Business Interruption Insurance in a COVID World

While a fortunate few industries have found opportunity during the pandemic, many more organizations have lost business after postponing operations, slowing down or temporarily closing their doors.

August 25, 2020

The COVID virus has seriously impacted most sectors in some form or other. While a fortunate few industries have found opportunity during the pandemic, many more organizations have lost business after postponing operations, slowing down or temporarily closing their doors.

In extraordinary circumstances where an organization must stop trading, business interruption insurance commonly provides relief for lost revenue and associated expenses, though most business interruption insurance specifies direct physical damage or loss to insured property. For many policies, business interruption losses caused by the COVID pandemic and other viruses are either not covered or explicitly excluded, yet that hasn’t stopped the filing of a wave of lawsuits on the part of impacted businesses.

Business interruption insurance — why didn’t anyone have it?
Historically few companies maintain business interruption coverage only 30% of organizations did so, with only 11% of SMEs opting for the policies. One theory for the low uptake is that though these policies were available, businesses viewed them as expensive, the coverage limited and the risk remote.

So what happens when a pandemic interrupts nearly 100% of businesses? Many organizations are now scrambling to read the fine print on their policy contracts, searching for a solid basis for a claim. Business interruption insurance, however, is normally quite narrowly defined, focused exclusively on physical perils.

Some sectors may have better claim than others
The nuance of business interruption varies greatly depending on the sector and its relationship with the material goods used to supply its services.

In the events and hospitality industries for example, some organizations have made the argument that since COVID can attach to surfaces, thereby materially “damaging” them and rendering them unfit for their intended use, their business interruption policies should provide coverage.

Restaurants, gyms, movie cinemas and theaters are making associated arguments. In contrast, a professional services organization might be hard pressed to prove that COVID caused physical loss or damage to the goods required for it to execute its business.

Now to the courts
Many of these arguments will eventually be decided by the courts, though a complication is that judgments will be on a patchwork of state-by-state decisions; thus far several US states have brought suits. New Jersey, for example, proposed a bill that would force insurers to pay business interruption claims regardless of virus exclusions in policies.

Constitutionally, it’s not easy for states to interfere in contracts, the argument being that an insurance company performs a risk evaluation and underwrites a policy based on known parameters. Forcing insurers to accept new variables retroactively changes contracts, fundamentally altering the prospective risk to something the insurer did not plan for and the policyholder did not pay for. A court in Michigan recently sided for the insurer in a case related to a COVID-affected restaurant.

Were some bills to pass, they might permit policyholders to bypass expensive disputes with their insurers about the detailed minutiae and semantics of their policies specific to the definitions of physical property damage.

Geography matters
Currently there are lawsuits in multiple states, and jurisdiction will be an important factor in final results, as some jurisdictions have a reputation for being more partial to insurers, whereas others tend to side with policyholders.

States where previous insurance cases regarding toxic dusts or noxious gases were decided either for or against insurers may inform how the courts could decide the outcome related to COVID, as well.

In a recent case in Missouri, a US District Court Judge denied an insurer’s request to dismiss a COVID-related case. The Cincinnati Insurance Company had claimed that forcing coverage for the losses to their insured businesses in Missouri and Kansas would result in debilitating payouts that would risk the solvency of the organization. The judge ruled that COVID was not a “benign condition,” that it did in fact constitute a “physical substance,” and that therefore it could attach to and damage property.

A financial black hole?
Were the courts to decide in favor of policyholders, the concern is that insurers would not have the financial resources to pay out claims they did not anticipate when setting pricing. The results may also undermine the confidence that insurers have in contractual law in certain states, if the courts force the companies to change contracts retroactively, especially given that many contracts actually include specific exclusions for loss due to virus or bacteria.

Of course, insurance industry representatives are lobbying legislators for relief.

The future of business interruption insurance
Will there be a new market for business interruption carriers as a specialty line? More companies will surely seek business interruption insurance protection in the future, however the details and exclusions of coverage on the carrier side are sure to evolve, as well.

When the SARS outbreak emerged nearly 20 years ago, insurers were forced into a similar reckoning. Concerned with the possibility of paying out huge numbers of claims due to the virus, some carriers began specifically excluding claims related to viruses and bacteria. Will that become another new normal, and if so will there be an opportunity for more specialty lines of insurance dedicated specifically to epidemic-related loss?

New “pandemic-proofing” policies are already hitting the market, and while not cheap they are offering businesses in a range of sectors some potential relief should another virus strike. Boston-based insurtech firm Machine Cover is developing policies that use technology to measure traffic fluctuations during lockdowns, near to food outlets, shops, beauty services, etc. and if traffic drops below a certain threshold insureds are able to claim. Chubb has established a “Business Interruption Program” envisioned as a public-private partnership offering support to insured businesses in the event of pandemic-related business shutdowns, relying partially on federal funds to pay claims.

The current state of business interruption insurance: clear as mud

  • Business interruption insurance was designed to help organizations survive physical loss or damage to property, and the current question is if COVID-related damages are covered under those policies.
  • Some sectors may have stronger legal footing over others, arguing that if a virus renders a physical good unusable and an organization consequently can’t perform its business, that should be considered physical damage.
  • The courts will most likely decide these outcomes, though on a patchwork basis and contingent on jurisdiction.
  • The outcome of these decisions could seriously impact the financial health of carriers, though may boost specialty lines of pandemic-related specialty coverage options.