Business Interruption Due to the Coronavirus: Is It Covered by Insurance?
Business interruption and other losses due to the global spread of coronavirus are projected to total in the billions of dollars. Business interruption insurance, sometimes called income loss insurance, is intended to protect businesses against revenue losses sustained as a result of their operations. Insureds who have contingent business interruption coverage may, in certain circumstances, have insurance coverage for losses due to the interruption of their supply lines due to the spread of the coronavirus or other diseases.
Business interruption insurance is typically provided as an add-on (an “endorsement” in insurance-speak) to a company’s property insurance policy. It typically covers a loss of income suffered by the insured due to damage to property that is covered under the policy, as long as the cause of the property damage is a “covered cause of loss,” such as a fire or windstorm. In addition to coverage for the damaged property, there is coverage for business losses directly or indirectly caused by that damage, such as the loss of profits that occur before business operations can be restored. The length of the “period of restoration” over which lost profits would be covered is usually specified in the policy.
Contingent business interruption coverage is a specialized form of business interruption coverage. It provides insurance for losses resulting from disruptions to a business’s customers or suppliers, as long as the underlying cause of damage to the customer or supplier is of the type covered by the insured business owner’s own property policy. A typical example is where the insured (call it “the Company”) has its business operations interrupted when a parts supplier (“the Supplier”) must shut down its business due to property damage at the Supplier’s facility. Say, for example, a windstorm damages the Supplier’s factory and prevents it from producing component parts that are essential to its customer’s (i.e., the Company’s) operations. As a result, the Company cannot produce goods incorporating those components for its own customers, resulting in major income losses.
If the cause of the damage to the Supplier’s property is a “cause of loss” that would be covered under the Company’s policy, the Company should have business interruption coverage. In our example, if the Company has insurance against property damage caused by windstorms, it would have coverage for its own business interruption losses due to a windstorm that damages the Supplier’s factory. Conversely, if the Supplier’s property was damaged by a flood, and the Company did not have flood insurance, the Company’s business interruption coverage would not be triggered.
But what does this have to do with business interruption caused by the spread of disease? Where is the property damage that would trigger that coverage? A common misconception is that only direct physical loss of property can be the type of “property damage” covered by commercial property policies. Insureds should keep in mind that courts in many jurisdictions have held that contamination and other incidents that render the property uninhabitable or otherwise unfit for intended use constitute “property damage” within the meaning of commercial property policies.
If, for example, fear that viral infection in the insured’s workforce causes the insured to close its doors and suspend operations, that should be a type of “property damage” covered under the insured’s business interruption policy. And, as discussed above, if the insured’s supplier shuts its doors for that reason, the insured should be covered for its resulting loss if it has contingent business interruption insurance.
In addition, many commercial property policies provide coverage for business income losses sustained when a “civil authority” prohibits or impairs access to the policyholder’s premises. Depending on its specific wording, a policy’s “civil authority” coverage often does not require that “physical loss” occur to the policyholder’s property. Accordingly, in the event that a federal, state or local government authority limits access to or from areas where active transmission of infectious disease has been identified, “civil authority” coverage may respond with insurance for the income losses of the affected business. And for reasons discussed above, if the insured has contingent business interruption coverage, and civil authority interrupts the business of the insured’s supplier or customer, the insured may also have coverage for its own indirect loss of income.
The takeaway is that a business that suffers direct or indirect business interruption losses due to the spread of the coronavirus should check its commercial property policy to determine if it has business interruption or contingent business interruption coverage. If so, it may be insured against the resulting loss of income, at least over the “restoration period” specified in the policy.