What is business interruption insurance?
Business interruption insurance, sometimes called business income insurance, is one of the core coverages in a business owner’s policy, offering businesses a lifeline in the event of a disaster.
A business owners policy typically includes three or four core coverages:
- Commercial property insurance provides coverage for building, equipment and inventory.
- General liability insurance helps cover any medical expenses or bodily injury.
- Crime insurance protects against fraud, theft or forgery.
- Business interruption insurance, also called business income insurance, helps cover bills and payroll in the event of a disaster that forces the business to temporarily close.
What is covered by business interruption insurance?
Business interruption insurance can cover the following:
- Profits that would have been earned, based on prior months’ financial statements.
- Fixed costs like operating expenses, based on historical costs.
- Moving expenses if the business must be moved to a temporary location.
- Commission and training costs for operators of machinery replaced by the insurer.
- Reimbursement for reasonable expenses beyond fixed costs.
- Civil authority ingress/egress, meaning coverage is provided if direct loss of revenue is caused when a government authority orders the closure of business, such as in the event of a curfew.
For example, if a fire breaks out in a restaurant, commercial property insurance will pay to replace inventory damaged in the fire as well as any damage to the building. Business interruption insurance, on the other hand, helps pay bills, replace lost income, and cover payroll while the restaurant is temporarily closed for those repairs. Other events covered by business interruption insurance include wind, hail, vandalism or damage to your building or equipment. However, damage caused by flood, earthquakes, or broken glass are typically not covered.
How is business income insurance calculated?
According to the International Risk Management Institute, Inc. (IRMI), business interruption insurance is calculated based on a formula that takes into account the number of hours or days operations are shut down; the quantity of goods normally produced or sold per unit of time used during the shutdown; and the value of each unit of production, typically expressed in profit. This formula is subject to change by specific policy language.
Congress urges insurance industry to cover COVID-19 business income claims
On March 18, 2020, members of the United States House of Representatives issued a letter to the CEOs of four major insurance trade organizations urging them to cover business interruption claims related to the COVID-19 shutdown, adding that it would “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”
Those organizations included:
- The American Property and Casualty Insurance Association
- The National Association of Mutual Insurance Companies
- The Independent Insurance Agents & Brokers of America
- The Council of Insurance Agents & Brokers
The CEOs rejected this notion in their response:
“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. … 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.”
Business Interruption Lawsuits
There are more than 1,250 business interruption lawsuits filed by businesses that had their COVID-19-related business interruption insurance claims denied. The lawsuits have been filed in both state and federal court as well as in every state. More than a dozen insurance providers have been named in lawsuits. More than a third of the cases have been filed by restaurants and bars. Less than third have been filed as class actions.
In October 2020, the U.S. Judicial Panel on Multidistrict Litigation decided against consolidating lawsuits into one or more MDLs, finding that doing so would not promote a quick resolution. However, the panel said it would entertain creating smaller MDLs for certain insurance companies.
For example, in December 2020, the panel consolidated 13 COVID-19 business interruption lawsuits from five U.S. court districts, all naming Erie Insurance Group in Pittsburgh.
On Nov. 6, 2020, District Judge William M. Ray of the Northern District of Georgia issued orders consolidating the cases of The Last Resort-Mobile and The K’s Inc. against their insurer Westchester Surplus Ins. Co., and appointed Beasley Allen’s Dee Miles and Adam Levitt as Interim Class Counsel and Gibson Vance as Liaison Counsel.
The court also indicated it would reserve the determination of whether to consolidate other later-filed actions or actions transferred or removed to the United States District Court for the Northern District of Georgia. The court also instructed that it will decide dispositive motions before addressing any motion for class certification. Since the issuance of the court’s order, the parties have begun discovery to prove their respective claims and defenses.
States crack down on insurance industry over COVID-19 business interruption claims
On March 16, 2020, New Jersey introduced legislation designed to alter the terms of insurance contracts to require insurance companies to assist businesses in the state impacted by COVID-19.
Since then, other states have begun to follow suit. As of March 27, 2020, similar bills are pending in Ohio, Massachusetts and Pennsylvania to require insurers to provide business interruption coverage for COVID-19 losses.
Ohio’s house bill, introduced by Representatives Jeffrey Crossman and John M. Rogers, states:
“Every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption … shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.”
Business Interruption Insurance FAQ
Business Interruption Insurance Lawsuits
Many businesses have suffered losses as a result of COVID-19. Most all businesses have a form of “Business Interruption” coverage that is designed to cover losses due to unforeseen circumstances out of the control of the business. This virus is a prime example of an event that may trigger this type of coverage.
However, there have been hundreds of business interruption insurance denials related to COVID-19. Obviously, the insurance contract language of each policy governs the coverages, but in many cases the insurance companies are denying coverage despite that the policy actually provides coverage. We are actively pursuing these cases already with our clients who received a denial communication from their insurance companies. Dee Miles, Head of our Consumer Fraud Section, Rachel Nichole Minder and Paul Evans are spearheading this litigation for our firm. They would like to talk to you about any potential claims.
Contact us for a free consultation regarding your business interruption insurance claims.