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.
- 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
Generally, damage caused by riots, vandalism, or civil unrest is covered by business interruption insurance policies as well, unless your policy specifically excludes those events.
Damages related to flooding, earthquakes, or mudslides may not be covered under a standard business interruption insurance policy. But you may be able to purchase additional coverage for those risks.
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.
Losses related to the suspension of utilities typically aren't covered by business interruption insurance unless you purchase an endorsement or add-on.
Managing Pandemic-Related Losses Due to Business Interruption
If you run a business that's been affected by the coronavirus pandemic or any other viral outbreak, and you have business interruption insurance, review your coverage. Specifically, check the wording of your policy to see if pandemics are either explicitly included or excluded.
For situations in which coverage regarding pandemics is unclear, you can reach out to your insurance agent or company directly for clarification. If you are covered, you can then ask about the next steps for filing a claim under your policy. This may require you to provide details about your losses, along with supporting documents showing how much your business has suffered financially as a result of the pandemic.
If your insurance company isn't able to provide a satisfactory answer, you may need to talk with an attorney to discuss whether filing a lawsuit is necessary or advisable.
In the meantime, there are a few other things you can do to potentially mitigate financial losses related to the coronavirus pandemic. They include:
- Reviewing your business operations to look for alternatives that could help you to remain open and serve your customers while observing social distancing and other safety requirements.
- Examining your business budget to trim expenses as much as possible and considering a short-term salary reduction for yourself to ease operating costs.
- Staying up to date on the latest state and federal legislative efforts to aid businesses experiencing pandemic-related losses.
- Documenting any losses you incur as a result of the pandemic, including those related to property damage, liability claims, or a loss of income.
- Considering financing options, including government-backed loan programs and loans from your bank or online lenders, to help you stay financially afloat until business rebounds.
If you have business interruption insurance, your policy may impose a 48- to 72-hour waiting period before the restoration period begins. The restoration period is the length of time your policy will pay for lost income and other damages.
The Bottom Line
Business interruption insurance is something business owners might consider purchasing now if they don't already have it. Though it may not help you offset any financial losses related to the coronavirus pandemic, it could be useful for covering your business against losses in other covered situations down the road. Before purchasing a policy, consider how much coverage is appropriate for your business and compare rates from the best business interruption insurance companies. Also, be sure you know exactly what will or won't be covered, including pandemics, before finalizing your policy so there are no unpleasant surprises later.