Experts: Interruption insurance, other policies may not cover COVID-19

As companies find their everyday plans turned upside down because of COVID-19, owners may want to turn to their business interruption insurance for help – but many are likely to find that this kind of coverage likely isn’t going to apply to the impact of the coronavirus pandemic, experts say.

Most businesses will carry a variety of insurances that may be able to provide funds that will cover losses and balance the impact of situations such as the United States is experiencing now with the coronavirus and its rapid spread. But this pandemic is having an unprecedented impact on business, so typical insurance policies may not cover everything and businesses may need to look to other sources, such as loans or government assistance, for help, officials said.

“Business Income Insurance in general covers business income losses from direct physical loss from a covered peril. Pandemics are not or have not been a covered peril,” said Stephen Avila, professor of finance and insurance at Ball State University. For example, “New Jersey is looking at legislation to have insurers cover business income losses due to the pandemic even though it was excluded. … This is an ongoing discussion within the industry and in the public now.”

Whether business interruption insurance is part of a company’s overall plan depends on what kind of coverage they have and what their policy specifically says, according to Johnny Hamood, an attorney and co-founder of Koussan Hamood PLC, a Detroit-based law firm.

“The payments (from business interruption insurance) are based on lost income if you have to shut down for certain reasons,” Hamood explained. “The problem is most of those policies have a caveat that there has to be a physical loss or damage to the business” such as a fire that interrupts or harms the business from its everyday activities.

A pandemic such as COVID-19 likely isn’t going to fit that description, Hamood said, as it is likely not a standard business interruption situation. Insurance companies started excluding bacterial or similar infectious diseases after the SARS outbreak that happened more than a decade ago, he noted.

Hamood recommends business owners get a copy of their policy and read it carefully. He also recommends owners talk to their insurance agent as well as share their policies with their advisors, such as a business attorney, to review it alongside them. Having two sets of eyes will help owners understand whether they are covered under that policy and what the next steps should be.

“We tell our clients to let us read it. With all of that fine print, it can be tough to navigate alone,” Hamood said.

Second opinion
In a March advisory blog, Richard A. Walawender of law firm Miller Canfield talked about First-Party Property and Business Interruption Insurance, which is generally applicable for the stoppage or slowdown of business due to property damage.

“Typically, coverage is triggered when a covered cause of loss creates a slowdown or suspension of business operations. For some policies, the inability to occupy your place of business due to the order of a governmental authority may be sufficient to afford coverage,” Walawender wrote. “Also, while policies may exclude coverage if the incident was caused by infectious disease pathogens, whether or not there could still be coverage depends on the language of the policy, the reason for the shutdown and the nature of the claim.

“Some policies may contain ‘all-risk’ coverage, triggered by all perils, including COVID-19. Moreover, certain industries, such as retailers, restaurants, bars and hotels may have unique coverages or coverage extensions under which COVID-19 would be covered, such as ‘event cancellation’ coverage,” he added.

Other situations
Hamood said he also is working with his clients on whether they should lay off employees or go through furloughs. At the same time, he is working with employees on whether their situations require legal assistance. These are unusual times, Hamood noted.

“It’s an unfortunate fluid time for everybody, employees and employers alike. We’re getting calls on both ends of the spectrum” from companies and their workers, he said.

His firm also represents residential and commercial landlords, who are wondering what they should do in this stressful time. With most district courts on recess, many cannot go to eviction or may face state mandates that prohibit these moves until April or later.

The bottom line for most small- to medium-sized businesses is they do not have the cash reserves on hand to handle this fast and lengthy shutdown of their operations, Hamood said. He expects many businesses will need help to stay in business.

“Even little hiccups can be problematic,” Hamood said. “A week of poor business can affect (the life of a small business) versus a complete shutdown. … The average small business in the state of Michigan just doesn’t have those reserves.”

As a result, businesses should focus instead on staying informed, consulting with appropriate officials and slowing down during this time of great upheaval, Hamood said.

“Stay calm; this will pass,” Hamood said. “Stay informed. Take action after considering factors – as a business owner as well, we never tell people to make rash decisions. Take a deep breath and find your direction.”