Will My Business Interruption Insurance Cover Coronavirus?
Property Damage Must Occur for Business Income Coverage To Apply
Countless small businesses have lost income as a result of government-ordered shutdowns to stop the spread of the coronavirus. Many may have purchased business income insurance (also called business interruption insurance), to protect themselves from an unforeseen event, but unfortunately, these policies probably won’t cover them against losses related to COVID-19.
Here’s why and what you need to know if your business income has been affected by the coronavirus. There may be other relief available for you.
What Is Business Interruption Insurance?
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. Because the spring 2020 shutdown orders stemmed from the coronavirus pandemic, not property damage, these policies probably don't cover the resulting income losses. What’s more, some commercial property policies specifically exclude any losses related to a virus or bacteria.
Why You’re Likely Not Covered
When the coronavirus pandemic began, many state and local governments ordered non-essential businesses to close to prevent or minimize the spread of the virus.
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. However, they don’t clearly state if the coronavirus would definitely be considered the peril that caused the property damage.
A March 31 report by the Congressional Research Service states that for some policies, “the determination of coverage related to the coronavirus may turn on the definition of physical damage.”
Even if civil authority did apply in this case, 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 the coronavirus.
If a commercial property policy doesn't explicitly include the virus and bacteria exclusion, will the policy cover losses stemming from coronavirus? 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 the coronavirus. Does contamination with a virus 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). The SBA’s Paycheck Protection Program provides loans to small businesses so they can keep their workers on the payroll, while its Economic Injury Disaster Loan (EIDL) and Emergency Advance helps businesses get the cash they need as they apply for disaster assistance.
The SBA is also offering enhanced debt relief for small businesses that have a disaster loan. The SBA will pay the principal, interest, and fees for up to six months on existing loans, as well as new loans issued prior to Sept. 27, 2020.
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.
The Bottom Line
Unfortunately, traditional business interruption insurance policies tend to focus only on relief for physical property damage rather than virus- or bacteria-related perils. While businesses may not currently be covered for income losses that have resulted from the government shutdowns in response to COVID-19, states are working to pass bills that would amend such policies. In the meantime, small businesses can apply for relief through the SBA.
Congressional Research Service. "Business Interruption Insurance and COVID-19." Accessed May 4, 2020.
New York State Department of Financial Services. "Coronavirus: Business Interruption Insurance." Accessed May 4, 2020.
Marsh. "Business Interruption Insurance: 8 Terms to Help You Understand What is Covered." Accessed May 4, 2020.
IRMI. "COVID-19—When Civil Authorities Take over, Are You Covered?" Accessed May 4, 2020.
Verisk. "Verisk Develops New Coverage Options in Response to Coronavirus." Accessed May 4, 2020.
U.S. Small Business Administration. "SBA Debt Relief." Accessed May 4, 2020.
The General Assembly of Pennsylvania. "House Bill No. 2372." Accessed May 4, 2020.