COVID-19 has caused an unprecedented level of business interruption throughout our nation. As a result, many policyholders have filed claims stating that insurance companies should cover their financial losses due to the business interruption coverage clause in their insurance policy. However, business interruption clauses trigger coverage only if you experience a “physical loss” that leads to the business interruption.
WHAT IS PHYSICAL LOSS?
What constitutes a physical loss is debatable. Insurance companies commonly argue that the physical loss requirement precludes coverage unless there is physical damage to the property, such as a fire or water damage. However, the reality is that insurance policy interpretation is jurisdictional-dependant. Many state courts have defined physical loss broadly to include anything that causes uninhabitability and deems the property unfit and unusable for human occupancy even if the loss is undetectable to the human eye. These Courts have held the following elements cause physical loss: gas vapors, humidity, fumes, carbon monoxide, ammonia, smoke, bacteria, asbestos, and strong odors. So, a physical loss can reasonably encompass many conditions that render the property uninhabitable or unfit for human occupancy or use.
Many insurance policies are form boilerplate policies and are contracts of adhesion, meaning that business owners had no option to negotiate the provisions and had to take the insurance contract as it was. Some policies have ambiguities written into the policy. There is a general rule that courts must construe ambiguities in a contract against the drafter who, in this instance, is the insurance company. One common ambiguity is the term “Risks of Direct Physical Loss.” In one section, the insurance company is stating that they will cover “Direct Physical Loss.” Then in another part of the contract, the insurance company is contradicting itself by saying that it will include “Risks of Direct Physical Loss.” So do we need “Direct Physical Loss,” or will “Risks of Direct Physical Loss” be sufficient? This ambiguity will be an argument to be decided by the courts.
HOW DO I KNOW WHAT COVERAGE IS AVAILABLE?
Insureds are often confused by the extent to which their business interruption insurance covers their claims. To determine what coverage is available to cover your losses, you should contact an experienced attorney to review your policy. A business owner can file a claim for many different types of business interruption coverage.
- “Business interruption” insurance compensates the insured for net income and expenses that are lost during the time that you are unable to use your business premises.
- “Extended business interruption” insurance provides coverage for income lost after you are allowed to use your property, but before your income has returned to its pre-loss level. This coverage is also called coverage for the ramp-up period. This coverage is usually for a period of time specified in the policy, sometimes 30 to 60 days. Still, it can help cover losses incurred while a business is regaining full operational capacity.
- “Contingent business interruption” or “Dependent property coverage” insurance provides coverage for the insured’s loss of income resulting from physical damage, not to its property, but the property of its providers, suppliers, buyers, drivers, or distributors. An example could be a convention that cannot host their conference because the convention center has was shut down. Perhaps, a winery uses one single manufacturer to manufacture its original wine bottle corks. If that bottle manufacturer has a loss and cannot produce and provide the winery of its bottles and corks, the winery may have a dependent property claim.
- “Civil authority” coverage is when the government issues an order that impairs access to the insured’s premises. Every state has had some form of state or local government order shutting down businesses in response to COVID-19.
- “Ingress or Egress” coverage that restricts ingress or egress from the premises caused by civil authority or order.
- “Infectious disease coverage” provisions of the policy. Infection disease coverage is an endorsement, an endorsement that adds coverage to a policy. Some businesses may have purchased this additional coverage.
- “Extra Expense Coverage” covers extra expenses that you had to incur due to the business interruption. For example, you may have had to pay for overtime or additional phone lines or internet due to moving to another location. A more straightforward case would be a building that has closed down due to a fire. The business relocated to a place across the street during the repairs to the old building and had to install new phone lines and internet. The company also had to hire movers to move things to the other property. Perhaps now the property is ready to open, but it may be able to open sooner if you were to pay your contractors extra money to rush the job or pay for a generator so you could open a week earlier. These are all considered extra expenses.
Some insurance companies have inserted “virus exclusions” into their policies to avoid paying out for claims caused by viruses like COVID-19, aka the coronavirus. Still you should make a claim. There are several reasons virus exclusions are not all created equal.
- Not all insurance policies include these exclusions.
- Some insurance policies do not mention viruses but mention bacteria, microorganisms, or microbes, which does not include viruses.
- Some exclusions are poorly worded or include ambiguous language. One can argue that if the insurance company did not state that this exclusion includes loss that could be caused “directly or indirectly” by a virus, then coverage should be afforded to the business owner. A lot of businesses were not shut down due to having a virus present on the premises. For example, perhaps no client or employee was found to be infected at your place of business. Well, then this exclusion would not apply. The company was not shut down due to a virus, but due to the governor ordering a state-wide shutdown.
There are also currently legislative efforts across the country that may void these exclusions in the policies.
Legislatures across the country have begun to step into the fold, and at least eight states have currently proposed bills relating to business interruption insurance. These states include Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and South Carolina. None of these states have passed the bills currently proposed, but various legislative committees are still considering these bills, and updates should be forthcoming.
There are bills pending in the United States Congress that may affect coverage for COVID-19 related business interruption claims. These are the “Business Interruption Insurance Coverage Act of 2020” and the “Never Again Small Business Protection Act of 2020,” and the Pandemic Risk Insurance Act (PRIA). None of these bills have been passed and signed into law yet.
The basic gist of these bills states that the insurance companies must afford coverage to small businesses (Usually businesses with less than 100 or 150 employees), regardless of whether there is direct physical loss or if the policy has a virus exclusion.
As mentioned above, none of these bills have passed yet. They have been referred to legislative committees for further consideration. We will continue to monitor these legislative efforts as they unfold to ensure we remain positioned to provide competent representation.
We are also telling most business owners to make a claim as soon as possible. See how to file a claim below.
SO, WHAT SHOULD I BE DOING?
The insurance industry is stating that losses related to COVID-19 are simply not covered under existing policies, and that is what they are telling their insureds in an attempt to limit the number of claims they will eventually have to payout. However, as discussed above, whether your losses related to COVID-19 are covered depends on a variety of factors, including which state your business is in and potential future legislative actions. So, you must act now to protect your interests.
- File a claim: Even if you’ve contacted your insurance company and were told that your losses are not covered, file a claim! You should note that insurance companies have an active interest in dissuading their insureds from filing claims, now more than ever. Most insurance policies contain provisions regarding how to provide notice of your loss. You must comply with these provisions. Failure to do so promptly may cut off your rights under the policy.
If, as discussed above, one of these legislative bills passes, one of the conditions of affording coverage to business owners may be that they already have a denial of coverage from their insurance company. Businesses that filed a claim and then received a denial of coverage will be a step ahead of the companies that did not file a claim. These bills will be limited in the amount of money that they cover, so if you are not the first one to file a claim, you may risk losing out if the government runs out of money.
- Take steps to mitigate your losses: If there is something you can do to stem your losses, do it! For example, restaurants should consider transitioning to take-out or delivery only instead of closing their doors completely.
- Stay informed: Don’t just wait around to see what happens. If money is earmarked to cover losses related to the COVID-19, the funds will be quickly depleted. You should contact an attorney and keep abreast of the latest state and federal regulations and restrictions. Ensure that you comply.
- Review all of your policies: Request certified copies of your current insurance policies and have an experienced attorney review them and familiarize you with your coverage options.
- Document your losses: Document your losses and extra expenses related to the COVID-19 pandemic. Document everything! The facts should support your insurance claim. Your insurance company will latch onto any lack of documentation to get out of paying you what you deserve.
- Collect relevant documentation needed to calculate a lost income and expense report. This information includes:
- Historical and current annual financial statements
- Federal and state annual tax returns
- Monthly profit and loss statement
- Budgets, forecasts, and projections done before and after the event
- Monthly bank statements
- Inventory reports
- Payroll records
- Invoices and purchase orders
- General ledger accounts detailing any expenses related to the loss: such as additional payroll, shipping, temporary facilities, etc.
- Documentation to support extra expenses, including receipts, invoices, timesheets, advertising costs, etc.
Every policyholder should get their policies reviewed and understand their terms of coverage. The economic conditions left in the wake of COVID-19 will likely result in even more significant losses than we’ve already seen. If you have an insurance policy, regardless of whether or not you have a business interruption clause, you should obtain knowledgeable legal counsel to understand your rights fully, and to argue on your behalf. For a free consultation, contact Van Law Firm at (702) 529-1011.