In the wake of the coronavirus (COVID-19) pandemic, many companies want to know whether their commercial property insurance policies will cover losses resulting from business interruptions as a result of the COVID-19 crisis. While there is no conclusive answer at this time, business owners should take specific actions now if they are considering making a claim in the future.
Most commercial property policies include business interruption coverage, which covers the insured for disruptions to its own operations. Contingent business interruption insurance is intended to cover financial losses to the insured as a result of disruptions to the operations of customers or suppliers.
Coverage for business interruption is typically applicable when a “direct physical loss of or damage to” the insured’s property has occurred due to a covered cause of loss. In the case of contingent business interruption coverage, the property of the insured’s customer or supplier has sustained a similar “physical loss” or “damage.” The meaning of “physical loss” or “damage” can be a matter of specific policy language or interpretation. Insurers have argued that the introduction of a bacteria or virus does not constitute “physical loss” or “damage.”
However, some courts across the U.S. have found that contamination and other incidents, not necessarily visible to the naked eye, that cause a property to be unfit for its intended use to constitute a “physical loss” that could trigger business interruption coverage. Some policies specifically exclude losses resulting from bacteria and/or viruses, while other policies expressly provide coverage for losses caused by “communicable or infectious diseases” or even epidemics—without requiring a physical loss or damage to the insured property. Both of these types of exclusions and inclusions became more prevalent after the SARS outbreak in 2003, as well as the more recent MERS outbreak.
Additionally, some commercial property policies include a “civil authority” clause, which provides coverage for losses resulting from a governing authority prohibiting or impairing access to the insured business premises. Such “civil authority” coverage may or may not require “physical loss” or “damage” to the insured property.
For policyholders considering a possible claim for business interruption or related coverage the first step is to review their commercial property policy for its specific language. They should engage their legal counsel and, potentially, their insurance broker in the review process. Perhaps, there may be an avenue to recover some of the lost profits. If there appears to be, then the second key step is to consider the timing of a claim notice.
Any policyholder considering a possible claim for business interruption or related coverage to track their losses. Tracking losses can be complicated. For example, observed decreases in revenues may have started with a drop in activity due to precautionary measures that predated a civil authority proclamation. The policy, however, may only provide coverage for a specific period when the proclamation was in effect. If the policy provides for broader coverage, the periods both pre and post-proclamation need to be carefully assessed.
For certain businesses, the loss of prospects can be significant. Also, unrelated factors such as seasonality, weather, and changes in the market or competitive forces must all be taken into account. All businesses are unique, and these “non-cause-of-action” factors will be different in each case.
The end of the damage period, when profits are back to where they would otherwise have been but for the covered loss, can be difficult to recognize. Any cost savings due to the decreased activity, as well as found alternative sources of revenue or upticks after reopening, can be mitigating factors and must be accounted for. Finally, all additional costs such as cleaning and sanitation, delivery charges, advertising, or costs of mobilizing a workforce, must be accounted for.
It is imperative that policyholders considering a claim make sure all their financial and operational records are compiled and in their best possible order, and continue to retain and maintain all such records. These financial and operational documents will provide the evidentiary basis in quantifying any claim for business interruption or similar claim for loss.
Weaver’s forensic and litigation services professionals have extensive experience analyzing and calculating losses or damages in conjunction with claims for business interruption or related coverage for both policyholders and insurance providers. We have also worked with many law firms that are highly experienced in all types of these matters.
For more information, contact us.
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