Businesses across the United States have been forced to close down. Controversy over whether businesses can claim business interruption compensation from their insurance policies is growing.
Business owners say they have been paying business disruption coverage premiums for a long time. Insurers, on the other hand, are insisting that pandemics are excluded from insurance policies. However, the wording is not clear or specific in most insurance policies and may leave some loopholes that can be exploited.
For instance, in commercial real estate insurance, most businesses have civil authority or business interruption insurance as their main property insurance coverage. Normally, these insurance policies require property destruction to trigger compensation.
However, the insured can argue that a loss resulting from COVID-19 has occurred and the insurer should compensate the business for relocation costs, lost profits, taxes, payroll, etc.
What is business interruption insurance?
Business interruption insurance coverage aims to replace business income lost in the event the operations are halted for some reasons, such as fire or natural disaster.
Normally, a business interruption policy is included in a comprehensive package policy as a rider or an add-on. It can also be added to a casualty/property policy but cannot be sold as a separate policy.
Business interruption policies cover the following:
Profits: It reimburses profits that the business would have made if the disruption had not occurred.
Fixed costs: Some business interruption insurance policies cover operating costs and other expenses of doing business.
Temporary location: It covers the cost of relocating to a temporary location.
Employee wages: If a business is forced to halt operation and does not want to lose employees, this coverage enables the owner to make payroll.
Taxes: Even in times of disasters, businesses are required to pay taxes. Tax coverage allows businesses to pay taxes in time and avoid fines.
Civil authority ingress: If government actions force a company to stop operations, a business interruption insurance policy can help to cover the losses resulting from such actions.
Loan repayments: Some policies help businesses make their monthly loan repayments even when they do not generate income.
Will insurance companies be compelled to pay up?
Most state legislatures in the United States have introduced bills that will force insurance companies to compensate for business interruption, particularly to small companies. The insurance companies may, however, be able to claim the costs from public funds in the future,
However, any effort to compel insurers to payout will likely be met by resistance not only from the insurers—but also regulators.
There is no doubt that most of these disputes will end up in courts. Considering the loopholes in the policy wording and the amount of money at stake, litigation is likely to last for years and incur hefty legal costs.
Is it possible to buy insurance cover for pandemics currently?
At the moment, it is impossible to buy any insurance cover that offsets the COVID-19 pandemic costs. Insurers are making their terms tighter to make it clear that business interruption coverage excludes coverage for infectious diseases. In the future, insurers may come up with new systems that provide some level of coverage during pandemics.
For the moment, companies should review the terms of their business interruption policies to determine whether filing for compensation is sensible.