Will your business interruption insurance reimburse profits lost from the COVID-19 pandemic? Maybe not.
“The general principles of law would lead the average business owner to believe there is coverage,” says C. Thomas Kruse, Partner & Chair of the Litigation Practice Group for Texas in the Houston office of Baker McKenzie (bakermckenzie.com). “Yet, the insurance industry released statements early in March announcing the opposite position. Most notably, the American Property Casualty Insurance Association announced its members’ position that there was no business interruption coverage for COVID-19 losses.”
The pandemic has put a spotlight on the exclusions buried in commercial insurance policies. “Over a decade ago, most U.S. insurers added exclusions to their commercial property policies to resolve this issue,” says Kruse. The policy section is often labeled “Exclusion for Loss Due to Virus or Bacteria.”
Some policies might not address the pandemic topic at all. “For businesses whose policies may be silent on the whole issue, this is an opportunity to argue that the absence of the exclusion, despite its common presence in the market, evidences an agreement to cover an event caused by virus or bacteria,” says Kruse.
A second problem is the unseen nature of the damage incurred. “In the context of COVID-19, many insurers are taking the position that they do not cover virus-related closures because there has been no ostensible damage to property,” says Robert M. Travisano, an attorney in the litigation practice of Epstein Becker Green (ebglaw.com). “This very point is the subject of several pending lawsuits and is sure to be hotly debated over the next several months and years as the true economic impact of the pandemic unfolds.”
Indeed, litigation is starting to pile up. “Lawsuits have begun to be filed in states from California, to Texas, to Louisiana, probing the limits of denials of coverage,” says Kruse. One recent lawsuit asserted that a denial by preliminary letter was tantamount to breach of a policy that even included a pandemic provision. The insurer had relied on a lack of specific coverage for the COVID-19 strain. “More such lawsuits will follow.”
So what will the courts decide? “One key factor will be determining the true cause of losses suffered by insureds,” says Kruse. “Was it the contamination of the premises, rendering them unfit for business, or was it the government orders requiring shutdowns?”
When checking your own policy for coverage, peruse the fine print. The terms of each insurance policy differ, and a maze of exclusions and endorsements must be navigated to determine coverage.
Some insureds may wish to increase coverage. “Businesses can purchase insurance that responds specifically to a viral outbreak,” says Travisano. “Such coverage largely came on the scene following the SARS outbreak in 2002-2004. However, given COVID-19’s prevalence and virulence, it is now likely that insurers will attempt to limit their risk by offering virus and disease coverage that is markedly more expensive or excludes COVID-19 outright.”