COVID-19 Pandemic Sparks Business Interruption Insurance Claims, Denials, and Lawsuits From Business Owners – What’s Next?
Many businesses with business interruption insurance have had their claims denied since the COVID-19 outbreak. Now, businesses are hiring attorneys to fight insurance companies. Should you hire a lawyer and file a lawsuit?
How Did It Come to This?
The history of business interruption insurance policies and pandemics alike play a role in our present situation. From how insurance works to policy language to coping with crisis, history tells us what to expect. Even the word “pandemic” comes from ancient Greek: “pan” meaning all, and “demos” meaning people.
It’s important also to note that insurance companies are not evil, they’re businesses. Their goal is make money, and they do that by reducing their costs and exposure to risk, and sometimes their payment of claims. It is when these claim denials are unlawful when claimants turn to experienced attorneys to fight for their rights.
Pandemics Happen, and the Risk is Known
The world has a long history of pandemics. From the Bubonic Plague in the 1300s, to the Spanish Flu in 1918, and more recently SARS in 2002, the world has endured population-changing outbreaks of disease. Most viral pandemics are caused by influenza viruses. The so-called Spanish Flu (which actually did not actually originate in Spain) cost somewhere between 20 and 50 million lives worldwide – a 1% -3% mortality rate of the general population. Those numbers are extremely general as tracking causes and infections was difficult then. Even now, we seem to struggle with it.
As such, world infection and mortality rates for COVID-19 are difficult to pin down due to variability in testing, and confirmed deaths from the disease likely do not represent the actual deaths caused by the disease. As of April 27, 2020, there are more than 205,000 confirmed deaths from the disease. The data is updated daily here. Likewise, the number of reported infections of this novel coronavirus likely underestimates the actual number of infections by an unknown quantity. For what it’s worth, there are more than 3,000,000 reported infections, again as of April 27, 2020.
Part of the difficulty in handling pandemics is that their course is difficult to predict. Even so, the European Actuarial Consultative Group published a paper covering pandemics – relating to insurance – in May 2006. In it, they calculated that the yearly likelihood of a global pandemic was between 3% and 4%, and that the likelihood of a pandemic in a given 10-year span was approximately 30%. The paper also offered telling predictions for the insurance industry and the economy.
How Business Interruption Insurance Works, and Why Insurance Companies Are Denying Claims
Business interruption insurance, like all insurance, is calculated based on risk. The higher the risk, the more the insurance will cost, if it is available at all. For the insurance industry to function properly, the covered events need to be somewhat predictable. Car accidents and other insured events can be reasonably predicted, which allows carriers to judge risk, maintain appropriate reserves, and pay claims.
Problems arise when disaster strikes and there are many more claims than the insurers projected. Insurers are aware of this, and they write policies to be as specific about what they cover as possible to include endorsements (what the policy will cover) and exclusions (what it does not cover). While most insurance companies will argue that pandemics are not something they can predict, there are already studies that do precisely that.
The industry reportedly has something in the area of $800 billion in reserves to pay business interruption claims, and the costs to small business have been estimated at between $220 billion to $383 billion per month. That may seem like the reserve won’t be enough to pay claims. However, only about one third of U.S. small businesses carry business interruption insurance. The insurance industry’s exposure may not be as great as it would have you believe.
Now, those businesses are facing outright coverage denials when they need the money most. Are those denials justified?
“Your Policy Doesn’t Cover COVID-19”
This is what many businesses are hearing after years of paying thousands in business interruption insurance premiums. They’re being told that the policy excludes the effects of the COVID-19 outbreak, but the truth is subject to interpretation. As stated earlier, insurers tend to specify their endorsements and exclusions, but sometimes the language isn’t ironclad.
Policy Language Excludes Bacteria and Viruses – After the SARS outbreak in 2002, most commercial carriers amended their business interruption policies to specifically exclude outbreaks of disease, and many of the recent denials being issued stem from these exclusions.
There are even reports of insurers denying claims when their policy includes this kind of coverage, with the policy language clearly stating: “We will pay for loss by damage from ‘fungi’, wet rot, dry rot, bacteria and virus.” The carrier is saying it is not responsible for losses incurred during the COVID-19 outbreak.
Policy Requires “Physical/Tangible Loss” – According to the Congressional Research Service, many policies require direct physical loss or damage to tangible property. But how is damage defined? Is a location contaminated with COVID-19 and unfit for habitation damaged? Is it tangible? And what if a place remains open for business, such as a restaurant offering take-out service?
There is case law that offers possible relief to businesses who have been denied claims by insurers who assert that the virus did not do direct physical damage. At the federal level, First and Third Circuit Courts have found that things like water contamination or unpleasant odor were “physical injuries to the property.” Likewise, a federal court in Virginia found that a home was “physically damaged” by toxic gases released by drywall. In short, there is precedent supporting that the virus has caused physical or tangible loss.
Policy Does Not Cover Acts by a Civil Authority – Here’s another chicken-egg interpretation being used by some insurers to deny claims. They’ll state that their policy does not include loss of business due to the act of a civil authority, such as the shuttering of non-essential businesses and the stay-at-home order. But what came first?
They will argue that the order to close non-essential businesses was a civil authority act, which it was. But the action was caused by the pandemic, and the possibility that locations were infected with the virus, making them uninhabitable or fit for people to gather. Even if the policy contains this exclusion, we expect court battles to determine whether it applies.
Claims Required Within a Certain Time, Payments Take Indefinite Periods
A great tragedy and irony of these cases is that small businesses, especially, often need funds in timely manner to meet their obligations, including rent, utilities, and payroll. Simultaneously, the insurers require claims to be filed quickly, but may take months to disburse funds – assuming they actually do anything other than deny the claim.
Business Interruption Insurance Claim – How It Should Work
In this example from Deloitte, a typical business interruption claim is calculated. This is what many businesses were expecting when they filed, only to have their claims flatly rejected.
|Example BI calculation||$|
|+ Expected sales (i.e. if the premises had not suffered damage)||100,000|
|- Actual sales||(20,000)|
|Reduction in sales||80,000|
|- Cost of sales (say 30%)||(24,000)|
|= Reduction in gross profit||56,000|
|+ Additional expenses (e.g. rental of temporary premises)||10,000|
|- Cost savings (e.g. lease of damaged premises)||20,000|
|+ Claim preparation costs (e.g. accountant’s costs)||5,000|
|= Total BI Claim||$51,000|
There are a few different names for policies that cover similar interruptions, though they all may have difference endorsements and exclusions. Here are a few of note.
All Risks Policies – The benefit of an All Risks Policy is the insured, “does not have to prove that the peril proximately causing his loss was covered by the policy. This is because the policy covers all risks save for those risks specifically excluded by the policy.” The fact that the quote above is attributed to a court means that there was a denial, a lawsuit, and a trial. Obviously, even an All Risks Policy has exclusions, so it is important to understand them before you begin paying premiums.
Business Interruption Insurance – this can be a standalone policy or an add-on to an existing policy. It can cover everything from loss of income, contingent business interruptions (see below), to acts by civil authorities.
Business Income Coverage – this covers the loss of a business’ income due to a necessary suspension of its activities. It requires a direct physical loss or damage to the property, such as a fire, and replaced income lost until the business returns to normal, up to the policy limits. It does not cover the damage to the property, etc.
Contingent Business Interruption Insurance – a sort of six-degrees of separation coverage, contingent business interruption covers a business owner’s loss due to damage, loss, or destruction of property owned by someone else. For example, if your business depended on a supplier, and the supplier’s factory was destroyed, this policy would theoretically kick in.
Civil Authority Coverage – This policy would cover a business from losses incurred due to the action of a civil authority that prevented normal business operation. The specific wording of the policy matters, and varies. These policies generally do not cover the loss of business due to preventative measures like mandatory evacuations, but again, the wording varies and the coverage is typically time limited (coverage duration might be for 30 days of interruption, for example). So what should a business owner do in the face of all these confusing terms, distorted meanings, and a mound of bills piling up all the while?
The COVID-19 Reaction: How Businesses Should Act, and How Insurers and Legislators Are Preparing for the Looming Lawsuits
If your business had a business interruption insurance policy, you need to file a claim per the policy’s terms. Doing so is the necessary first step, and policies put the duty to file a timely claim directly on the insured. Failing to file in the time frame specified in the policy will bar you from obtaining any compensation.
Businesses Are Seeking Compensation
Reports from across the country continue to demonstrate that many insurers are denying business owners claims based on the COVID-19 crisis. Further, lawsuits are already being filed across the U.S. as businesses struggle to survive and many insurance companies refuse to pay.
Restauranteurs seem to be leading the struggle, with celebrity chefs – in some cases – reaching out directly to the President with their pleas. Trade organizations, like the International Health, Racquet & Sportsclub Association, have hired a new wave of lobbyists to advance their agenda on Capitol Hill.
Insurers Are Preparing to Fight
The National Association of Insurance Commissioners unsurprisingly supports the position of the insurance industry, noting that these policies were never designed or priced to cover something like the COVID-19 outbreak.
The insurance industry has begun its own damage control and started lobbying for a government backed solution constructed similar to the approach the government used to provide aid after the September 11, 2001 terrorist attacks, asking the federal government to shield them from the disaster. The Terrorism Risk Insurance Program, started in 2002, enables the government to cover losses due to a certified act of terrorism.
Legislators Are Grasping for Solutions
Industry associations and insurers are arguing, but legislators across the country are already attempting to construct solutions. A small, bipartisan group in the U.S. House of Representatives sent a letter to several insurance trade groups asking them to cover the effects of the COVID-19 crisis under existing policies. Insurance companies balked at the idea.
A Congressman from Pennsylvania advanced legislation to force insurers to pay for losses by covered businesses, and a California Congressman has introduced a law that would require future policies to cover pandemic losses – something the insurance lobby has claimed would eliminate that sector for the insurance market entirely.
Meanwhile, two conservative U.S. Senators are drafting plans to have the federal government pay a form of business interruption coverage to those affected by future epidemics, something that may be seen as an insurance industry bailout. In any case, it will have no effect on the current crisis. So what should business owners do?
Business Owners Should Explore Their Own Policies and Take Appropriate Action
If your business has been interrupted and you have paid premiums for any form of business interruption insurance, there are three basic steps you need to take as soon as possible.
- Read your policy. Obtain a certified copy of your policy, and read it carefully. Are you covered or is there a gray area? Even if something in the policy specifically excludes things like viruses or civil authority actions – but not both – you may have grounds for a claim.
- Examine the closure order. So the government shut down your business, in whole or in part. You want to find out what effect that order has on your policy. The wording of those orders can be extremely important in evaluating possible coverage.
- Document your losses. This should, include records of business income from the closure and over time. Any amounts for which you are seeking compensation should be included.
- File a claim as the policy requires. If you don’t file a claim within a certain amount of time, you may miss your window to file one at all. Once the claim is filed, the insurance company will respond one way or the other. Based on the prevalent news, you should expect a denial.
- Contact an attorney who knows how to deal with insurance companies. If it’s too confusing or you’re not sure, you may be best served having an attorney review your policies and the nature of your losses. You will need an attorney to evaluate your case, examine the facts, and determine whether or not you have grounds to fight the denial of your claim. Many firms, like ours, offer a free case evaluation. You will ultimately need a certified copy of the insurance policy to proceed.
Contact an Experienced NC Attorney Who Knows How to Fight Insurance Companies
At the Law Office of James Scott Farrin, we’re no strangers to negotiating with, fighting, and ultimately presenting a case against insurance companies. If you believe your claim has been wrongly denied, please call us at 1-866-900-7078 for a free evaluation of your case, or simply contact us online.