The impact of COVID-19 on businesses has been catastrophic, with many forced to close altogether, and others required to scale back operations significantly. Put simply, the pandemic has caused widespread business interruption, which poses to each affected business the question of whether there is coverage for the current shutdown-related interruption under its insurance program. In this article, we provide basic information necessary for business leaders to assess whether, and to what extent, coverage is available for their businesses.
Coverage for business interruption is typically provided through an endorsement that is added to a policy for property insurance (often titled the “Business Income (and Expense) Coverage Form”). As a general practice, it is “add-on” coverage that must be specifically purchased by the policyholder. To trigger business-interruption coverage, there must be a “direct physical loss of or damage to property at the premises which are described in the Declaration.” A fire that destroys or damages a building out of which the company operates is an example of such a “direct physical loss.” Put another way, as a threshold matter, to have coverage for business interruption arising from COVID-19, a company must establish that COVID-19 caused a “direct physical loss or damage” to the building(s) insured under the property-insurance policy.
Further, many property policies also contain an “Exclusion of Loss Due to Virus or Bacteria.” The insurance industry adopted this exclusion in the aftermath of the SARS epidemic of 2003 in response to carriers’ concerns that viral epidemics could increase their exposure to business interruption claims. This exclusion provides in relevant parts as follows: “[The Insurance Company] will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Accordingly, even if an insured company can establish that COVID-19 created a “direct physical loss or damage” to the building out of which it operates, its insurance carrier certainly will cite to this endorsement to deny coverage for a business-interruption claim.