Founder and Managing Partner
Business interruption insurance
Will insurers pay?
With all of California under a “shelter in place” order from the Governor, car dealers across the state are wondering if their business interruption insurance will cover any of the income lost due to mandatory showroom closures and other disruptions. At first blush, it appears that most insurers will not cover these losses, as most policies only apply where there is damage to the covered building or the immediate vicinity, and others also have exclusions for communicable disease. Nonetheless, depending on the specific wording of your policy and the facts at your dealership, there may be compelling arguments that coverage applies. We therefore recommend a careful analysis of your policy as soon as possible, with an eye to whether you should put your insurer on notice or file a claim.
What is business interruption insurance?
Most dealers carry some form of business interruption insurance as part of their overall property policy. This insurance includes coverage in the event of a certain types of events such as natural disasters or fire. Depending on the policy, the insurance covers repairs to the facility or even income lost resulting from the damage. The coverage for lost income often covers loss 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 (order of civil authority)
- Damage to properties that attract customers to the policyholder’s business (leader property)
For businesses that have interruption insurance, the threshold for recovery generally depends on a series of factors:
- The property has to sustain damage (e.g., a lightning strike)
- The property must be insured
- The peril itself must be insured (not specifically excluded)
- The loss must be quantifiable
Most importantly here, for nearly all policies, the event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a property policy.
Before 2003, many property policies covered communicable disease outbreaks that lead to property damage. However, after the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, most insurers moved to exclude these types of events from coverage.
How business disruption insurance covers losses
If all the conditions in the policy are met, business interruption insurance coverage could pay out for the entire period of time it takes to restore the damaged property and put the company back in business.
However, many business interruption policies only pay for quantifiable physical losses, like repairing and replacement of damaged property and inventory. Insurers are therefore very likely to argue that even if COVID-19 (its presence in the community or your building, or civil orders related thereto) disrupts business, it does not cause physical damage to the building and therefore does not trigger coverage.
Compelling arguments are already surfacing, though, to support claims of non-structural damage to properties as a result of the presence of COVID-19. For example, an Oklahoma casino filed an action for declaratory relief in mid-March seeking a determination that their business interruption insurance applies because they were forced to shut down due to the presence of the virus in the building.
Other litigators are taking this a step further and arguing that because COVID-19 can travel in the air and stay on surfaces, the presence of this dangerous substance is a covered event that triggers business interruption insurance. While this argument may apply generally to areas that have known cases, it is likely a stronger argument for any dealership that has an employee or customer test positive for the virus.
Defenses Against Coverage
Insurers will assert a range of defenses to any arguments that business interruption insurance covers damage resulting from the current crisis. First, many policies contain broad exclusions for damage caused by biological agents. However, some policies only partially exclude such damage, sometimes barring coverage for the presence of bacteria but not viruses.
Second, policies may contain sublimits on coverage, have waiting periods before the coverage is triggered, or both. This means that even if an event is covered, the amount of coverage available or he time period for which it is available may be limited.
Third, if arguments that the presence of COVID-19 in a building or in the community are found to trigger coverage as a type of property damage, coverage may be limited to the period of time it takes to “repair” the damaged property. Depending on the type of damage, this could be as little time as how long it takes to clean surfaces, or the amount of time the virus can live on a surface.
Individualized analysis necessary
During this time of uncertainty is absolutely essential that you understand the terms of your business interruption coverage. While it appears that making a successful claim could be an uphill battle, the specific provisions of your policy and the facts on the ground at your dealership will control. Now is the time to know what your options are, as the situation on the ground changes daily. Scali Rasmussen is here to help with attorneys with years of experience negotiating and litigating insurance coverage. Contact us today to conduct a review of your policy to prepare for what is ahead of the curve.