Business Interruption Insurance: At Issue Amid COVID-19 Shutdowns

Whether or not Business Interruption insurance should step in and pay for loss of income as a result of temporary business closures due to the COVID-19 pandemic is a topic of heated debate among different stakeholders. Let’s take a close look at what’s taking place.

BI Coverage Triggered by Physical Loss

Business Interruption insurance, explains Robert Hartwig, former president of the Information Insurance Institute (I.I.I.), when asked whether coverage would apply as a result of the coronavirus, has stated unequivocally that “coverage is triggered only when there is actual, direct physical loss or damage to insured property from a covered cause of loss like fire, wind, explosion, smoke, etc. Not only does COVID-19 not meet the definitions for ‘direct physical loss or damage,’ but it is also the case that interruptions resulting from the presence of (actual or suspected) viruses and bacteria are explicitly excluded. These same requirements and exclusions apply even if the closure of the business was ordered by government authority.”

Several insurance associations – the American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, Independent Insurance Agents & Brokers of America and Council of Insurance Agents & Brokers – when urged by Congress in mid-March to cover Business Interruption claims arising from COVID-19, concurred with Mr. Hartwig’s view, writing in a letter the following:

“Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business Interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19…[Any] proposed retroactive application legislation would fundamentally change the agreed-upon transfer of prospective risk-of-loss exposure to coverage for a known and presently occurring loss, something the parties did not agree to, the insurer did not rate for, and the policyholder did not pay for.” 

According to estimates by the American Property Casualty Insurance Association, firms with 100 employees or fewer could see business continuity losses of as much as $431 billion a month.

States Call for Insurers to Provide BI Insurance

Several states in fact have proposed legislation to force insurers to cover COVID-19-related Business Interruption claims. New Jersey was the first state to propose such legislation, requiring commercial property insurers to retroactively cover losses that businesses in the state have accumulated because of the coronavirus outbreak. The legislation was eventually pulled to give insurers and lawmakers more time to come up with a solution. Other states, however, have proposed similar legislation to New Jersey, including Ohio, Massachusetts, New York, Louisiana, Pennsylvania and South Carolina.

Businesses Suing for Coverage for Loss of Income

Businesses across the country are turning to litigation over coronavirus Business Interruption coverage. A restaurant in New Orleans was the first to file a lawsuit asking a state judge for a declaratory judgment that its Business Interruption policy cover damages if it is ordered to close by civil authorities in response to the coronavirus. Thomas Keller, owner of famed French Laundry in Napa and other restaurants around the Bay Area, is suing his insurance company for denying his Business Interruption claim. A Native American tribe is also suing a group of insurance companies, and has asked the court to declare its losses as a result of closing its casinos during the coronavirus pandemic covered by insurance.

President Trump recently weighed in on the matter during a White House coronavirus briefing, suggesting that he “would like to see the insurance companies pay if they need to pay.” The president said there’s “an exclusion” for pandemics “in some cases,” but “in a lot of cases, I don’t see it.”  Several Republican senators came to the insurance industry’s defense after the president’s statements, writing in a letter: “If the insurance industry were now forced retroactively to cover perils that were never accounted for, commercial insurers could experience significant economic strain and/or insolvencies, given the magnitude of the current cumulative estimated claims.”

Proposed Solution: Federal Subsidy Program

With so much at stake, the insurance industry has joined with business groups in promoting a federal subsidy program similar to what was created to help businesses after 9/11. The American Property Casualty Insurance Association, the Independent Insurance Agents & Brokers of America, the National Association of Mutual Insurance Companies, the National Association of Professional Insurance Agents, the Wholesale & Specialty Insurance Association and others issued a group statement calling for the creation of a “COVID-19 Business and Employees Continuity and Recovery Fund.” The COVID-19 fund would provide assistance directly to businesses impacted by the COVID-19 pandemic and their employees.

The associations’ letter dated March 31 to President Trump and congressional leaders stated the following:

“The COVID-19 Business and Employees Continuity and Recovery Fund (‘Recovery Fund’) would be funded by the federal government and under the authority of a special federal administrator with the ability to enter into contracts with interested businesses to administer the Recovery Fund and facilitate the distribution of federal funds and liquidity to impacted businesses and their employees. The requested relief would be designed to help businesses retain and rehire employees, maintain worker benefits, and meet operating expense obligations. Strong anti-abuse provisions, including audits and special Inspector General oversight, would be included.

We urge the Administration and Congress to continue to think broadly and holistically to address the catastrophic emergency that has caused these unprecedented economic challenges. We believe the establishment of the Recovery Fund is necessary to supplement the efforts to expand lending in the CARES Act. Businesses across the United States are looking to you to restore confidence in our economy, support employee retention, and position businesses to survive this crisis and rebound once it ends. We stand ready to work with the Administration and Congress in implementation.”

How best to address the enormous economic losses that businesses are experiencing across the country due to the COVID-19 pandemic is a fluid situation about which we will continue to keep you updated.

Sources: National Law Review, Insurance Journal, MarketWatch, PropertyCasualty360