“Experienced coverage counsel, at times working with the broker, can try to get some cash into the client’s hands more quickly.”
Business interruption (BI) insurance can cover companies for losses for business disruptions that relate to events like fires and power outages. But will it protect your company from losses stemming from the COVID-19 or Coronavirus pandemic?
The answer, explained V&E partner Michael Charlson, likely depends on the particulars of your specific policy. Charlson says that insurance policy terms and conditions are the critical factor.
“What ends up being a covered business interruption loss is at least as much defined by what’s excluded as what’s included,” he said. “Insurance companies sometimes write their policy language very tightly, with many conditions and exclusions, so that the disruptions they cover are clearly limited. Other times, the carriers don’t write the policy language that tightly and they end up having to cover situations they may never have specifically contemplated.” But the policy language is key, and the mere occurrence of a business disruption does not trigger BI coverage.
If you’re wondering whether you have insurance to cover pandemic-linked losses or if you’re preparing a claim, here are five questions you should consider:
1. Do you have business interruption insurance as part of a broader insurance policy?
Many business leaders and owners may be unaware that they even have BI insurance. Such coverages are commonly included as part of commercial property liability insurance policies.
“People buy a commercial property liability policy because they’re operating in a business property, and they want to make sure that if someone slips and falls in front of their facility and gets hurt, there’s insurance for that,” Charlson explained. “Some people may not realize that commercial property policies often — though not always — include a BI cover as well.”
Where an insurance policy provides for BI coverage and where a potential loss has occurred, it is very important for an insured to provide formal notice of the claim without delay. If a company does not have an in-house risk-management function, the insurance broker who placed the coverage, or outside counsel experienced with insurance issues, can assist.
2. Are you documenting your losses in real time?
You should start keeping records immediately on how your business has been and is being specifically affected by the pandemic and related events: whether it was shut down by a government order, customers stopped coming in, your supply chain was interrupted, or you had to spend time and money to set up remote-work capabilities for your employees.
Because business downturns can be a function of many factors, it is critical to be able to document a business interruption loss with accurate records. A company may wish to create a way to segregate expenses tied to Covid-19 in a separate account to document out-of-pocket loss. For lost profit, records that compare revenue and expense from current accounting periods with the past are often a useful starting point.
“You’ve got to start developing the data in real time. If you try to go back and recreate it, it’s almost always not as good and may be impossible to reconstruct,” Charlson said. And, if your claim winds up being litigated in court, he added, delayed record-keeping or inaccurate data may result in difficult questions being asked during cross-examinations.
3. Are your losses strictly related to the pandemic, or were they also caused by something else?
Some companies are struggling not just because of the pandemic, but also because of other economic factors that existed before the pandemic shook the globe. The energy industry is an example.
“There’s been all kinds of turmoil in the energy markets, part of which may relate to negotiations between OPEC and the Russian government over oil production levels,” Charlson said. “Is Coronavirus a reason why when oil prices are down today? Undoubtedly, at least in part . . . but it’s not the only reason.”
Insurance companies will resist BI claims related to Covid-19, even where the policy includes no exclusion specific to the situation. But here is where multiple causes can work to an insured’s benefit: There could be other reasons that are clearly covered by the policy that contributed to a business disruption. In any event, the insurer will question the degree to which the business disruption was caused by any particular event. This makes documentation by the claimant all the more important.
“The burden of proving the magnitude of a loss is on the insured in the first instance. And insurance companies are going to challenge that evidence by trying to show that a particular business downturn is not the result of the interruption the insured is claiming, but is actually the result of other factors, at least partially. That way, the insurer can claim it is not responsible for 100 percent of the loss,” Charlson said. “These disputes, when it comes to larger enterprises, can involve a very sophisticated and detailed economic analyses.”
In the face of such objections, having your own data to support your claim is critical.
4. Are you turning to your insurance broker and outside counsel for assistance?
The insurance broker who sold your company’s policy may be helpful with pursuing a BI (or other) claim. This is especially true if the company is working with a larger insurance broker that has some market clout.
“The insurance brokers have relationships with the insurers with whom they place a lot of coverage. A very large broker that places millions and millions of dollars of coverage with different carriers has deeper business connections with the major insurers,” Charlson said. “While it is not clear whether those relationships will help with BI claims in this context, those business relationships can be valuable in terms of trying to get a claim negotiated in a manner that’s more favorable to the insured.”
Meanwhile, outside counsel can be helpful in terms of carefully parsing policy language, perfecting a claim, and setting up mechanisms to help ensure that a claim gets properly documented.
“This situation calls for attention to the details. Experienced coverage counsel, at times working with the broker, can try to get some cash into the client’s hands more quickly, especially in situations where the business disruption may potentially reflect an existential threat,” Charlson said.
5. Are you ready to go to court?
Insurance companies sometimes deny claims, even when they risk a lawsuit over that decision. Lawsuits seem likely in this context, Charlson said.
“In a negotiation or mediation, an insured very rarely gets 100 cents on the dollar of a claim,” Charlson said, “so it can be cost-effective for the insurer to dispute claims. If we’re talking a multi-million-dollar claim, a 10- or 20-percent reduction in the amount the carrier has to pay can add up to a lot of money.”
The good news is that in most jurisdictions, where there’s ambiguity or disagreement over what the language of an insurance policy means, courts tends to resolve ambiguities in favor of the claimant.
“The reasonable expectations of the insured is the standard that prevails in many jurisdictions,” Charlson said. “The language is construed in the context of what a reasonable insured person would think they had bought in terms of coverage. An insured’s stated expectations won’t overcome clear contrary language in a policy, but where there is ambiguity – and often there is – it tends to go the insured’s way.”
Even if plaintiffs don’t get everything they ask for, what they do get may be enough to keep their businesses afloat.