Business Interruption Insurance and COVID-19: What You Need to Know
March 23, 2020
As businesses across the U.S. begin to assess their current and future losses sustained due to COVID-19, many are raising questions about whether their business interruption (BI) insurance policies, and others, will cover any potential losses.
The definition of “damages” – Here is what we know*:
- Business Interruption Insurance: BI insurance is intended to compensate for income lost during the time necessary to repair physical damage to covered property and may entitle the insured to recover additional expenses that would not have been incurred during the ordinary course of business. This means that coverage is only triggered, in most policies, by having physical damage to the insured property.
- Civil Authority Coverage Clause: Given that the government has issued restrictions on a number of types of businesses, there may be an avenue to recover losses under the Civil Authority coverage clause within typical business income coverage or Business Owners Policy. However, the Civil Authority coverage also contains a property damage requirement pertaining to nearby or adjacent property.
- Contingent Property Insurance or Dependent Property Insurance: (a/k/a Supply Chain coverage) might be in play too. This will depend on whether the presence of COVID-19 or threat thereof will be considered property damage because all of these coverages are typically triggered off of the requirement of physical damage to property (somewhere, as is the case with the supply chain losses).
Infectious Disease Coverage
Currently, one of the only ways for a business to recover its losses due to COVID-19’s impact may be under infectious disease coverage. We are currently in an unprecedented situation with COVID-19 and it is difficult to predict whether the presence of the virus or the threat of contamination will be sufficient to trigger business income coverage. However, we expect that many insurance providers will initially oppose coverage of Coronavirus related BI, Civil Authority, Contingent Property or Dependent Property claims.
It’s possible, however, that this gap in coverage and economic loss will soon be addressed at the state level. The New Jersey State Legislature, for example, is currently considering New Jersey Bill A-3844, which would force insurance companies to pay COVID-19 related BI claims, even when “viruses” are specifically excluded from BI policies. If passed by New Jersey, or other states, insurers may challenge its legality in court due to the unprecedented risk and exposure insurance companies could face from a significant volume of BI claims.
Never fail, lawyers are considering creative arguments with regard to whether or not the presence or the threat of contamination might constitute some nature of property damage that could trigger the civil authority coverage. The first suit on this question was just filed in New Orleans.
What you can do now:
- Take steps to mitigate the losses:
For example, restaurants focusing on take-out and delivery only should develop a “visible” plan to reassure customers of their safety on your premises. If your business is dependent on someone else’s products find alternative suppliers.
- Stay Informed:
Keep up with the latest regulations and restrictions coming from state and federal governments so you can be sure you are in compliance.
- Consider unemployment claims:
Consider whether partial unemployment claims should be filed for your employees whose hours have been cut. You should check with your individual state on this.
- Review all of your policies:
Make sure you have complete copies of all of your insurance policies and review them not only to familiarize yourself with the coverage you have but also to make sure that policies are correct.
- Document your losses
Document what you believe your losses are specific to the COVID-19, and not any other cause of action, so that if you can make an insurance claim, you are ready with the support.
- Collect your documents to assist in calculating:
Be proactive in collecting the relevant financial documentation needed to calculate lost income and extra expenses to support a claim. This information includes:
- Historical and current annual financial statements
- Federal and state annual tax returns
- Monthly profit and loss statements
- Budgets, forecasts or projections done prior to and after the event
- Monthly bank statements
- Inventory reports
- Payroll records
- Invoices and purchase orders
- General ledger accounts established to account for any expenses related to the loss, such as additional payroll, shipping, temporary facilities, etc.
- Documentation to support extra expenses including receipts, invoices, time sheets, advertising costs, etc.
The bottom line
Taking these steps will assist an insured in attaining the appropriate coverage during the BI insurance claim process.
These are some complex times we are living in and we expect more clarity on this in the coming weeks and months. For now, stay safe and healthy. We are here for you if you need us.
For questions or more information, contact Howard Zandman, partner-in-charge, Litigation Support & Forensic Accounting, at [email protected], or 404.814.4915.
*Please note, the following provides only a brief overview of business income coverage. This information is not intended to address your specific insurance policy. A review of the coverage you have may be warranted by both counsel and your CPA advisor if you think you’ve suffered a loss.
Adapted from an article written by Laurie Dugoniths Busbee
Dugoniths Law, LLC
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.