What Is Business Interruption Insurance?
Property damage must occur for business income coverage to apply
Business interruption insurance, or business income coverage, covers income a company loses when its operations are suspended because the insured property has been damaged or destroyed by a covered peril. The insurer will reimburse the company for losses it incurs while the property is being repaired or replaced. It can be bought alone or as an add-on to commercial property insurance.
Most business income policies do count a government blocking access to a business as a trigger for interruption, but only if the government's order is initiated by property damage.
Why You’re Likely Not Covered
Civil Authority Coverage Doesn’t Apply Here
Most business income policies include an extension, or extra component, for what’s called civil authority coverage. But this typically only applies when access to a business has been blocked by a government order because a fire or other peril has damaged the property or a nearby location.
For civil authority coverage to apply, the government action must result from physical damage by a covered peril. The property posing the danger must be the covered property or property situated within 1 mile of it.
According to Bill Wilson, former Associate Vice President of Education and Research for the Independent Insurance Agents & Brokers of America, some governmental orders mention property damage.
If civil authority does apply, there are some important limitations to the standard business income policy. For one, civil authority coverage doesn't begin until 72 hours after the government has taken action. (For example, if the government issued an order on March 15, coverage wouldn't have started until March 18.) Plus, civil authority coverage generally applies for a maximum of four consecutive weeks.
Virus and Bacteria Exclusions
A provision found in many commercial property policies is a virus or bacteria exclusion. This exclusion, part of what’s called an endorsement—or amendment to the policy—is mandatory in many states, meaning it must be attached to policies. It excludes loss or damage caused by any virus or bacteria that's capable of inducing illness or disease. If this endorsement is attached to a property policy, it will exclude any claims related to viruses.
If a commercial property policy doesn't explicitly include the virus and bacteria exclusion, will the policy cover losses stemming from a virus? Unfortunately, Wilson says no—the absence of an exclusion doesn't create coverage. A claim will be covered only if it meets all the requirements outlined in the civil authority insuring agreement.
Can a Virus Cause Property Damage?
Suppose a business files a claim for income it lost after it was forced to shut down its operations because its property was contaminated with a virus. Does contamination constitute property damage? Wilson contends that the answer is generally no if the virus can be removed by cleaning. However, he told The Balance that courts disagree as to whether surface contamination is “direct physical” damage. Many (but not all) courts consider property to be damaged only if the insured can show the property has suffered a physical change or alteration.
Coverage For Pandemics
Can a business buy business income coverage that applies to government-ordered shutdowns to prevent the spread of disease? The answer appears to be no. In February 2020, the Insurance Services Office (ISO), which advises insurers, created two endorsements that insurers can use to cover coronavirus-related business income losses.
If an insurer chooses to offer the endorsements, the ISO says they “will need to make appropriate regulatory filings on their own.” As of February 2020, the ISO had not yet filed the endorsements.
Government Assistance and Other Remedies
Even if businesses can't recover their coronavirus-related income losses under their business interruption insurance, they can apply for relief through the Small Business Administration (SBA). This includes the Economic Injury Disaster Loan (EIDL) to help businesses get the cash they need as they apply for disaster assistance.
Several states have introduced bills intended to force insurers to pay for claims. For example, a new bill in Pennsylvania would require insurers to pay income losses whether or not any physical damage to property has occurred. Insurers would be obligated to pay claims even if the policies contain a virus exclusion.
Pennsylvania, New Jersey, New York, Massachusetts, and Ohio are among the states that have introduced bills on business interruption insurance coverage related to the coronavirus.
None of the bills have been passed yet. And even if they do pass, insurers will likely file legal challenges. Among other things, insurers may contend that the laws are unconstitutional because they attempt to change the terms of valid contracts.