Covid-19 and Business Interruption Insurance

By Joseph Kelly

Covid-19 and the response from state and local government in the form of stay-at-home orders have led to closures or slowdowns for many Illinois businesses. Many businesses have been submitting claims to their insurers for lost income and extra expenses under the business interruption insurance component of their property insurance policies. Some have sued their insurers.

What is business interruption insurance?

Business interruption insurance generally may include three types of coverages:

  • “Business income” coverage for business income (defined typically as lost profits plus continued normal expenses) and extra expense (defined as expenses that wouldn’t have been normally incurred) resulting from direct physical damage to property on an insured’s premises that leads to an interruption of that insured’s business.
  • “Contingent business interruption” coverage for business income and extra expense resulting from direct physical damage to property outside of an insured’s premises – e.g. a key supplier’s plant is destroyed by a tornado.
  • “Civil authority” coverage for business income and extra expense when access to a business is prohibited by a local, state, or federal order after damage to property outside of that business’s premises. For example, a hurricane strikes a major U.S. city, resulting in serious damage to the downtown business district. The local government issues an order closing all businesses in a part of the city as a result. Civil authority coverage pays for business income and extra expense of a business where “access” to the business premises is prohibited by the government order. Civil authority coverage, though, is typically limited to four-weeks’ lost income.

Although there are standard industry forms for those coverages, such as from the Insurance Services Office or “ISO,” there can be variation from policy to policy—so it’s important to read the particulars of each insurance contract.

Does business interruption insurance apply to lost income resulting from a Covid-19 stay-at-home order?

The insurance industry contends generally that there’s no coverage under any version of business interruption insurance for any loss relating to Covid-19.

For business income coverage to apply, there must be direct physical damage to property on an insured’s premises. And for contingent business interruption coverage to apply, there must be direct physical damage to property outside an insured’s premises. Policyholders are arguing that the presence of the Covid-19 virus at their premises (for business income coverage) or at their supplier’s premises (for contingent business interruption coverage) satisfies the direct physical damage requirement. Insurers disagree. And proving that Covid-19 virus is physically on-site may be difficult for a policyholder in any event. Plus, many policies have “virus” exclusions that state the insurer won’t pay for loss or damage caused or resulting from any “virus” that induces, or is capable of inducing physical distress, illness, or disease.

There have been Covid-19 coverage lawsuits—in Illinois and nationwide—filed by businesses particularly hard-hit by COVID-19, such as restaurants, bars, dental practices, salons, and theaters—that allege that insurers have wrongfully denied their claims. The policyholders argue generally that that their premises and suppliers’ premises have been damaged by Covid-19 and that “access” to their premises has been prohibited by State or local stay-at-home orders due to damage on their premises and damage to the “public space”—namely, damage from the presence of the Covid-19 virus on surfaces and in the air—outside of their premises. Some stay-at-home orders (but not Illinois’s) even state explicitly that the Covid-19 virus has damaged property. Insurers deny that they are required to provide any coverage whatsoever. Many businesses aren’t entirely closed, moreover, such as the restaurant open for carryout—so another contested issue likely will be whether “access” to a business is prohibited, even when a stay-at-home order is in effect.

We’re unaware of any court decisions regarding business interruption coverage for COVID-19-related losses. But given the stakes, at least some policyholders, as well as the insurance industry will continue to litigate these cases aggressively both at the trial court level and on appeal.

Are there timing and other requirements for submitting a claim and filing a suit?

Early on, brokers and agents reportedly were generally advising policyholders to forgo submitting COVID-19 business interruption claims to insurers. But that changed—even though insurers continued to deny coverage. That change presumably resulted from the fact that there is a fair amount of litigation over coverage and numerous businesses with claims to bring. There are timing and proof requirements for submitting a claim and policies frequently include a shorter contractual limitations period for filing suit; so, to preserve whatever rights they may have, policyholders reportedly are at least providing required notices and other documents to their insurers, whether through their brokers or agents or otherwise.

Will pending legislation render the coverage question moot?

New Jersey, New York, Massachusetts, Ohio, Pennsylvania, and Louisiana have proposed legislation that would mandate business interruption coverage extend to Covid-19-related losses by rendering moot the direct physical damage requirement and “virus” exclusions. To our knowledge, there’s no similar proposed legislation in Illinois. It remains to be seen whether any proposed legislation will become law and, even then, whether they will withstand court challenges by insurers, which will inevitably follow. Last week, there were news reports that certain Senators were advocating that the Trump administration take steps to protect the insurance industry from any such State legislation.

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