The COVID-19 coronavirus has caused an unprecedented halt to the global economy, and many small and medium businesses in the United States and abroad are facing serious economic strain. This article will examine whether existing business interruption coverage will reimburse owners for lost revenue during this pandemic, whether there is additional coverage they should consider purchasing going forward, and whether there are other forms of aid available to cover uninsured losses. Many businesses have been forced to close during these uncertain times, or have had their sales drastically reduced due to the social distancing measures governments and citizens are taking in order to contain the spread of the virus. If you have doubts about what exactly is covered by insurance, keep reading to learn more.
What is Business Interruption Insurance?
Business Interruption Insurance, sometimes referred to as Business Continuity Insurance is an insurance policy designed to indemnify a business owner in the instance that the business must stop operations due to some unforeseen event such as a hurricane or an earthquake. This coverage is typically purchased as part of a commercial property package.
How is coverage for interruption insurance calculated?
The formula for business interruption is often a source of confusion, as it considers a handful of factors, not just the average income of the business. Factors that are added:
- Expected gross profit during the indemnity period – This will be the revenue expected over the period minus the direct costs associated with that revenue.
- Incurred additional expenses due to event – These are any expenses that are incurred due to the circumstances of the covered event, but that are not incurred during the normal course of business. Examples of these expenses are gasoline for a power generator, moving your businesses to a temporary location, etc.
Factors that will be subtracted:
- Saved expenses – These are expenses that the business in not incurring or that are reduced due to the event. Examples of these expenses are payroll, utilities, and rent if the landlord allows for leniency.
It must be noted that your policy will prescribe a specific indemnity period, and coverage will only pay within that period (usually around 24 months).
Business Interruption Insurance and Coronavirus in the United States
The main factor determining whether or not your business interruption coverage will coverage loses due to COVID-19 is whether those losses were directly caused by a covered peril. As the coverage is usually a part of a commercial property package, you need to review your policy in detail to determine whether there is an exclusion for a pandemic or infectious disease. You’d be surprised to find that many policies do have this exclusion, as it is an exclusion that started to be introduced in policies dating back to the SARS epidemic of the early 2000s.
There are two types of coverage in which COVID losses could potentially be covered:
- Loss of Attraction – Typically seen in the tourism and travel industry, and is meant to cover when a location has “lost its attractiveness” due to some indirect event, such as a terrorist attack in the country.
- Contingent Business Interruption – This type of coverage is for revenue disruptions caused by indirect disruptions to the business. You will need to ensure that your contingent business interruption coverage specifically includes diseases in order to cover COVID-19 losses. The most common use of this coverage is for supply chain interruptions where a key input in the supply chain to a business encounters some issue and the business can not operate normally.
It must be noted that the plans above can be extremely costly and typically are only used by very large businesses who have a very low tolerance for risk.
Given the complexity of these policies, your best bet is to consult with your insurance broker the specifics of your particular case.
Business Interruption Insurance and Coronavirus in Puerto Rico
In Puerto Rico, these policies gained widespread notoriety following Hurricane Maria. Many business owners went a few weeks at the minimum with no revenues, and those that were able to open and operate had extraordinary costs, such as running on diesel fuel generators or paying a premium for suppliers. Those business owners that had adequate coverage were able to come out of the hurricane in a much better financial position than the majority of businesses on the island.
Following Hurricane Maria, insurance companies tightened their underwriting standards for this type of coverage and greatly increased the premiums. Generally, all business that wanted to purchase this coverage following the hurricane had to demonstrate that they had an emergency power generator with a maintenance contract to maintain that generator. Not only that, but many insurance companies added an exclusion for an “off-premises” event, meaning that no coverage would be provided for an event outside of the premises that prevented normal business operation. Under this exclusion, many businesses would not have been covered following the hurricane as the main impediment for many businesses was the lack of electrical power rather than actual damage to the property.
In the case of COVID-19, the general situation in the greater US also applies to Puerto Rico, most business interruption coverage will not cover the losses generated by the pandemic or by the measures implemented by the government to contain the pandemic.
Business Interruption Insurance didn’t cover me, what other options do I have?
Given the various exclusions in most business interruption policies, it is very likely that your policy won’t cover the losses your businesses has suffered due to the COVID-19 pandemic. Do not despair yet, though, the Federal Government has enacted a set of measures to help affected small businesses, and you likely qualify for one of these programs. The environment is changing day by day, and new initiatives are continually announced – make sure to check the applicable federal agency websites or local offices for the latest information. Below are the main assistance programs available for qualifying small businesses:
- SBA Disaster Loans – Check to see if your business qualifies for an “Economic Injury Disaster Loan” and apply as soon as possible. The loan is meant to cover working capital, payroll, and other needs brought on by a covered disaster. COVID-19 is the first to be declared a disaster by all states, and businesses that qualify can receive financing at very attractive and flexible terms.
- ”Stimulus2020” – This is a private initiative to provide local business with emergency cash. Be careful of the terms and ensure you pay back as soon as you can, but it is certainly an option if you need cash quick.
Is Business Interruption Insurance worth it?
Given the number of exceptions and high cost of these policies, many business owners wonder whether it is even worth it to purchase this coverage. The answer is that, frankly, not all businesses should purchase this coverage. You should look closely at the premiums for your business, implement disaster mitigating processes and practices whenever possible as these will have the double benefit of reducing your premiums and also likely reducing your losses during an event. If you know that your business does not have the cushion to survive a protracted loss of revenue, then you should weigh business interruption insurance more heavily. In any case, whether you decide to purchase the coverage or not, you should seek to establish emergency cash reserves, as even in the case of a covered event your benefits will likely come in the form of reimbursement and you will need cash on hand to pay the bills at the time.
How can I get Business Interruption Insurance for my business?
The best way to get coverage is to work with your current insurance broker and ask them what type of coverage options are available for your situation. If you are located in Puerto Rico, feel free to request an insurance quote from us and we will speak with you for a free consultation.