Loyola University Chicago School of Law, JD 2022
Due to the COVID-19 pandemic, state and local municipalities have issued emergency proclamations requiring small businesses to either shut down or limit their business operations. This has caused small businesses to suffer substantial profit losses. In response, small businesses have filed business interruption claims with their insurance providers to recover their profit losses. However, insurance companies have mostly rejected their insureds’ business interruption claims because there has not been a direct physical loss or damage to the insureds’ properties, which is required to grant business interruption coverage. Businesses have been forced to file lawsuits against their insurers, hoping that the courts will compel insurance companies to provide business interruption coverage to their insureds during the pandemic. Business owners have also asked their elected officials to intervene and help them by passing legislation that would require insurance companies to provide business interruption coverage.
Business interruption insurance provisions
Most business insurance policies contain a business interruption provision. These business interruption provisions provide that an insurance company must cover lost profits and extra expenses due to direct physical loss or damage to the insured property. Thus, the provisions indicate that coverage will attach when there has been a direct physical loss or damage. The question that has arisen during the pandemic is whether the COVID-19 emergency proclamations imposed by municipalities and which restrict many small businesses’ operations should be considered a direct physical loss or damage to the insured’s property.
Some states’ emergency proclamations include language describing the risk of being infected with COVID-19 as extremely high and, thus, encouraging residents to stay at home and requiring businesses to either shut down or limit their business activities. Some of these proclamations include detailed information about the risks of COVID-19.
Property loss and damage may trigger coverage
As stated above, insurance companies have denied business interruption claims because the companies argue that insured businesses have not suffered a direct physical loss or damage to their property. Insurance companies have claimed that business interruption insurance does not cover COVID-19 related losses because these losses are not a direct physical loss to property. Insurance companies further claim that a direct physical loss or damage includes an actual or structural loss or damage to property.
However, a Missouri federal court has rejected this argument. In Studio 417 Inc. v. The Cincinnati Ins. Co., the Court focused on the ordinary and plain meaning of the phrase “physical loss,” which was undefined in the insurance policy at issue. It found that the phrase was broad enough to encompass deprivation of use of property caused by a natural phenomenon like the virus. In so doing, the Court has provided small businesses with a blueprint of the argument they must make to succeed when bringing a complaint about a business interruption provision. One avenue that small businesses could use is to argue that the language in the emergency proclamations demonstrates the danger of staying open during the pandemic, which subsequently should be evidence that this is a direct physical loss of their property.
Small businesses have asked their elected representatives to intervene
Many small businesses have also requested their elected representatives to intervene through legislation that would require their business interruption claims to be paid by their insurance. Several states have drafted legislation to compel business interruption coverage due to the pandemic. Some of the bills have certain features in common such as requiring insurers with business interruption policies to cover business interruption losses during a defined period of a declared emergency due to COVID-19. The coverage would include losses from small businesses that occurred when the state of emergency was declared.
If businesses are successful and insurance companies are mandated to provide business interruption coverage to all of their policyholders, the payouts could cripple the insurance industry. Insurance companies could be responsible for reimbursing their insureds more than a billion dollars in losses due to business interruptions caused by the pandemic. For example, one small business industry with fewer than 100 employees estimate the total monthly cost of reimbursing their pandemic losses at $52 billion and $223 billion.
What is next for business interruption claims?
If insurance companies are required to provide coverage either through a court’s order or legislation, a policyholder could seek to recover the actual loss of business income it sustained during the suspension of its operations. Some of these losses would also include loss of profits and costs during shutdown periods and restoration up to their policy limits.
As challenges to business interruption coverage continue, policyholders should continue to monitor court rulings that have found that “physical loss” includes the deprivation of property by COVID-19 restrictions. Additionally, policyholders should monitor the progress of legislative initiatives designed to addressed insurers’ COVID-19 related coverage obligations. This will allow policyholders to challenge and negotiate business interruption claims with their insurance providers.