Does Business Insurance Cover Interruptions due to a Pandemic?

Similar to how car insurance protects your car if you’re in an accident, business insurance protects your business’ assets and property from loss. Even if you don’t own physical assets such as inventory, you may have assets like accounts receivable or intellectual property such as patents. Every business has something they need to protect.

There are several types of business insurance. This includes:

• Business property insurance
• Professional liability insurance
• Product liability insurance
• Workers’ compensation insurance
• Business vehicle insurance
• Business Interruption Insurance

Business property insurance covers your business’s physical assets, like inventory, equipment, tools, or office furniture. General liability insurance pays out if someone sues your business for various reasons, which could range from an accusation that a mistake you made led to an injury to a claim that you failed to uphold your end of a contract.

Business income insurance also called business interruption insurance, protects you from lost income in certain circumstances. Business income insurance can help you cover:

• Taxes
• Payroll
• Utilities
• Rent
• Outstanding
• Lost income

At a minimum, a small business owner should purchase a Business Owner’s Policy or BOP. This policy often combines business property, general liability, and business income into one policy. Depending on your type of business, you may not need other business insurance coverage such as worker’s compensation, or commercial auto policies, but you do need to protect your core business.

Typically, business interruption insurance has applied in situations such as catastrophic damage to your place of business that forced you to close your doors. Your policy would help pay expenses while your business was idle and you were rebuilding. A software business might add an endorsement, or rider, to cover interruptions for loss of access to the cloud. It could replace lost income if an important supplier is temporarily unable to fulfill their contract due to an interruption at their site, such as a plant closure.

It’s this clause that many small business owners are hoping will help them out during the pandemic. But, does business insurance cover interruptions specifically due to a pandemic?

Because policies are tailored to your specific business and its needs, there is no “one size fits all.” The answer to whether or not your policy will cover business interruption due to the pandemic is  “it depends.” All insurance policies list both covered incidents and exclusions. Your policy may include communicable disease coverage, but viruses and diseases aren’t usually insured perils unless added by a rider.

Before filing a business interruption claim related to COVID-19, carefully read your policy. If you have questions, your agent can help interpret the fine print and guide you if you want to file a claim.  Their advice may be invaluable if your policy doesn’t state anything specific about viruses, diseases, and pandemics.

The COVID-19 pandemic has already led to an increase in lawsuits over business interruption insurance. As of August 3, 2020, businesses seeking coverage from their insurers for coronavirus-related interruptions to income have filed over 700 lawsuits against insurance companies. This is two to three times more than lawsuits filed after recent natural disasters.

This is partly because, after a natural disaster, much of the negotiation revolves around how much of the damage an insurer will cover and how much a government agency may payout. With the COVID-19 pandemic, if an insurer simply denies a claim, there’s no negotiation involved. If they want to pursue it, business owners have no option but to immediately file a lawsuit.

If your main business interruption policy doesn’t have a rider that covers viruses and diseases, there is another clause that could help. A “civil or military authority” rider covers losses and expenses related to a civil or military order which closes your business. It’s subject to a time limit, such as 30 or 60 days, but could provide some relief.

If the governor’s quarantine or stay-at-home order issued in March meant that you or your employees could not access your buildings to work, this clause could payout for losses. Some businesses have found success getting insurers to pay out under these clauses, but they have had to go to court. Most small business owners will find that expense of a lawsuit, when compared to a possible payout, doesn’t justify spending the time and money.

If you’re successful in filing a claim, how will the insurance company calculate your losses? The company uses a basic formula that may vary based upon your industry, policy, and insurer’s specific actuarial tables. It usually involves these three steps:

• Calculating expected gross profits
• Calculating lost revenues (difference between projected revenues and actual revenues)
• Analysis of past performance and industry data

The insurer will typically look at your projected revenues during the time period they’re willing to cover based upon historical factors. For example, if you made $50,000 in that month last year, and your sales this year had been growing by 10%, they might arrive at projected revenues of $55,000 for the month. Note that this is a simplification of their actual underwriting process.

Then, they’ll subtract your actual revenues during that time. If you were still generating revenue during the stay-at-home order, don’t expect your insurer to reimburse the whole $55,000. Let’s say you made $25,000, so the amount of lost revenues is now $30,000.

The insurance company then deducts the projected expenses that you would have spent to produce those lost revenues. If your cost of goods sold would have been $15,000, they’ll subtract that for a final payout of $15,000. However, under many policies, you can add back the extra expenses incurred to keep the business running during the interruption – such as computers for employees’ homes or costs to rent another location.

The pandemic caught everyone off-guard and has already brought massive changes to how we live our lives. Could it dramatically change business insurance coverage in future years?

Back in February, the Insurance Services Office (ISO) put out two new riders for insurers to offer small business owners. These riders, “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus” and “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting Some Modes of Public Transportation),” can be added to existing policies to expand their coverage for COVID-19.

While these riders are available, it’s up to your insurer if they want to offer them. As always, expanding coverage of an existing insurance policy will raise your monthly premiums. And there has been industry pushback around future pandemic coverage.

Two major insurance organizations, the American Property Casualty Insurance Association and the National Association of Insurance Commissioners have already begun urging the government to prevent backdating insurance coverage for the pandemic or forcing insurers to cover pandemics in new policies. Insurance works by spreading the risk over a large pool of insured individuals and companies. Companies pay premiums, which insurers save and then have the money to pay out claims to a small percentage of claimants.

Due to the widespread nature of the coronavirus pandemic, insurers believe that claims would be spread throughout their entire pool of insureds. There would be too many companies filing claims, the risk would be too concentrated, and insurer’s reserves (the money they save to pay out on policies) would be insufficient.

The AIPCA believes that losses could fall between $220-$383 billion a month and that insurers simply don’t have the resources to pay out on claims that high. Given these numbers and the actions of lobbyists and associations, it’s unlikely that the government will make insurers pay out retroactively or require that they cover coronavirus in the future.

Before you cancel your business insurance policy because it won’t help you in this instance, remember all the ways in which it does protect you.

If you run a CPA firm and one of your junior auditors makes a mistake that leads a client to incur fines with the IRS, your professional liability insurance protects against a lawsuit. If your manufacturing business relies upon a key piece of equipment and it’s damaged or stolen, different clauses in your policy would cover a temporary replacement to maintain operations, repairs, and possibly payout for lost income while it was down. A retail business might need it if the mall loses power and closes down for a few days.

There are many situations in which business insurance does payout and does protect your interests. No insurance policy applies in every single situation you might face, but the right policy will apply in the most common situations it’s needed.

The COVID-19 pandemic has been a complicated, and unprecedented, situation. As the situation has evolved, it has meant constant change for businesses and insurers alike. It’s hard to tell what the situation will look like in the future – will insurers be forced to cover pandemic interruptions, or will the business continue to have to litigate? Will they add coverage for pandemics in the future, or specifically exclude them?

Keep these questions in mind when considering possible revisions to your existing policy, either now or when it comes up for renewal. While you may not be able to get relief from losses caused by the pandemic under your existing coverage, now is the time to talk with an experienced insurance agent about how your policy could protect you going forward. They can review existing policies, make suggestions, and become a partner in your success.

Reach out to talk to someone at Insurance Professionals of Arizona today.