March 2020
Find out why the impact of the novel coronavirus pandemic on businesses and supply chains across nearly every industry sector is prompting a common question: will business interruption insurance cover losses associated with COVID-19?
By Sean Clements
As the coronavirus (COVID-19) pandemic is disrupting much of our daily lives, such as with mandatory or voluntary quarantines, “social distancing” measures, cancellation of sporting events and social gatherings and reduced or restricted travel increasing in the U.S. and around the world, it’s also creating havoc on global supply chains. As a result, businesses will likely see immediate liquidity problems and face severe financial impacts.
In addition, insureds will likely look towards their brokers and underlying policies to determine if COVID-19 and associated government actions will trigger an insured event under their policies. Whether the losses are covered and under what form of loss will depend on the terms and conditions of each individual insurance policy and the circumstances of the loss. Through conversations with various brokers, we believe that 99% of the insured market will lack business interruption and other associated coverages for COVID-19.
While the impact of the virus has not yet peaked, it’s been reported that companies have already had claims rejected tied to COVID-19 for payments under a popular type of coverage called business interruption insurance. In the rejections, insurers cited various terms and conditions, signaling that those companies’ ability to recoup losses will likely be fought in court on policy-by-policy based on contractual language.
What Is Business Interruption?
Business interruption is a temporary suspension in business operations on either a partial or complete basis due to the result of a specific and sometimes catastrophic event. In terms of insurance coverage, the loss event is the result of a covered peril such as a fire, hurricane or tornado. Business interruption insurance isn’t sold as a separate policy; however, it can be either added to a property/casualty policy or included in a comprehensive package policy as an add-on or “rider”.
"The fundamental question with respect to property insurance coverage for every coronavirus-related loss is whether the mere presence of the virus can cause or constitute 'physical damage' and whether such damage played a role in the loss of income."
In almost every case, business interruption insurance policies require “named perils policies” whereby physical damage, loss or destruction to tangible property needs to be triggered in order to be insured. It’s likely that COVID-19 will not meet the coverage trigger threshold in and of itself because it doesn’t cause “physical damage” to a property in the same way an “act of God” event or peril—such as fires, hurricanes or tornados—would. Even if losses tied to COVID-19 are covered, it’s unlikely companies that have business interruption insurance will be able to collect damage compensation.
For example, when Hurricanes Rita swept through the U.S. Gulf Coast in 2005, mostly affecting Louisiana, many establishments in Houston experienced power outages. While building structures didn’t suffer actual physical damage directly caused by the hurricane itself, they thus had no standing in building a case seeking claims for compensation of damages despite municipality-mandated evacuations.
Recently, New York and New Jersey, and we believe the federal government, are pushing on carriers to insure for losses associated with COVID-19, even where it’s specifically limited. The federal government needs to consider how that cost will be supported as losses from COVID-19 are likely large enough to crash the insurance and reinsurance market. On top of that, claims will still take time to pay, so insureds will still suffer, the economy will suffer and we’ll have then potentially damaged both the working class, brick-and-mortar America and the insurance market, compounding the economic impact.
Read the Small Print: Understanding Your Policy
Each carrier has their own unique language, so understanding your carrier’s form and the language contained in it is critical. For example, the wording contained in FM Global’s Standard Business Interruption Select Advantage Form has extensions in both business interruption and property damage for communicable diseases and infections, but they’re limited to $1-million remediation and $1 million for business interruption losses.
"Through conversations with various brokers, we believe that 99% of the insured market will lack business interruption and other associated coverages for COVID-19."
Some brokers place "Special Perils" wording in their forms. This typically includes coverage for infectious diseases. We saw hotels draw on this language for the Zika virus outbreak in 2015. However, this language tends to be applied mostly to the hospitality, real estate and healthcare industries. And, within those industries, we believe that only 10% of the market carries this specific type of coverage.
First Party Property Policies
Many businesses’ first party property insurance policies include coverage, not only for tangible property damage, but also for lost profits resulting from that damage. The coverage for lost income often covers loss resulting from:
The fundamental question with respect to property insurance coverage for every coronavirus-related loss is whether the mere presence of the virus can cause or constitute “physical damage” and whether such damage played a role in the loss of income. Property damage as a limiting factor is not the end of hope. Policies may still allow for additional forms of loss through an all-risk coverage or due to acts of civil or military authority. To the extent losses are covered, they’ll likely be challenged by “loss limit” restrictions, occurrence restrictions and location restrictions.
Occurrence and location restrictions present significant challenges to claiming losses. For instance, oftentimes, the location is specified as an owned/rental property plus 1,000 ft. So, if the coronavirus isn’t detected in your location, can you claim? On occurrence, windstorms are typically defined as 168 hours. Will similar arguments be made for COVID-19 working against the market? What challenges does that present?
In the past, some jurisdictions have allowed for an odor or vapor to be treated as physical damage, but this is jurisdiction specific. Could the same apply for this virus? A concern we have is that, even where policies allow for an insured loss, the limits associated with this will be insignificant to the overall loss itself.
‘All-Risk’ Policies
All-risk policies typically allow for all perils, unless specifically excluded. Many all-risk policies exclude damage from hurricanes, floods or earthquakes, but such coverage can generally be added for an additional fee. This policy is expensive. And, still some policies may specifically carve out protecting insureds against airborne contagions. Insureds with all-risk policies should collaborate with their brokers to determine their best course of action.
Acts Of Civil/Military Authority
In order to claim business interruption insurance tied to damages caused by COVID-19, insureds may need coverage for “Act of Civil or Military Authority”. A civil authority clause, also known as a public authority clause, is an insurance policy provision that outlines how the loss of business income coverage applies when a government entity denies access to the insured property.
Typically, act of civil/military authority coverage is triggered if:
For example, if Houston government officials order a complete and total shutdown of the city due to COVID-19, the enactment of this authority may still require physical damage for insureds to claim compensation.
Prohibition of Access
The specific language pertaining to “prohibition” and “access” may be difficult to argue in court and will likely be open to interpretation. In this instance, the courts will turn to the “Plain Language” standard and open a dictionary and determine what each word means in the context of the underlying policy. Language regarding “prohibition” is going to be specific regarding the directive of not being allowed to do something. What we’ll likely see, for example here in the case of Houston, is that government and local officials could limit or suspend indefinitely non-essential businesses, a curfew or specific locations, which could be defined as “prohibiting” the “access” of continued business.
How We Can Help
Disruptions to businesses due to COVID-19 are expected to rise in the foreseeable future. As such, we expect coverage claims to be heavily litigated in the following areas:
With our experience in restructurings and litigation support, we are well-positioned to add value to clients seeking damage collection/support, as well as be of value in court justifying these damages. We stand ready to assist our clients associated with any of these risks.
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Sean Clements is a Partner in Opportne LLP's Restructuring practice. Sean has worked across the entire energy spectrum and in the manufacturing space. Sean specializes in restructurings, valuation, business insurance claims, damage analyses and forensic investigations. Sean’s experience includes leading numerous energy restructuring projects, both in- and out-of-court, the negotiation of complex business interruption claims, as well as damage analyses and investigations related to asset misappropriation schemes and financial statement fraud. Prior to joining Opportune, Sean worked as a Manager in the Dispute and Investigation practices of Navigant Consulting Inc, Deloitte & Touche, US and Deloitte & Touche, UK. Sean graduated from Texas A&M University, Magna Cum Laude, with a BBA in Accounting and an MS in Finance. Sean currently serves as the Trustee to ERG Resources and on the Risk Advisory Board of an independent gas trading and marketing company.
