Business interruption insurance offers businesses protection against financial loss when they are unable to operate. In the past year, the COVID-19 outbreak has raised questions about whether that coverage includes pandemic-related losses. The short answer is, it depends on the terms of the policy and how the insurer, and possibly the courts, interpret them. Some state legislatures are also getting involved.
KEY TAKEAWAYS
- Business interruption insurance is meant to help offset the loss of income when operations are temporarily halted due to a covered event.
- Unless a business interruption policy specifically lists pandemics or contagious illnesses as covered, they may not be.
- Some states have introduced legislation that would apply business insurance coverage to pandemic-related losses retroactively.
Business Interruption Insurance: What's Covered
Business interruption insurance policies can help a business remain afloat if it has to close temporarily. The policies provide income replacement that can be used to cover day-to-day operating expenses and overhead costs until the business is able to reopen. The National Association of Insurance Commissioners estimates that 30–40% of business owners carry some form of business interruption coverage.
Business interruption policies are generally used by small to midsize businesses. According to the Insurance Information Institute, businesses with 100 or fewer employees and $5 million or less in revenue are good candidates for coverage.
A typical business interruption policy will include property, liability, and business income coverage. So you're covered against losses stemming from damage to your business property or its contents caused by a covered peril, as well as personal liability claims or loss of income if the business has to close temporarily.
Covered or named perils depend on the terms of the policy, but they may include:
- Fire damage
- Damage from wind or falling objects
- Lightning damage
- Theft
Business Interruption Insurance and Pandemics
The coronavirus pandemic has delivered a significant economic blow to many business owners. According to data from Yelp's Local Economic Impact report for 2020, more than160,000 businesses had closed as a result of the pandemic through the end of August 2020. Of those closed businesses, approximately 60% were not expected to reopen.
Whether business interruption insurance applies in that situation isn't always clear. But generally, unless a policy specifically lists coverage for pandemics or contagious illnesses, those events may be excluded.
That means if you run a business that's closed temporarily because of a pandemic, either due to government-mandated shutdowns or out of an abundance of caution, any loss of income you experience may or may not be covered by your policy. As a first step, it's worth reviewing your policy and checking with your insurance agent.
For situations in which business interruption policies have ambiguous language, judicial intervention may be necessary to determine if pandemic losses will be covered. A handful of court cases have been filed in connection with business interruption coverage and the coronavirus pandemic, but the rulings have been a mixed bag, with some decisions in favor of business owners and others siding with insurers.
Several states have proposed legislative action to address pandemic-related losses and business interruption insurance coverage. As of August 2020, 10 states, including California, New Jersey, and New York, had drafted legislation to require insurers to retroactively pay for business interruption losses caused by coronavirus shutdowns. Federal lawmakers have also discussed measures related to business interruption insurance to help offset losses for businesses that had to shut down, but any definitive legislation has yet to materialize.
