A hot topic within the hospitality industry right now is whether insurance policies will cover the drop in revenue (and subsequently, lost profits) arising out of both the pandemic and civil actions taken by federal, state, and local officials.
Typically, this issue would arise months down the road when businesses would begin to file interruption claims. However, organizations across the country are starting to take proactive measures for potential interruptions as opposed to reactive measures. In New Orleans, a French Quarter restaurant, Oceana Grill, fired the opening salvo by filing suit against Lloyd’s of London in Orleans Parish Civil District Court, seeking a declaratory judgment to proactively force its insurance carrier to pay for losses from the pandemic and the related government-ordered closures due to the coronavirus. The suit seeks an order from the court that will express that Lloyd’s policy does not contain an exclusion for a viral pandemic and will cover any future civil authority shutdowns due to the coronavirus. It will also provide business income coverage “in the event that the coronavirus has contaminated the insured premises.”
Similar to the most recent lawsuit mentioned above, it is common for policies to list viral pandemics or “virus or bacteria” among the exclusions. For example, the excerpt below blocks recovery unless other circumstances are met.
- We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
- Virus or Bacteria
- Any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.
- Virus or Bacteria
In general, most coverage for lost income will cover losses resulting from:
- Damage to the policyholder’s own property (business interruption)
- Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
- Government action such as evacuation orders, quarantine, or shelter in place (order of civil authority)
- Damage to properties that attract customers to the policyholder’s business (leader property)
However, aside from specific all-risk policies, the event that triggers any of these coverages is property damage—without which there will be no coverage for lost profits under a first-party property policy. Under most policies, the biggest obstacle that companies face when trying to activate their business interruption coverage will be whether or not coronavirus caused any direct physical loss to their business. The triggering argument given by Oceana Grill’s attorney, in this case, was that the “coronavirus can stay on substances for many days. So, it’s clearly affecting property, it’s clearly contaminating property, and that is the trigger for business interruption coverage.” This same argument could certainly apply to the rest of the bars, dine-in restaurants, hotels, and other businesses that depend on steady foot traffic.
In that event that you are impacted by the pandemic or the restrictions imposed by civil authorities, it’s crucial you provide timely notice to your carrier when a potential loss event has occurred. Please note that this does not necessarily mean you have to quantify losses or make a claim. But by jumpstarting the process, you are simply putting the carrier on notice and getting a claim number to get the ball rolling. Any calculations of lost income will come later for most businesses.
Policies that are of an all-risks nature or include specific riders or endorsements related to pandemics, event cancellations, or other non-property damage extensions or triggers of coverage, may want to start looking back over the past two months and documenting losses. If those losses are significant, then an interim claim would be advisable.
In any case, given that policies differ, businesses should carefully review their policies, giving extra attention to specific items or terms such as:
- Covered causes of loss
- Civil Authority coverage requirements and limits
- Bacteria, virus, pandemic, or communicable disease exclusions
- Communicable disease coverage endorsements
- Contingent business interruption coverage
- Coverage for the cancellation, abandonment, curtailment, postponement, or relocation of events
The applicability of coverage and any coverage-related questions should be discussed directly with your insurance agent.
Once coverage is determined to be probable, the terms of that coverage should be reviewed and understood as they will dictate the limits, deductions, and calculations that will apply to a lost business income and extra expense claim. These will typically be found in the Declarations form, the Business Income and Extra Expense Coverage form, or the Contingent Business Income form attached to the policy.
Businesses that anticipate making business interruption claims should review the terms of their policy related to the insured’s duties in the event of a loss. These duties may include steps related to documentation and record-keeping, mitigating the loss, and notifying the carrier.
Engaging with your CPA to discuss future business interruption claims can help provide information on funding sources, grants programs, monthly financials compilations, information collection and organization, accounting assistance, and cash flow review. Gathering information on these items can determine if an interim claim is necessary. Be sure to reach out to your CRI advisor if you believe your business will be affected by the outbreak and need help interpreting your interruption claim.