An Overview of Business Interruption Insurance Claims and COVID-19

The most discussed business insurance issue recently is whether business interruption insurance should cover lost revenue and expenses due to the COVID-19 shutdown. Therefore, it is important to know why business owners believe they have a claim, and why most insurers assert their policies do not cover COVID-19 losses.

What is Business Interruption Insurance?

Business interruption insurance is designed to compensate the policyholder in the event their business suffers a loss, usually reimbursing lost income, payroll, relocation expenses, etc. Historically, covered losses were due to direct physical property loss preventing the business from operating (e.g. fires, floods, and natural disasters).

Why Business Owners are Making Business Interruption Claims

California and local governments mandated all non-essential businesses close to combat the COVID-19 epidemic. As such, many business owners lost all their revenue since March 2020, which might be covered by business interruption insurance. Therefore, business owners are making claims seeking payment of their expenses and lost profits during their business’ mandated closure. 

Why Insurers are Typically Denying Coverage for COVID-19 Claims

Like any contract, insurance policies are governed by the specific terms in their issued policies. Typically, if the policy does not specifically include a type of covered loss, a claim under those grounds will not be honored. Additionally, all insurance policies contain lists of excluded items which are not covered. Some insurance companies have even specifically disclaimed business interruption insurance due to pandemic or disease in their policies.

Why A Flood of Litigation is Coming

There are two central disputes which will be litigated in the coming months. One, what caused the business to close? In most situations, it was not the pandemic, but the state and local governments’ orders which required businesses to close. Many believe such cases are covered by business interruption insurance. 

Second, what did the parties intend when the insurance policy was issued? Was the policy to cover losses resulting from the statewide closure of non-essential businesses, or does mandated closures to prevent further spread of a pandemic fall under excluded items? When there’s no clear answer and insurance companies are uncompromising, policy holders turn to the courts to resolve the dispute.