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Can Business Interruption Insurance Help Your Company Weather the COVID-19 Pandemic?

  • Insurers often offer business interruption insurance to reimburse policyholders for loss in revenue caused by temporary shutdowns
  • Few businesses have been able to receive relief from these policies, as they usually include a property damage requirement or specifically exclude virus-related interruptions
  • Some companies have won victories in court by challenging specific aspects of the policy or approaching their claim in a different way

Business owners reviewing their insurance policies may be surprised to find just how many unlikely contingencies they’re covered for. An insurer is often happy to cover damages caused by everything from volcanic eruptions to falling satellites.

So when the COVID-19 pandemic struck last year, business owners who were forced to shut down and suffer revenue losses may have been cheered to find a that their policy included something called business interruption insurance. On its face, this seems tailor-made to assist businesses through events such as the pandemic by offering relief for businesses that need to shut down temporarily. However, few businesses have been able to win a payout through these policies.

What is business interruption insurance?

Business interruption insurance is typically bundled with property insurance to account for the revenue a business loses if it needs to shut down due to property damage. For example, if a restaurant suffers a kitchen fire its property insurance will help pay to repair the damage while the business interruption insurance will help cover the income the restaurant lost when it was not operational.

Business interruption insurance varies by insurer and by type of company. Each policy has its own specific terms, conditions, and exclusions, and business owners should consult with their broker or agent to get more information on their coverage.

Does business interruption insurance cover COVID-19 losses?

In most cases, no.

Business interruption insurance typically excludes drastic events that are considered too expensive to be underwritten at an affordable price. These exclusions tend to include unlikely scenarios such as damage from war or nuclear accidents. However, most insurers began adding pandemics to the list of exclusions, barring payouts for “virus or bacteria” losses, after the SARS outbreak resulted in the settlement of sizable claims for some Chinese companies.

Moreover, business interruption insurance policies are generally triggered by property damage or loss, further stymying attempts to make a claim based on shutdowns resulting from COVID-19. Policies often include a clause allowing businesses to make a claim based on government-mandated shutdowns, but these clauses also tend to have a property damage requirement. For example, if a riot causes damage and prompts a city to impose a curfew, businesses that need to shut down early can still qualify for business interruption insurance even if they aren’t harmed by the civil unrest.

Several businesses have filed legal challenges against their insurer after being denied business interruption insurance, but the courts have dismissed more than four times as many cases as they have allowed to proceed. About 75 percent of all business interruption insurance lawsuits filed since during the pandemic, more than one-third of which have been submitted by restaurants or bars, have been dismissed.

How have businesses been able to collect business interruption insurance related to the pandemic?

Company owners have been successful in winning business interruption insurance payouts by testing the policy restrictions in a number of ways. Lawyers have argued that insurers did not specifically name COVID-19 in their exclusions or suggested that a policy’s language is ambiguous enough to not merit exclusion. Some businesses have based their claims on government shutdown orders, “all risks” policy clauses, or other bases that might increase their chances to qualify for a payout.

Some courts have been more lenient in determining what constitutes property damage or loss. In a recent suit filed by an Ohio restaurant group against its insurer, the court agreed with the plaintiff’s interpretation that the inability to use its property due to a government shutdown order constituted a physical loss. Some claims have built on past cases establishing that issues such as carbon monoxide qualify a policyholder for business interruption insurance.

The situation has led to the formation of the Business Interruption Group, which advocates for insurance reform on the issue. Some lawmakers have joined the call to mandate coverage for pandemics, and possibly make any such legislation retroactive to apply to COVID-19. However, the insurance industry has also warned that business interruption losses under a pandemic could be severe enough to make insurers insolvent within months.

Connecticut business owners who believe they have been unfairly denied a business interruption claim can contact the Connecticut Insurance Department for assistance through its consumer affairs process.

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