Editor’s Note: With many companies shutting down due to the coronavirus, business interruption insurance has never been as important. Stuart J. Polkowitz and Rose A. Suriano of Brach Eichler answer questions about this coverage works coronavirus.
How is your business protected if there is a shutdown due to a state of emergency, government restrictions, or a shutdown because an employee has tested positive for the COVID-19 virus?
Your commercial property insurance policy likely includes business interruption coverage for losses if your business has to abruptly shut down. Some policies also include “contingent” coverage for losses resulting from the closure of a supplier. Some policies may also cover rents unpaid by tenants who have suspended or terminated their occupancy following the occurrence of a direct physical loss. Whether your insurance policy covers an interruption to your business, including lost rents, depends upon the policy’s language. Business interruption (a/k/a business income loss) coverage is included in the property section of a commercial policy or a standalone policy.
This coverage is triggered when there is “direct physical loss” to your business’ property, which compels a closure. Many businesses have closed, or will, in response to the COVID-19 pandemic. The closures may be based on risk assessment and similar concerns by owners/management, an infected employee, or an employee having contact with a person known to or suspected of having COVID-19. There could also be a landlord-directed closure based on the presence of a person with COVID-19 in a tenant’s space or a common area/facility or a shut down at the direction of a government authority.
If your business closes due to COVID-19 concerns, but your building remains habitable, the direct physical loss requirement will not be met. However, if your building is physically contaminated, for example, following the presence of an infected person, those circumstances may trigger coverage.
Since 2006, many commercial property policies exclude “loss or damage caused by or resulting from a virus… that induces or is capable of inducing physical distress, illness or disease.” In New Jersey, the Assembly had been considering a bill, which, if enacted, would bar the enforceability of such exclusions for businesses with less than 100 employees. That bill has been withdrawn, but there are efforts to introduce a bill in the State Senate seeking to achieve a similar result.
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The anecdotal information, to date, is that insurers are denying business interruption claims arising out of the COVID-19 situation. However, litigation is likely in the ensuing months challenging the insurers’ denials of coverage. There is yet to be consensus in the scientific community as to how long the novel coronavirus survives on surfaces. The litigation will focus on the language of the policy involved and the circumstance of the business interruption, but may allow for a broad interpretation of the policy language to allow for coverage of business losses, where the insurance company attempts to restrict rather than expand coverage. There is little downside to submitting a claim if your business operations have been suspended or a civil authority has ordered a suspension of your business or closing of the premises.
Your policy needs to be carefully reviewed to determine coverage definitions, limitations, conditions and exclusions. Other particulars, such as deductibles, which vary based on the source of the direct physical loss, and payroll coverage, which may exclude payroll associated with executives, officers, or managers, should also be evaluated. There are variations in coverage forms, terms, limitations, and conditions even within the same insurance company group. Each of these provisions needs to be carefully reviewed. But, as noted above, notice to your insurance carrier of each of these claims, is the first step.
Do you have any other means of recovery when your policy fails to provide coverage for the loss of business operations?
You purchased “business interruption” insurance and now the claim is denied. What did you purchase? Were the limitations of the coverage explained to you? Was broader coverage offered? What you understood your policy to cover will also be the subject of litigation, not against your insurance carrier, but your insurance broker. If broader coverage was available, but not disclosed by your broker or if the broker inaccurately explained coverage in response to direct questions by your company or your company’s risk manager—these instances may impose liability against your broker. These are all questions that need to be carefully evaluated in order to assess whether your company is protected, and if not, what next steps are necessary.
In these uncertain times, carefully consider a review of your insurance policies, as well as your relationship with your broker, to evaluate whether insurance is available to your company or whether further action is necessary to protect your enterprise.
Stuart J. Polkowitz is a Member in the Litigation Practice at Brach Eichler, a law firm in Roseland, NJ. Rose A. Suriano is Co-Chair of Brach Eichler’s Litigation Practice. Polkowitz may be contacted at [email protected] or 973-403-3152 and Suriano at [email protected] or 973-403-3129.