What is Business Interruption Insurance?
COVID-19 has routinely placed business interruption insurance in our headlines since March. Cash-strapped businesses are flooding the courts looking to keep their companies alive. But what exactly does the typical business interruption insurance policy cover. While policies differ from company to company and policy to policy, the typical policy covers:
- Lost profits
- Fixed costs
- Temporary location
- Commission and training cost
- Employee wages
- Loan repayments
Like all policies, the coverage is not without limits. The policy will have a host of exceptions. Again, the typical business interruption policy excludes:
- Property damages caused by riots or civil unrest
- Flood or earthquake damage, if otherwise covered
- Water, electricity and other utilities
- Losses stemming from communicable diseases, viruses and pandemics
And even assuming the policy does not exclude pandemics, these policies may still prohibit coverage for such losses. In these cases, the threshold hurdle facing business owners in the wake of COVID-19 is the definition of “loss.” The typical policy provides that the business interruption must result from “direct physical loss of or damage to” the affected property. Traditionally, a direct physical loss is a fire or some other clear interruption to the physical business premises. Most policies provide a lengthy definition of what exactly a direct physical loss is. Thus far, those cases with clear definitions are finding no coverage for COVID-19 related business losses. However, some policies do not have extensive definitions. And a few of those cases have so far survived early dismissal efforts.
Much like coastal residents faced in the wake of Hurricane Katrina and the definitions of rising water and wind damage, we’ll be discussing this issue for years to come.