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If your business has recently suffered property damage in a protest or you have had to close up to comply with stay-at-home orders due to COVID-19, you might be concerned with your ability to cover employee wages once your cash reserves dry up. Business interruption insurance is an optional coverage that you can choose to add on to your main commercial property insurance policy. It specifically provides benefits for losses you incur as a result of physical loss of or damage to your property that caused a suspension in your business operations.
The good news is, if you have it, business interruption insurance does cover payroll. However, your main first-party commercial property coverage and your business interruption coverage are tightly linked. In fact, your business interruption insurance coverage only kicks in if your property damage coverage also applies to the situation. Benefits from your primary commercial policy compensate you to rebuild or repair your business property, and your business interruption insurance benefits help you cover the business income you lose from having to close for a period of time due to property damage. Read on to learn more or speak with one of our experienced Coronavirus business interruption insurance attorneys to discuss your case.
Situations covered by your commercial property policy that typically trigger your business interruption insurance coverage include:
This guide offers additional information about business interruption insurance in California, situations that are typically covered, common exclusions, and steps you can take if your commercial property insurance carrier denies your business interruption claim to cover payroll.
As mentioned above, business interruption insurance is an optional coverage that business owners purchase as an add-on to their commercial property policy. Business owners choose between a specified perils policy or an all risk policy.
In a specified perils policy, your insurance carrier explicitly states the causes of property damage, or perils, that it covers. Essentially, if the cause of property damage is not listed in your policy, your insurance will not cover the damage.
Conversely, under an all risk policy, your commercial property insurance carrier covers all causes of property damage except those explicitly excluded.
If your property damage insurance policy applies, it then triggers your business interruption coverage. In most cases, business interruption insurance is an all risk policy.
In general, to get coverage under business interruption insurance, you must show physical loss of or damage to covered property caused by a covered peril during the policy period. This damage must result in an actual loss of income due to the necessary suspension of operations during the period of restoration, which is the time it takes for the property to be usable again.
The definitions of “loss of” and “damage to” in many insurance policies is still being hashed out in the court system. To complicate matters, insurance policies never define what either requires or means.
However, federal courts in the First, Third, Fourth, and Eighth Circuits have affirmed decisions where the physical loss of property or loss of use of property criteria is satisfied without actual structural damage.
This particular phrase is the subject of the main arguments in cases like these, and insurance companies will insist physical alteration or structural damage is necessary. Experienced business interruption attorneys will be able to find the loopholes and make the arguments to show why your business losses resulting from COVID-19 closures are covered.
Companies sell business interruption insurance policies to prevent business owners from suffering catastrophic financial loss if they have to close their business because of property damage or government orders.
A business interruption insurance policy for a California business owner typically covers:
Each commercial property insurance policy and business interruption add-on contains different language concerning coverage and exclusions. You should review your policy closely, so you have a broad understanding of your coverage. If the policy’s language is unclear, which is often the case, consult with a skilled attorney who can help you decipher your policy. Although business insurance exceptions exist, business interruption insurance coverage typically excludes the following:
Business interruption insurance coverage only provides funds for documented business income. Policies do not cover unrecorded cash transactions or estimated or projected future income. Business owners need to provide proof of income to their insurance company, often in the form of tax documents, paid invoices, and retail receipts. The exact type of proof a carrier wants varies based on the type of business. Furthermore, business owners must keep meticulous records to show exactly how the closure has impacted their income.
As previously mentioned, your business interruption coverage is an optional add-on to your broad commercial property coverage. They are linked to the extent that only damage covered by your commercial property policy can trigger your business interruption insurance. Additionally, you cannot receive insurance benefits if you voluntarily close your business.
Some events commonly excluded from commercial property coverage include:
Although the above are typically excluded from commercial property insurance coverage, some insurance providers offer separate policies or optional add-ons that specifically cover one or more exclusions. If you have suffered a business interruption as a result of property damage from one of the events listed above, you should never just assume that you do not qualify for business interruption insurance to cover your payroll expenses. Always review your policy closely and speak with a lawyer if necessary.
When major property damage occurs, it’s unlikely utilities like electricity, internet, water, etc. will stay on. For this reason, business interruption insurance coverage typically does not provide benefits for monthly utility expenses. Unlike rent payments or loan payments, business owners can disconnect or pause utility service without penalty in most cases.
Power outages and road closures after a storm or a severe car accident that blocks a business for several hours are some examples of situations in which business owners experience short-term closures or business interruptions. In most cases, these types of events are short-lived; power is restored quickly, roads open, cleaning crews clear accidents. Consequently, business interruption insurance typically does not cover any closures that last for fewer than 72 hours before your coverage applies.
The arrival of COVID-19 in early 2020 brought the relationship between business interruption insurance and viruses, biological agents, and infectious diseases to the forefront for business owners, insurance companies, and government agencies.
Historically, most commercial property policies have explicitly excluded business interruption coverage for losses incurred as a result of viral contamination. Even when policies provide coverage, business owners typically have to show a direct loss or damage to their business property. This isn’t easy, because current losses have generally stemmed from CDC guidelines and government mandates in California that have forced businesses to close.
As the virus spreads, insurance companies have been denying coronavirus-related claims and policyholders have been suing. The biggest issue lies in determining the type of damage COVID-19 causes to a business. The virus spreads through the air and infects surfaces, so it can be present in all types of commercial spaces.
In past cases, courts have ruled that harmful substances count as property damage that triggers commercial property insurance coverage. In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America a New Jersey federal court ruled that ammonia released into a building constituted property damage because structural change does not have to occur for physical damage to occur. Oregon and New Hampshire courts have come to the same conclusion in similar cases. Furthermore, in Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., a court found the presence of asbestos and its potential threat to cause future harm satisfied the “physical damage” requirement for business interruption insurance.
COVID-19 resulted in business closures, but buildings and business property went structurally unharmed. Global pandemics and insurance coverage are an untested area of law. California’s Department of Insurance has reinforced the notion that insurers have a legal obligation to follow the state’s Fair Claims Settlement Practices Regulations. Businesses were forced to shut down because of a government mandate, making it questionable if the order is enough to trigger business interruption insurance coverage.
If you suffered a business interruption as a result of the ongoing spread of COVID-19, it’s in your best interest to consult with an attorney if your carrier denies your claim. Laws and regulations will likely change quickly, and insurance company decisions and court-rulings will also likely vary greatly. A skilled business interruption insurance attorney can evaluate the circumstances of your property damage and determine if you have a viable claim for business interruption insurance.
If you have recently discovered the cause of your business closure is not covered under your commercial property insurance policy, which means your business interruption insurance won’t kick in, don’t lose all hope. You still might receive benefits to fund your payroll, even if your carrier has denied your claim. Insurance policies are long, complex documents with complicated language full of windows and loopholes.
Luckily, the law of contracts, which governs every insurance policy, mandates that all contracts are construed in favor of the party with less bargaining power. Since insurance policies are written by the insurance company, the party with less bargaining power is you, the insured. This means any ambiguities or loopholes in the policy will be resolved in your favor.
Additionally, some policyholders choose to file a lawsuit to fight for benefits when their insurance company denies them. When courts rule in favor of a business owner in this type of case, it sets a critical precedent that can sometimes take priority over the exact language of a policy.
Keep in mind that an insurance company is not a friend, even if you are the policyholder. They stay in business by protecting their bottom line, which means avoiding costly payouts for business interruptions, property damage, and more. If the cause of your closure is excluded or your insurer denies your claim for some other reason, you have options. Your insurance carrier likely hasn’t kept abreast of new regulations and laws surrounding business interruption coverage or your carrier could intentionally act in bad faith, hoping you give up.
Consulting an experienced business interruption insurance attorney is the best course of action when you are unable to secure the insurance benefits you deserve. Hiring a lawyer will ensure your carrier takes your claim seriously and discourages your carrier from pushing ethical boundaries or acting in bad faith.
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