that, if a business is unable to access its property due to government-mandated closures, coverage may be available. However, in most cases, a direct physical loss to an adjacent or nearby property is required in order for civil authority coverage to kick in. As such, businesses need to review their policies alongside their insurance professional to determine if civil authority coverage is available. For most insureds, civil authority clauses will not apply for losses stemming from COVID-19.
Moving Forward
COVID-19 is uncharted territory, and a number of factors come into play when it comes to insurability. Moving forward, businesses should review their insurance programs with their insurance advisors.
