It’s probably safe to assume that every business has encountered disruptions over the last few months. Lots of business owners are asking big questions about what could have protected their companies more effectively. Many are likely wondering, was there a form of insurance coverage that could have helped?

The first thought that comes to mind would likely be some form of business interruption insurance (also sometimes called business disruption insurance). One might think the large-scale closings, stay-at-home orders, and restrictions that were imposed over the last few months throughout the pandemic would count as something that would have been covered by this type of policy. But that’s unfortunately not the case for most companies.

 

What Does Business Interruption Insurance Cover?

According to descriptions published by the Insurance Information Institute (III), an industry association based in New York, business interruption insurance is mostly applicable to a company recovering from damages to their physical location or assets. For example, if a company experienced a fire, the repairs would be covered by their property insurance. Business interruption insurance would cover the losses generated due to closures during the repair process if a building were temporarily unusable.

So essentially, it’s there to help throughout recovery from physical damage. Additionally, the III said that:

• Business interruption insurance covers the revenue a company would have earned, based on financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.
• Some companies also have extra expense insurance. This would reimburse your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually, extra expenses will be paid if they help to decrease business interruption costs.

 

Would This Have Helped During the Stay-at-Home Orders?

Many business owners were surprised to learn their business interruption insurance likely wouldn’t cover their losses from government stay-at-home orders and other social distancing closures. The position of the insurance industry was that policies like these only cover disruptions caused by physical damage to business property. Pandemics and other communicable diseases are typically not included.

Of course, many policy holders thought differently. Several have launched lawsuits alleging this type of coverage was misrepresented. There was also a push for legislative action to compel insurers to pay.

Were that to happen, credit rating agency AM Best estimated those actions would wipe out up to 50% insurer capital with just two months’ worth of claims, leading to widespread insolvencies.

The U.S. Treasury Department said that it was against these legislative measures in a letter from Frederick Vaughan, principal deputy assistant secretary with the Office of Legislative Affairs, to the U.S. Senate.

In the letter, Vaughan said, “Several states have introduced legislative measures to retroactively change the terms of insurance contracts and compel coverage of COVID-19 BI [business interruption] losses. While insurers should pay valid claims, these proposals fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry.”

Another side to this issue is that these legislative issues would open up a multitude of class action lawsuits across other forms of business and insurance contract laws. In short, it would be a huge can of worms.

 

Check Your Policy

Different business insurance policies contain a variety language, so business owners are advised to review their coverage carefully. The general trend does appear to favor most insurers in the case of 2020’s shutdowns, but there are likely exceptions to be found out there.

In fact, the insurance industry is expecting them. One industry media outlet even said that “insurers that have failed to make their wordings robust enough would be a source of less that would flow through the market in the future.”

That’s probably not the message of hope that many struggling business owners wanted to hear, but it appears to be the best they’re going to get for the time being. This will be a hotly debated issue throughout the rest of the year and certainly a perceived existential threat for parts of the industry, but the reality is that most of this year’s shortfalls will likely not be covered by most business interruption insurance.