There is no question that businesses large and small have been financially impacted by the coronavirus pandemic. The property and casualty insurance industry estimate that business interruption costs from coronavirus for U.S. small businesses could be between $220-$383 billion per month (Insurance Journal, March 20, 2020). Not only are business shut-downs required by Wisconsin’s “Stay-At-Home” order causing widespread financial challenges for non-essential businesses, but related supply chain impediments are also resulting in economic hardships for essential businesses that are struggling to stay open for business.
Much like the uncertainties inherent to the COVID-19 crisis, the answer to this question is equally uncertain and dependent on many situational factors.
The most likely source for insurance coverage for business interruption is the commercial property package. All businesses are likely to have a commercial insurance package that includes commercial property and business income and extra expense coverage. It is worth noting that business income and extra expense coverage is often an optional coverage, elected by the business owner.
These business interruption coverages will generally track the standard insurance policies published by Insurance Services Office, Inc. (ISO). Specifically, the package will include language similar to the policy language in the ISO Building & Personal Property Coverage Form CP0010 and Business Income (and Extra Expense) Coverage Form CP0030. The “perils”, or causes of loss, covered in these forms is often dictated by the ISO Special Cause of Loss form, CP1030. While your business insurance package may provide unique variations of commercial property coverage, with different form titles, the policy language is likely similar to these standard forms and the coverage analysis provided in this blog is based on standard ISO language.
The ISO Business Income (and Extra Expense) Coverage Form CP0030 10/12 version provides business income and extra expense coverage for businesses due to the “suspension” of “operations” during the “period of restoration”. The key coverage challenge is presented by the following provision of the Business Income (and Extra Expense) Coverage Form, also known as the “insuring agreement”:
“We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by the direct physical loss of or damage to property at premises which are described in the declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.”
The Extra Expense coverage similarly states under 2.a.b:
“Extra Expense means necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.”
There is additional coverage in the Business Income (and Extra Expense) Coverage Form for Civil Authority. Under 5. Additional Coverages a. Civil Authority it reads:
“We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by the action of civil authority, that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”
As such, business income and extra expense coverages are “triggered” when these provisions of the Business Income (and Extra Expense) Coverage are met. If they are met, then coverage is determined by the perils described in the ISO Special Cause of Loss form, CP1030. In the Sept 2017 version of the ISO form Section A. it states:
“When Special is shown in the declarations, Covered Causes of Loss mean direct physical loss unless the loss is excluded or limited in this policy.”
So, we turn to the “suspension” of operations likely caused by the COVID-19 virus and related crisis. Two situations can be contemplated by the crisis and both can be analyzed with this policy language in mind.
What if the “suspension” of my business operations is caused by the government-mandated shut-down of my business?
Here, the insurance company is going to evaluate whether the “suspension” of business is caused by “direct physical loss of or damage” to “property” (as described in the Business Income and Extra Expense policy) caused by a covered cause of loss (as described in the Cause of Loss Form). Arguably, the insurer will have difficulty construing the government COVID-19 mandate as “direct physical loss” to “property” because the mandate is not in response to direct physical damage to property, but instead is issued for public health reasons arguably outside the scope of the coverage. Accordingly, the insurer may assert that the business income and extra expense coverage is not “triggered” because the nature of the claim falls outside the insuring agreement as described above.
What if the “suspension” of business operations is caused by a shut-down due to a possibly COVID-19 exposure on my business premises?
More challenging coverage analysis is presented when a business has a known, or likely, exposure to the virus on its premises. For example, when either an “essential” or “non-essential” business is forced to shut-down due to reported contamination of its premises and/or a possible outbreak on its premises. Here, also, the insurance company will have to evaluate whether this scenario constitutes “direct physical loss of or damage” to “property” caused by a covered cause of loss. The evaluation of coverage in this scenario hinges on whether the business owner can prove that the possible contamination constitutes “direct physical loss” and this fact is not only very debatable but also will likely be determined by court rulings that have yet to be published and the insurance industry’s response to such court rulings.
So, that leaves the question, Should I file my business interruption claim with my insurance company? At Ansay, we are advocates for our business clients and desire that their insurance package will help them manage insurable business risks. At the same time, we realize the insurance coverage will be determined by the coverage terms of each business owner policy and realize that each insurer will evaluate COVID-19 business interruption claims according to their policy language. Please refer to the Wisconsin Office of the Commissioner of Insurance publication on the topic for additional guidance. We also encourage you to review the language of your policy. As always, your Ansay agent is available for consultation and assistance with your decision.
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