Secondary Costs Mount for Business Interruption Losses Due to Pandemic

Both “essential” and “non-essential” businesses are experiencing the impact of COVID-19 on their operations and bottom line. Business owners are looking to their commercial property insurance policy as a means of minimizing or recovering revenue shortfalls by filing COVID business interruption insurance claims, construction claims and other property damage claims related to the pandemic. Establishing coverage is a critical first step, but the “response(s)” to the pandemic could lead to more devastating losses for the policyholder.

The restaurant and hospitality industries may be the most affected industry based on insurance claims and lawsuits filed. A May 21, 2020 article in Claims Journal noted that a federal court has received notice that 101 lawsuits have been filed seeking coverage for business interruption losses caused by COVID-19 and plaintiff attorneys expect the number to rise into the thousands.

Other industries are also showing the effects of shutdowns and other governmental mandated restrictions. While the construction industry is considered “essential” and has for the most part not been subject to extended shutdowns, projects have been delayed or cancelled as supply-chains are disrupted, employee work schedules are modified, and other protective changes are made to the construction site adding costs and/or inefficiencies to the project and therefore presenting a challenge to both the budget and completion date.

The manufacturing industry is experiencing a similar impact to its supply chain and operating costs. While challenges to estimating revenue and expenses are anticipated, the more notable concern is anticipated changes in operations. Manufactures may reduce throughput in response to the pandemic and subsequently maximize production in anticipation of a recovery. Risk of a loss may increase if the manufacturer also made changes to the workforce (e.g., workforce reductions or new hires with different skills) or changes in the operating budget (e.g., reduced training, or delayed other preventive maintenance).

The risk of an operational loss may go beyond the more straightforward effects of the pandemic as indirect and potentially overlooked factors can lead to the interruption of operations. Also, the likelihood of greater losses increases as the expected physical damage to insurable property also increases. Policyholders need to be aware of issues originating from the pandemic and the effect operational changes have on optimum production or on a loss event. Changes can include adjustments to operating protocols and controls, as well as the following management decisions:

It is easy to understand a loss in net income when a business is shut down or going through a partial interruption of its operations. However, the pandemic and its impact on businesses is more difficult to measure and understand. Businesses seeking to measure the full impact of the pandemic on their operations need to cast a wide net and take into account both immediate losses, as well as any operational changes when the recovery takes place.

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