Determining Disruptions

The COVID-19 pandemic has affected businesses throughout the world unlike almost any event in history. Although many businesses have business interruption insurance, not all policies contain the same policy language. For example, after the Swine Flu epidemic in 2009, many business interruption policies were amended to contain an exclusion for loss caused by virus, bacterium, or other microorganism. To offset this exclusion, some insurers began offering a rider to cover losses from viruses or other microorganisms not covered under their traditional business interruption policy:

In order to trigger business interruption coverage, a business must establish that the business sustained a “direct physical loss” to covered property under the policy, and that as a result there was a “suspension of operations” (e.g. complete interruption of the business).

In the wake of COVID-19, many plaintiffs’ attorneys have established separate practice areas to focus on business interruption claims. They have become very creative in their efforts to satisfy the “direct physical loss” element previously mentioned. One example is to claim the loss was caused by the potential exposure of the virus on its property, which forced the business to close. Another strategy is to claim that the loss was caused by the various state and municipal stay-at-home orders. A stronger argument has been to claim that the loss was caused by known exposure of a business’ premises to a person diagnosed with, or suspected of having, the coronavirus.

Even if a business can establish a “direct physical loss” to its property, it must also show that the loss resulted in a complete suspension of its operations. Mere partial closures or reduced hours have not been found by the courts to constitute a “suspension of operations.” Many plaintiffs argue that even though the business hasn’t completely shut down, its operations have been constructively suspended, thereby triggering coverage.

In evaluating a potential loss, it is critical that claims professionals request and obtain profit and loss statements from the business for the last 24-36 months. Claims professionals must also determine if the business was declared an “essential” or “non-essential” business by the state or municipality, and confirm that the loss occurred as a direct physical loss of the suspension of operations, not seasonal or other downturns in the market.

Even if a business can establish a direct physical loss and a suspension of operations, the loss cannot be due to loss of interest in its product (see Dictiomatic Inc. v. U.S. Fiduciary & Guaranty Co., 958 F. Supp. 594 [S.D. Fla. 1997]), or loss of windfall profits. (American Auto Ins. Co. v. Fisherman’s Paradise, 1994 U.S. Dist. Lexis 21068 [S.D. Fla. October 1, 1994]).

Anyone evaluating or assisting an insured with a claimed loss must be knowledgeable of the scope and effective date of all applicable municipal, state, or federal laws that would override any policy language or exclusions. Although many insurers have argued that claims related to COVID-19 are not covered because there has been no physical damage to the property or because the policy expressly excluded coverage for viral contamination, some members of Congress have asked insurers to cover COVID-19 losses under business interruption policies.

In addition, some state legislators in Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina have proposed legislation that would require insurers to provide some coverage for losses resulting from COVID-19, and some counties and municipalities are following their states’ lead by wading into coverage waters. For example, an emergency order issued by a large county in South Florida specifically states that COVID-19 causes “property damage.” Of note, any legislation that attempts to expand coverage obligations of any insurance policy would expectedly be challenged as unconstitutional under the contracts clause of the U.S. Constitution, which generally prohibits states from enacting legislation that impairs contractual obligations.

As an alternative to coverage, some commercial policyholders and insurance industry groups have sought federal government intervention to create a “recovery fund” designed to further assist businesses. They have proposed the “COVID-19 Business and Employee Continuity and Recovery Fund” to “supplement the efforts to expand lending in the CARES Act,” which, the groups say, “would be designed to help businesses retain and rehire employees, maintain worker benefits, and meet operating expense obligations.” Despite the unsettled insurance coverage issues and requests for government assistance, several struggling businesses have filed lawsuits seeking declarations that they are entitled to recover losses they deem resulting from COVID-19.

Anyone assessing or assisting an insured with a business interruption claim needs to be aware of whether the business was declared an “essential” or “non-essential” business by the state or municipality. In addition, the stay-at-home or shelter orders issued by various state governors may need to be considered in the calculation of a business interruption claim. These orders may also establish deadlines for filing claims with insurance companies.

Aside from these unique issues arising from the COVID-19 pandemic, the insured must gather critical documents to assist in preparation or evaluation of lost income and extra expenses associated with a business interruption claim. These include the following:

•    Annual and monthly financial statements (three years to current).

•    Federal income tax returns (three years).

•    Historical budgets, forecasts, and/or projections (three years).

•    Monthly budgets, forecasts, and/or projections prepared prior to and after the event.

•    Monthly bank statements.

•    Inventory reports, if applicable.

•    Payroll records.

•    Invoices and purchase orders.

•    General ledger account detail.

Critical analyses of these documents should provide for a substantiated claim by the insured that has been appropriately vetted by the insurer. Additionally, the insured must also demonstrate mitigation of losses and provide supportive documentation—not doing so could jeopardize a business interruption damages claim. Furthermore, the insured must link the loss event to lost revenue and related earnings, exclusive of other causes to declines in revenue and earnings (if any). Not isolating and linking the cause of a decline in revenue and earnings may debilitate a recovery for claimed losses.

Business interruption claims can be complex, especially related to the COVID-19 pandemic. This is new territory for both insureds and insurers to navigate. We anticipate more clarity on these claims in the coming months from both the courts and lawmakers.