Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by a business due to a slowdown or suspension of its operations at its premises, under certain circumstances. Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a policy holder or supplier.
Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.
On March 10, 2020 members of the United States House of Representatives requested that four major insurance trade organizations cover business interruption claims arising from COVID-19. The letter was addressed to the CEOs of the following organizations:
– The American Property and Casualty Insurance Association;
– The National Association of Mutual Insurance Companies;
– The Independent Insurance Agents & Brokers of America; and
– The Council of Insurance Agents & Brokers.
Members of Congress stated that business interruption insurance is intended to protect businesses against income loss as a result of operational disruption, and covering losses resulting from COVID-19 would “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”
In response, the CEOs stated, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” While recognizing the impact of the pandemic, the CEOs argued: “The proposed retroactive application legislation would fundamentally change the agreed-upon transfer of prospective risk-of-loss exposure to coverage for a known and presently occurring loss, something the parties did not agree to, the insurer did not rate for, and the policyholder did not pay for.”
New Jersey has taken preliminary steps to directly alter the terms of insurance contracts issued to insureds in New Jersey. On March 16, 2020, New Jersey Bill A-3844 was introduced with the goal of assisting businesses impacted by COVID-19.
The principal provision of draft Bill A-3844 states:
“Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”
While no other state has taken any measure as extreme as the draft bill in New Jersey, it is possible other states will seek to influence whether insurers provide coverage for claims relating to COVID-19. On March 10, 2020, the New York Department of Financial Services mandated property casualty insurers provide to the department, “Certain information regarding the commercial property insurance it has written in New York and details on the business interruption coverage provided in the types of policies for which it has ongoing exposure.” Insurers must also provide the same information to policyholders. Several observers have noted this move could be a precursor to a draft bill similar to NJ A-3844 being introduced in New York.
With the anticipated passage (not finalized yet at the time of this article) of a $2 trillion economic relief package, it seems appropriate that Congress should assist insurers if they are going to ask insurance companies to pay for business interruption arising from COVID-19. By encouraging insurance companies to honor such claims, Congress seeks to support business and provide capital to the economy. Other industries such as the cruise industry and the aviation industry are receiving large bailouts as a result of COVID-19, under the theory that it’s “not their fault.” Perhaps given the extraordinary situation, the insurance industry can receive similar help in exchange for increasing the scope of coverage. In that way, the insurance industry would be required to be more reasonable when it considers coverage claims for COVID-19.