Business Interruption Insurance: Are You COVID-19 Covered?
The recent Small Business Administration disaster loans are designed to keep people employed and to help small business run their businesses. They do not cover COVID-19 business losses. For most full-service operators, who have been ordered to discontinue dine-in business, delivery and takeout business represents a fraction -- if any -- of pre-COVID-9 sales. Moreover, even with the Paycheck Protection Program loans, they don't need to keep more than a handful of employees on staff.
You might have read the news high-profile chefs, restaurateurs, and legislators are pushing business interruption insurers to cover losses due to COVID-19. What are your chances of your claim being approved?
An experienced insurance litigation attorney breaks down business interruption insurance as "red-, green-, and yellow-light" policies.
The CARES Act loan programs won't help most independent restaurateurs recover losses that could ultimately drive them out of business. And that's why some operators are fighting for their business interruption policies. In fact, if you have been following the restaurant trade media during the COVID-19 crisis, you might have read about a group of high-profile chefs and restaurateurs who are challenging insurance industry refusal to pay business interruption claims for losses due to the pandemic.
Their efforts include forming a "Business Interruption Group" led by New Orleans attorney John Houghtaling II, who secured hundreds of millions for policyholders in the wake of Hurricane Katrina and Hurricane Sandy. In mid-March, Houghtaling filed a suit for declaration of coverage for coronavirus-incurred losses at a French Quarter seafood restaurant.
You might have also read about proposed state legislation to require insurers to pay business-interruption claims related to Business interruption insurance provides protection for the loss of profits and continuing fixed expenses resulting from a break in commercial activities due to the occurrence of a peril.
Granted, not all independent restaurant owners carry business interruption insurance; however, for the ones that do, they might very well ask how it might benefit them right now -- particularly when reading about celebrity chefs taking on insurers. The answer is "it depends," according to Jeff Raizner, managing partner of Houston law firm Raizner Slania, who categorizes businesses interruption policies as red-, green-, and yellow-light. Here's how it works.
Red Light
When there is specific virus exclusion, it will be very difficult -- if not impossible -- to argue for the insurer to cover the claim, says Raizner. Exclusion is just as it sounds. It's any loss or damage that isn't covered by your insurance policy. After the SARS outbreak in the early 2000s, insurers began adding language to their business interruption policies to exclude coverage due viruses and epidemics. For a number of operators who purchased "boiler-plate" policies, these exclusions are standard language and the basis for claim denial. [See the redacted actual letter denying a restaurant business interruption claim based on this exclusion at the end of this article.]
What could change that? As of this writing, in several states, including New Jersey, Ohio, and Massachusetts legislators are working on laws that would preclude virus exclusion enforcement. AS noted by the National Law Review, on March 16, 2020, the New Jersey Legislature proposed an assembly bill, which seeks to force insurers to pay COVID-19 business interruption claims notwithstanding a"Virus or Bacteria" exclusion. The law would apply to existing insurance policies as of March 9, 2020, that insured businesses with fewer than 100 eligible employees (full-time who work 25 or more hours per week) in New Jersey.
That said, Raizner is hesitant to provide false hope. There are potential constitutional challenges to such laws, which are likely to be pressed by insurance industry lobbyists.
Green Light
On the other end of that spectrum are policies including language that specifically covers pandemic events or losses due to the risk of communicable diseases at the property. These are called endorsements, optional coverage to broaden your insurance protection. Like exclusions, endorsements can require interpretation based on the facts to apply to a COVID-19 shutdown of dine-in business. For example, if the endorsement is for"onsite contamination", how will you be able to demonstrate that an infected person was on-site, or that the presence of the virus resulted in physical loss or damage?
Another example of specific endorsements includes "leader property" language. A leader property is often a venue that feeds significant guest traffic. For example, businesses near a stadium or that depend on local conventions might have leader property endorsements to cover losses if events are cancelled.
In spite of endorsements such as these, policy interpretation can hinge on the facts. Raizner provides an example of a"pandemic event" endorsement, which provided coverage if a person infected with a pandemic disease enters the property. And, indeed, such a person entered the property; in this case, the policy specifically mentioned SARS (severe acute respiratory syndrome) as the covered disease.
The insurer declined coverage, claiming that"SARS" referred to a specific strain of the disease. Could an attorney argue for coverage? Possibly, since both COVID-19 and SARS are caused by coronaviruses. The virus that causes SARS is known as SARS-CoV, while the virus that causes COVID-19 is known as SARS-CoV-2. This is just one example of the"gray areas" encountered in insurance policy interpretation.
Yellow Light
According to Raizner,"yellow light" policies are most likely to be the source of disputes. These policies are silent -- they have neither exclusions nor endorsements -- regarding coverage of losses related to viruses or pandemics. Many of these disputes will focus on business interruption coverage for acts of civil authority. These cases will often turn on the language of the Stay Home Order, whether there was demonstrable presence of the virus within the community prior to that order, and the law of the particular state. As you can imagine, policy language interpretation is a critical component of arguing for COVID-19 coverage. For example, the language might require the existence of"physical loss or damage" or "a dangerous property condition" to trigger coverage. In fact, this has arisen as a point of contention between insureds and insurers. An Eater.com article that referenced the lawsuit filed by Houghtaling, the attorney was quoted as saying "The argument that the coronavirus doesn't create a dangerous property condition is a lie" in response to an insurer's denial of a COVID-19 business interruption claim filed by at least one of his restaurant clients.
The question of what constitutes physical loss or property damage -- and whether presence of the virus or an infected person results in physical loss or damage -- is likely to be a continuing issue because most policies will require"physical loss or damage" in order to trigger coverage.
Stop, Go, or Proceed with Caution
Whether or not your insurer will approve a business interruption policy claim can hinge on a number of factors, including the type of policy, how the insurer will apply the facts of the claim to the special policy, the state in which the business is located, the language of government orders, and how the courts will interpret pending legislation. Or as Raizner notes, "There are no one-size-fits-all answers."
He adds a sophisticated and competent broker might be able to provide general guidance; however, if a proverbial push comes to shove with the insurer, it might require the counsel of an attorney who is experienced interpreting insurance policy language and arguing for accepting claims.
Attorneys such as Houghtaling and Raizner, who have experience representing hospitality enterprises in the wake of disasters such as hurricanes and flooding, are likely going to lead the charge for operators who have the resources to fight the insurance companies.
For the average independent operator with a business interruption policy, the best place to start is by filing a claim. If the insurer approves the claim, expect a fair amount of effort ahead to determine the value of the loss. In this environment, however, any stream of cash flow to get you through this crisis is worth pursuing.
ADDITIONAL RESOURCES...
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Restaurant Owner Resources for Surviving the Coronavirus Crisis
Resources and information that will help you make informed decisions and take appropriate, proactive steps to protect yourself, your staff, and your guests from the Coronavirus pandemic.
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Financial Assistance Resources
Here is a listing of government and private industry resources providing financial assistance to restaurant employers and their employees
