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Companies that bought business interruption insurance to guard against losses in case of a major disruption may likely find their coverage won’t protect them from the fallout of the coronavirus pandemic.
Following the SARS outbreak years ago, insurance carriers carved out infectious disease outbreaks from business interruption coverage that generally covers physical losses or damage.
“This situation is almost not covered by traditional business interruption insurance,” Rob Fowler, CEO of the Small Business Association of Michigan, said Tuesday during a daily briefing on the pandemic.
Unless a business specifically had infectious disease written into their policy, they may not get their losses covered from the coronavirus pandemic.
The deciding factor on whether a business can get a claim paid out of the pandemic is what exactly triggered the loss.
“As with every policy, there needs to be a triggering event to trigger that coverage, and typically business interruption coverage clauses will require a physical loss or damage to your premises in order to trigger coverage,” said Jeff Muth, an attorney with the Grand Rapids office of Miller, Johnson, Snell & Cummiskey PLC.
“Most policies since the SARS outbreak of 2002 and 2003 have exclusions related to viral or bacterial outbreaks, so most what I call ‘off the shelf’ insurance policies exclude from coverage viral or bacterial outbreaks and would likely take the position that pandemics like COVID-19 is excluded from coverage,” Muth said. “Obtaining collectible insurance when COVID-19 is the triggering event or the occurrence you’re relying on is going to be extremely difficult under most policies.”
Business interruption insurance typically covers losses from events that slow or shut down a business. Policies can cover lost revenue, fixed costs such as rent and utilities, moving to a temporary location, or temporarily leasing machinery until the company gets back to normal operations, Muth said.
Individually policies can define physical losses differently. Some define it as loss of use of premises or loss of access, Muth said. He cites as an example an electrical failure or problem that shorts out and damages key equipment and affects production or prevents a company from meeting contracted production quotas.
Something that can trigger coverage is an “act of civil authority” like the executive orders issued in Michigan this week limiting large gatherings to no more than 50 people, closing bars and restaurants for dining, and shutting down other businesses such as fitness centers and entertainment venues through March 30.
In those instances, a business can make a claim that the order from the state was the triggering event, not the coronavirus pandemic, per se.
“For some policies, the inability to occupy your place of business due to the order of a governmental authority may be sufficient to afford coverage,” attorneys from Miller Canfield Paddock and Stone PLC wrote this week in a client briefing. “The answer in each case depends on the language of the policy, the reason for the shutdown and the nature of the claim.”
Alternate coverage may exist for slowdowns and shutdowns if they are due to “a supplier or customer-related shutdown or market disruption,” according to the law firm.
Miller Canfield noted that some insurance policies may hold “‘all risk’ coverage, triggered by all perils, including COVID-19. Moreover, certain industries, such as retailers, restaurants, bars and hotels may have unique coverages or coverage extensions under which COVID-19 would be covered, such as ‘event cancellation’ coverage.”
As companies navigate through the crisis, Muth urges them to “scour” their commercial policies to see if coverage is available from such alternative means. Many commercial policies will cover business losses resulting from an “act of civil authority,” which “prohibits or impairs access to the policyholder’s premises,” Muth said.
“I think you have a very strong argument, especially based on how this pandemic has progressed, that it was the ‘act of civil authority’ and mandating the closure of a business that created the physical loss or damage for which I am seeking coverage. Prior to that act of civil authority, the pandemic existed and I was operating. But for that state mandate, I’d still be operating,” he said.
Still, Muth envisions that insurance carriers will not pay out those claims easily to businesses affected by the pandemic and executive orders from Gov. Gretchen Whitmer.
“I would expect that you will get into a fight with your carrier as to what the real ‘triggering event’ is. That happens all of the time and carriers typically are not just in the business of paying out claims,” Muth said.
In a statement to MiBiz, Tricia Kinley, the executive director of the Insurance Alliance of Michigan, a group that represents carriers in the state, encouraged businesses to contact their insurance company or agent to find out what is covered from the effects of the pandemic.
“We understand business owners may have questions about what is and is not covered by their business interruption insurance policy. There is no one-size-fits-all approach to these policies, and they vary from businesses to businesses,” Kinley said.