Business interruption insurance provides coverage for the loss of net income and for payroll expenses when a covered peril causes a business to suspend its operations. However, most policies exclude losses resulting from viruses or bacteria – so is your firm (or your client’s firm) covered for losses caused by COVID-19?
By Carl A. Salisbury, Policyholder Lawyer
Business interruption insurance is coverage that is typically provided as part of a company’s business owner’s property policy. It provides coverage for the loss of net income and for payroll expenses when a covered peril causes a business to suspend its operations.
Does Business Interruption Insurance Cover the COVID-19 pandemic?
I prefer to think of the recent interruption of business in New Jersey as having been caused not by the Coronavirus, but by the Governor’s Executive Order requiring non-essential businesses to close. That was the “direct” cause of the closures. Concern about COVID-19 was simply one of the causes in a chain of causation that ended with the Governor’s Executive Order of closure. Business interruption insurance is triggered by “physical loss of or damage to the insured premises.” There are New Jersey cases that have interpreted this policy language to mean that loss of access, loss of use, and loss of functionality can constitute a covered “physical loss of” the premises. Coverage does not necessarily require physical alteration of the property. Thus, loss of use and functionality of the insured premises occasioned by the Executive Order to close should trigger coverage, as long as there are no applicable exclusions in coverage in any other part of the policy.
Most policies have an exclusion for losses caused by or resulting from viruses or bacteria. There is a well-settled doctrine in NJ insurance law that may – in fact, should – result in this exclusion being held inapplicable to this circumstance. Yet, because the courts of NJ have never been asked to decide a case under these precise circumstances, the application of this legal doctrine to coverage for the Executive Order closures has not yet been tested in court.
How does business interruption insurance differ from regular property insurance?
Business interruption insurance is typically part of a property package policy, as described above. Property insurance will pay for the repair, replacement, or reconstruction of covered property after a loss from such perils as fire, collapse, earthquake, flood, and the like. Business interruption insurance typically covers the loss of after-tax business income and payroll expenses for your business during the period of temporary suspension of operations. Business interruption insurance can also cover loss of rental income and the reasonable and necessary expenses, if any, incurred to continue in business during the disruption (expenses to set up at a temporary location would be an example of covered “extra expense”).
How long business interruption coverage lasts varies from one policy to another. It typically covers a business for what is called the “period of restoration,” which begins (usually) 72 hours after the commencement of the interruption and ends when normal business operations are restored “with reasonable speed.”
How do I know if my business is covered for losses incurred by Executive Order closures?
Someone who knows how to navigate the policy and who understands your state’s insurance law can give you an opinion about your coverage. Ultimately, courts are likely to decide if this particular circumstance is covered by business interruption insurance.
To file a claim, you may either send a letter to your insurer or, more typically, you may ask your broker to place your carrier on notice of a claim. Most business owner’s property policies have very tight deadlines for placing the carrier on notice of a loss. Notice provisions use phrases such as “immediately” or “as soon as practicable” after a loss has occurred. Carriers will attempt to deny coverage if they believe that you have provided notice “late,” in violation of the notice provision of the policy. Placing the carrier on notice of a claim does not compel you to pursue it in litigation if the claim is denied. If, however, you fail to place the carrier on timely notice, you risk forfeiting the coverage even if a court ultimately decides that the claim should otherwise be covered.
What if the carrier denies a business interruption insurance claim due to COVID-19?
The total losses due to the Executive Order closures, both in New Jersey and nationwide, are going to be so extensive that the insurance company will almost certainly deny your claim – at least initially. An alternative response to a claim for this coverage could be a notification of the need to “investigate” further. This could be another way of effectively denying the claim by “slow-walking” the coverage determination. If the claim is denied or unreasonably delayed, the only way to protect your rights, unfortunately, will be to sue the carrier for coverage. In my experience, no governmental body – including the Department of Banking and Insurance – will intervene to help a policyholder in a dispute with its insurer.
Carl A. Salisbury has a national reputation as a policyholder lawyer and has devoted more than 25 years of his professional practice to the representation of policyholders in claims against their insurance companies. He has represented Fortune 500 companies, small and middle-market businesses, government bodies, and individuals in complex insurance disputes, as well as in contract, trade secrets, and employment matters. www.jonbramnick.com
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