COVID-19 and Business Income Insurance

This post is directed at business owners who have, or have an interest in, business income insurance (BI) which is also known as business interruption insurance. BI has been in the news lately because COVID-19 has “interrupted” many businesses and owners want to know why this insurance doesn’t cover those losses. Let’s learn more.

According to the International Risk Management Institute, BI is “commercial property insurance covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension in operations.” It’s an important adjunct to property insurance because even with adequate property insurance around 50% of businesses with damage that renders their premises unusable eventually fail due to loss of revenue during the repair period. Actually, it’s probably more accurate to describe BI coverage as “repair period insurance.”

Contractually, the coverage doesn’t apply to COVID-19 because there is no physical damage to the property. Further, because insurance doesn’t work if what you’re protecting against happens to everybody, most policies have a specific virus/pandemic exclusion. Now that hasn’t stopped some lawyers arguing that technically COVID-19 is physical damage. Insurance carriers counter that technically virus on site would need to be proven, and even if there were virus on site there’s a 72-hour waiting period so the virus would need to be still alive after 72 hours, and viruses are excluded anyway so it’s not covered.

Still, because of that term “business interruption”, some business owners have filed claims. The claims my clients have filed have all been denied, and I know of no COVID-19 business interruption claims approved across the industry nationwide.

Now a few states have gotten involved and drafted legislation to force insurance carriers to pay COVID-19 business interruption claims. I don’t believe any is likely to pass. First of all, for the state to step in and override private contracts by forcing one party to pay another doesn’t appear constitutional. Second, the amount we are talking about is huge: for all business with less than 100 employees, losses are running at over $400B/month. One month of losses would be 10 times the amount paid out for all 9/11 related insurance claims! Many carriers would be insolvent. And third, if this legislation passed and were enforced, going forward the remaining solvent carriers would need to write incredible restrictions in all insurance contracts. Commercial insurance as we know it today would disappear and might need to be socialized.

So as much as I hate to be the bearer of bad news, I’m committed to be transparent with my clients good or bad. Business income insurance doesn’t cover COVI-19. It wasn’t designed for that, it wasn’t priced for that and it’s not in the contract. And we as a society can’t force it onto the insurance industry; it’s too big.

The only entity big enough to help bridge the economic impact of COVID-19 is the government. So stressed business owners should look into the Payroll Protection Program and other forms of emergency lending programs for help, and take some solace that furloughed employees will be eligible for enhanced unemployment benefits as we work through this difficult time. To be prepared for the unlikely event the government and insurance industry work out some middle ground related to BI insurance, I would suggest business owners maintain a file documenting COVID-19 losses.

Meanwhile, my thoughts go out to my business owner clients, colleagues and friends. We business owners are being forced to bear a very big load here, but I’m incredibly proud of our common resolve in doing what is needed to beat COVID-19.