Business interruption insurance has been at the center of countless disputes since the first statewide shelter-in-place order was mandated in California on March 19 to prevent further spread of the novel coronavirus, COVID-19. Since then, all 50 states have imposed varying degrees of pandemic-related restrictions, with many opting to close non-essential businesses.
These mandatory shutdowns have hit businesses hard, and many have turned to their insurers to recover business interruption and business income losses. However, business interruption insurance does not typically cover a pandemic. The coverage normally only triggers if there’s direct physical loss to property, which is very hard to prove or quantify in the case of COVID-19. Therefore, insurers are denying coronavirus-related business interruption claims, and this has triggered an onslaught of coverage disputes and litigation against the industry.
Unfortunately, these coverage disputes are only going to get more complex over the next few months. While the COVID-19 pandemic is certainly the headline issue at the moment, the United States is steamrolling towards the peak wildfire and hurricane seasons. Forecasters with the NOAA’s Climate Prediction Center, a division of the National Weather Service, announced mid-May that there’s a 60% chance of an above-normal Atlantic hurricane season in 2020.
A busy hurricane season would be problematic in normal times, let alone during a global pandemic. In 2020, businesses in hurricane-exposed areas have new questions and challenges to contend with. One such question is whether business interruption insurance will be activated during a storm if mandated closures are still in effect.
“This is the gray area of all gray areas,” said Doug Jones (pictured), co-founder and managing partner of Florida-based JAG Insurance Group. “I’ve spent a lot of time thinking about this question, but also talking to some of the most elite claims handling professionals in the country about it. And the answer is fairly uniform in that we won’t know until it happens. When you file a business interruption claim, it’s adjusted by taking averages of your income over a certain period of time, but what if you have no income? You can’t close something that’s already closed, and, in that sense, the storm did not cause you to lose anything - it was never there in the first place.”
In the hospitality industry, there’s been a lot of concern about re-opening at limited occupancy and whether it’s worth it from a business perspective to only run at 25% or 50%. However, Jones advises businesses – especially those in storm-exposed areas - to get back up and running as soon as restrictions are lifted, and public safety is accounted for.
“From where I sit, from the insurance perspective, you’re starting to create cash flow again, and you’re starting to create an argument for if you do get shut down because of a storm, that you did have income coming in, and that income – even if it’s at 25% or 50% - has been halted by that storm,” Jones told Insurance Business. “There is no gray area in that scenario. That is when, without a doubt, your business interruption insurance will kick in if the building is damaged by the storm. That’s why I think it’s important for people to get back operational as soon as possible.”
However, as is often the case with business interruption, there are more complexities that may arise. For example, what happens if a hurricane causes property damage to a business that is closed under mandatory shutdown, and that property damage then delays the business’s re-opening once lockdown is lifted? That, according to Jones, is once again a “huge gray area”.
“In that case – if you were prepared to re-open but now you can’t because of damages relating to a storm – documentation becomes so important,” said Jones. “Document, document, document! During lockdown, it’s important for businesses to document what they’re doing to get back open. What are the steps you’re taking? What money are you spending? How prepared are you? What’s your argument that in fact, you were ready to open and now you can’t - not because of COVID-19, but because of a storm that hit?
“That’s the beautiful thing about the business interruption trigger being physical damage. At that point, half the argument is set because an adjuster can visit your location and see that it is not habitable, and operations cannot start. There’s no argument with the insurance company at that point - there is a claim. What is the value of the claim? That is what will come in question at that point. Folks may go back and look at what your income was prior to COVID-19. That would be my guess, although I’m not a claims professional. Ultimately, I think your responsibility as a business owner is to prove that you have hit those triggers on the business interruption claim, which is most importantly physical damage, and to file your claim.”