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 impacted their ability to serve their customers, but, for some, it has also led to indefinite disruptions—disruptions that could impact their bottom line.

As a result 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 may not be available for losses stemming from COVID-19. This blog highlights characteristics and types of businesses interruption insurance, examining how they may or may not respond to the outbreak.

Designated Perils

Under most standard 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 fires, wind, and water damage from pipe breaks or sprinklers.

This means that, if the insurance policy requires a specific loss (e.g., a fire) and the loss in question doesn’t qualify or is not stated explicitly, coverage may not be available. For some businesses, COVID-19 will not constitute as a designated peril, and business interruption insurance may 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.

Direct Physical Losses

Business interruption insurance is typically triggered by a direct physical loss or damage. Under this interpretation, contagious diseases like COVID-19 would typically not count as a covered loss. This is especially true as it relates to mandatory or voluntary closures stemming from 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, insurers may push back, making coverage unavailable. Some policies may even 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 many cases, a direct physical loss to an adjacent or nearby property is usually required in order for civil authority coverage to kick in.

It should be noted that the scope and limitations of civil authority endorsements vary. In fact, some insurers can secure customized civil authority coverage to address their specific exposures, including diseases. As such, businesses need to review their policies alongside their insurance professional to determine if civil authority coverage is available.

Endorsements for Infectious Diseases and Pandemics

While it’s true that traditional business interruption insurance policies may not extend to losses that arise from a health crisis or pandemic, limited amounts of specialized coverage for these disruptions may be available for specific industries:

  • Communicable and infectious diseases coverage for hospitality and health care operations—Businesses in the hospitality or health care industry might have some dedicated coverage or endorsements for losses caused by communicable or infectious diseases or food contamination. One benefit of this coverage is that a direct physical loss is generally not required for the policy to go into effect, but the “disease” usually needs to be present at the insured facility for coverage to apply.
  • Pandemic-specific coverage—While past health crises, like the Ebola outbreak, led some insurers to exclude coverage for pandemics, others created specialized business interruption policies. These policies were created for by a small number of specialty insurers specifically for operations like hospitals, hotels, airports, shopping centers, restaurants, theaters, gyms and other establishments that may have to close their doors as the result of an Ebola outbreak. While these policies have largely not been available in recent years, there is hope that similar coverage may be developed for COVID-19 and other types of communicable disease outbreaks in the future.

Availability of these forms of coverage will depend largely on the carrier and the insured. That said, it’s important for businesses to review their coverage with their insurance professional.

Contingent Business Interruption Insurance

Business interruption insurance is a crucial component of risk management programs, but it does not extend to disruptions to a third party. That’s where contingent business interruption insurance (CBI) comes in.

Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI lets businesses transfer the risk of certain losses to the property of a third party. CBI reimburses policyholders for lost profits and extra expenses resulting from an interruption of business at the premises of a customer, vendor, supplier or other third party.

This type of coverage is increasingly important as COVID-19 continues to affect the global economy. Even if a business is not located in an area where COVID-19 has been detected, aspects of their supply chain might be, leading to potential disruptions. In fact, in China—where COVID-19 originated—many workers have been ordered to stay home, forcing some manufacturers to halt operations. Without access to the products or components they need, businesses that partner with these manufactures also have to stop distribution.

While CBI could provide coverage in this scenario, there are caveats. With CBI, the covered third-party property may be specifically named, or the coverage may simply blanket all customers and suppliers. Insureds will have to review policy language to ensure their suppliers are included in the policy.

Additionally, similar to traditional business interruption policies, some form of property damage will need to occur before coverage is triggered. Again, contamination may constitute as property damage depending on the policy language and insurer.

Moving Forward

As the COVID-19 situation evolves, more organizations are looking to business interruption insurance, hoping it will respond to losses and help them weather the outbreak. However, COVID-19 is uncharted territory, and a number of factors come into play when it comes to insurability. To prepare, businesses should review their insurance programs to:

  • Ensure the policies they have in place provide sufficient protection.
  • Avoid overlooking unique exposures COVID-19 brings.
  • Determine how COVID-19 could impact their various lines of insurance beyond business interruption coverage.

To continue the discussion, contact Borden Perlman today.

This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.