People running businesses are scrambling to figure out how to deal with their financial losses and expenses from coronavirus COVID-19 business interruptions. Including me.
I like sharing explainer Q&As with people who know more about subjects than I do and am using this blog post to share with others what I learned about what types of business insurance cover coronavirus COVID-19 losses.
This is a basic explainer and not legal advice, and I tried to ask questions that would be helpful to both non-lawyers and lawyers.
The following is a Q&A with Daniel P. Barton of the Barton Law Group. Law is a very specialized field like many, and lawyers often ask each other questions. I’ve been friends with Dan for almost my entire legal career, and he is the first person I call when I have questions about insurance coverage issues and specifically, business interruption claims.
Dan Barton is Board Certified by the Texas Board of Legal Specialization in Personal Injury Trial Law and Board Certified in Civil Trial Law by the National Board of Trial Advocacy. He has vast experience in understanding insurance coverage issues in unusual events, and as a part of his practice, consults with policyholders’ about their insurance coverage and rights.
Q&A with Dan Barton on Coronavirus COVID-19 Business Insurance Claims
What types of businesses may have insurance that helps pay for money lost when their businesses shut down due to coronavirus COVID-19?
Any business that carries commercial property insurance or business owner’s insurance policy coverage.
According to the American Property Casualty Insurance Association (APCIA), American small businesses may lose $220-383 billion per month during the COVID-19 outbreak, creating around 30 million coronavirus insurance loss claims.
They believe that these small business insurance claims would be ten times the number of claims that they have ever handled in one year.
Remarkably, this estimate of coronavirus business interruption losses does not take into account COVID-19 global losses, large and medium businesses, and event cancellations.
Generally, how do you determine whether a loss is covered by business insurance?
Typically, an event must occur that is a named peril that you can find in your policy, or if an “all risk” policy caused by a peril that is not excluded.
Most policies require that there has been direct physical loss caused by the peril. This is where things get very fact and policy specific. There may be a few ways to obtain coverage without a direct physical loss.
There are some situations that appear promising for coronavirus-related coverage under property policies, general liability insurance, D&O liability insurance, and event cancellation insurance
Here are some examples where direct physical loss may not be necessary. A careful analysis of the law and policies under each is required and technical beyond our Q&A scope:
1. First-Party Property/Time Element Claim Under Policy with Express Communicable Disease Coverage Grant
2. Event Cancellation Insurance Claim
3. First-Party Property/Time Element Claim
4. Ingress/Egress Claim Under First-Party Property/Time Element Insurance Policy
5. Civil Authority Claim Under First-Party Property/Time Element Insurance Policy – For example, your supply chain was interrupted when a supplier shut down plant operations due to a coronavirus-related quarantine ordered by the government.
6. Claim Under Directors and Officers Liability Insurance Policy
How do businesses know if they have the right type of insurance to pay for these coronavirus COVID-19 losses?
Normally, I would suggest consulting your agent first. A modern global pandemic is uncharted territory with few risk managers savvy enough to have purchased specific coverage for a named virus. Read your policy and contact your agent or professional with questions.
As a part of my practice, I review policies and determine whether businesses have business interruption coverage that covers their losses, including now, coronavirus COVID-19 losses.
What is an “All Risk” policy? Does that cover coronavirus COVID-19 losses?
Simply stated, an all risk policy covers all risks (perils) that are not specifically excluded.
Voila, coronavirus or COVID-19 is not specifically excluded in my all risk policy, so I have coverage. Not so fast, first, it may be excluded under an exclusion expressly naming bacteria, biological agents, or virus. Some policies exclude contaminants. Contaminants are usually defined in your policy. This definition may contain viruses.
If not, the direct physical loss requirement by a covered peril, as interpreted in some jurisdictions, may still kill your claim.
You still need a direct physical loss to your property or in some instances to an adjacent property, with some exceptions, namely, event cancellation coverage.
What is “Business Income Loss Coverage?” May that cover coronavirus COVID-19 business income losses?
Business income loss coverage covers your loss, profits, and expenses that you normally have but don’t because you are completely shut down. In some scenarios, it will cover the cost of cleanup or decontamination.
What is a “Pandemic Coverage Endorsement?” May that cover coronavirus COVID-19 losses?
This is an endorsement bundled or add on to your policy that may name the coronavirus or arguably a virus that is in the same family.
The Pandemic Coverage Endorsement is your clearest path to business interruption coverage for COVID-19 losses.
What is “Civil Authority Coverage?” May that cover coronavirus COVID-19 losses?
Civil authority is when the government causes your business to shut down completely. Depending on the specific wording of the coverage and what the governmental restrictions are will guide whether it covers losses or not.
Most policies require direct physical damage to your property or nearby property with some narrow exceptions.
So these declarations by local, state, and federal governmental authorities may affect the way that contracts and insurance works?
Yes. When the government makes these declarations, it does not just affect whether the government provides aid to areas. For insurance and other contracts, it can trigger claim events.
Your decision to voluntarily close without official government authority will not trigger coverage.
Do the insurance documents differ from business to business, state to state?
Insurance documents are different from policy to policy and can differ within the same state. So just because someone else’s business in your area has this insurance, does not mean you do.
With all insurance issues, you need to read the policy carefully.
If you have insurance where the policy looks like it will cover the losses, will the insurance company contact you to ask about your losses?
No. You must make a claim. The IRS is not going to notify you about tax deductions, and likewise, insurance companies are not going to advise you on how to take their money.
What is the best way to contact your insurance company about losses due to coronavirus COVID-19 shutdowns?
All policies state how to put them on notice to make a claim. You must follow their procedures and make a record.
IMPORTANT: The caveat, the way a claim is reported may trigger coverage or a denial.
It is critical you know all your rights and obligation under the policy and governing law before you give notice of your COVID-19 claim. To analogize, it is a bit like rubbing the bottle and saying the magic words before the genie will come out of the bottle.
How do you prove the amount of your loss for Coronavirus COVID-19 losses?
The policy will state your deductible, what is covered, and some will give examples on how to calculate damages. After that determination is made, it becomes a bookkeeping or CPA exercise.
Businesses should be keeping good records for business and IRS purposes, and the same applies for making COVID-19 business insurance claims.
How long do you have to make claims for your Coronavirus COVID-19 losses? Is it better to make an early claim, or does it matter?
In Texas, you generally have two years to make claims covered by the insurance code sections for consumers (541,542). You may have four years for breach of contract, but lose your statutory damages afforded to you in the insurance code.
There are commercial policies that require you to make a claim in one year and make it in New York (Where there is no bad faith insurance law). If your policy has this New York forum selection clause, do not sit on what rights you have left and consider changing insurance agents.
I have litigated the issue with mixed results. If you have a forum selection clause stating your disputes will be settled outside of Texas and have coverage, you may want to challenge the clause legally. For me, this made a million-dollar difference to a client.
What are the maximum losses that businesses can get these types of insurance?
The maximum losses generally are in your declarations page of your policy stated as an amount per occurrence. A deductible will be applied.
Most policies contain different deductibles for different types of losses. For example, you may have a $1,000 theft deductible and a 2% wind damage deductible. The same goes for business interruption. A careful reading of the entire policy is critical.
I’d like to thank Dan for sharing knowledge on this topic. Please note, this is not something that my firm handles, so do not email me on this topic. You can contact Dan if you would like more information on the subject or believe you may have a business interruption loss claim.
In any event, please stay safe, and I am sorry we are all going through this.
Like with other blog posts here, if you have helpful information on this topic beyond what is in this blog post, you can put it in the comments below. Sometimes I update explainer blog posts based on topics discussed in the comments.
As some of you know, the comments are moderated by me when I get around to it. I am the sole judge of what is helpful and good, and zero spam comments will be published. Instead, they will be shot straight into the sun or perhaps mocked first, and then shot into the sun.