Business interruption insurance is a life-saver for a business that has to close because of a fire on its premises or a flood caused by a storm. The insurance will cover your lost profits, plus your expenses as you try to continue in business, minus the expenses you've been spared because parts of your operation have been sidelined.
Business owners who have closed because of the coronavirus pandemic are anxiously turning to their business interruption policies, hoping for some relief. Whether they will be successful depends entirely on the wording of their policies, which can differ widely. Below, we explain the possibilities.
Despite what you might have read, not all policies are alike. Insurance companies use either an "ISO" policy, a variation of an ISO policy, or they write their own. An ISO policy is one that's written by the Insurance Services Office, a private company that drafts insurance policies for use by insurance companies. If you have an unadulterated ISO policy, chances are that your coronavirus-related closure will not be covered. Follow these steps to get an idea of whether you can expect coverage.
Although you might have a copy of your insurance policy in your filing cabinet, you should ask your broker for a "certified copy," which will be a complete and current version of all coverage and endorsements. Next, before reading the text, look at the bottom of each page, at the footers.
You can read more about how to identify an ISO form at "Is It ISO…?"
If you're pretty sure that your business interruption coverage is an ISO form, you'll see language like this:
"The [suspension of your operations] must be caused by direct physical loss of or damage to [covered] property….The loss or damage must be caused by or result from a Covered Cause of Loss."
This little phrase poses a major obstacle to your attempt to cover your business losses during a coronavirus closure. Assuming you could prove that the virus was physically at your place of business, it did not shut down your operations. The virus did not cause a physical loss. Rather, the government's shelter-in-place order, or your decision to close (if your workforce could not come to work, or you did not want to risk contracting or spreading the disease), were the causes of your business interruption. Contrast your situation with the typical one, where a fire destroys all or part of your business. The fire was assuredly present and caused the damage, and damage from fire is one of the standard perils that are covered. To make matters absolutely clear, ISO added the peril "virus" to its list of excluded perils over 15 years ago.
Many insurance companies write their own policies, though they're not necessarily more likely to cover coronavirus-related business closures than a pure ISO form. Here's some examples.
This language is tantalizingly optimistic, at first:
"We will pay for the actual business income loss that you incur due to the actual impairment of your operations….The actual or potential impairment of operations must be cause by or result from direct physical loss or damage by a covered peril to property…."
You might think that all you need show is "impairment of your operations." But alas, there's that "direct physical loss or damage" requirement. Again, even if you could prove that the virus was on your property, it did not cause the damage.
Now, let's look at coverage that might do you some good. Here's a policy that will reimburse you for losses due to your business's interruption caused by:
"your inability to use your premises due to restrictions imposed by a public authority following…an occurrence of a notifiable human disease…."
A notifiable human disease is any disease that is required by law (American and international) to be reported to the federal government and the World Health Organization. The coronavirus is on the list.
Finally, consider this policy language, contained in a restaurant's interruption policy:
"We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations resulting from a closure order issued by the Board of Health or other government body."
This policy does not require direct physical loss, but only the imposition of a closure order by the government.
The analysis in this article has not been lost on state legislators, who are concerned about the many small businesses who will turn in vain to their policies. Several states, including New Jersey, Ohio, New York, Massachusetts, Louisiana, and Pennsylvania, have introduced legislation that would direct insurance companies to cover business losses, even when the insured's policy clearly would not apply. Pennsylvania's bill is typical; it states that insurance policies held by businesses that employ 100 or fewer employees, in effect on March 6, 2020, "…shall be construed to include among the covered perils under the insurance policy coverage for business interruption due to global virus transmission or pandemic."
How can a legislature rewrite a civil contract, you might ask? You're not alone, and to head off lawsuits from insurance companies, the bills provide for the state to reimburse companies who pay out under these rules. In short, if the companies suffer no economic loss, they have no reason to sue. But there's a catch: Pennsylvania's bill allows the state to collect from those very companies some of the money the state has just given them, according to the size of the carrier. If these bills pass, you can expect some fiery lawsuits.
Your insurance policy might include an endorsement entitled "Civil Authority." This coverage typically kicks-in when the government prohibits access to your insured property—think of neighborhood closures following a devastating flood. In its ISO iteration and many others, this coverage reimburses you for loss of business profits, but only when there has been "direct physical loss" to another property (for example, if the streets flooded and the area was cordoned-off, it would cover even if your property was not damaged). You'll recognize the problem: The virus itself did not cause physical damage to anyone's property.