This week, the Government reported that over three million people filed for unemployment. On Order of the Governor of California, the novel Coronavirus has shut down innumerable restaurants, bars, gyms, and other establishments. In response, the Federal Government passed a two-trillion dollar stimulus bill. But will it be enough to keep a business's doors open after the Coronavirus abates? If not, what other options do businesses have?
What is Business Interruption Insurance?
Businesses that are unable to operate for a period of time following a catastrophe may seek coverage under the business interruption provisions of their commercial property policies. The purpose of business interruption insurance is to indemnify the insured against losses arising from an inability to continue the normal operation and functions of their business.
Although there is a lack of standardization among business interruption policies, a business interruption policy most commonly provides: "The insurer will pay for the actual loss of business income the insured sustained due to the necessary suspension of its "operations" during "the period of restoration."
When Does it Apply?
The policy requires a "suspension" of operations, which means a temporary, but complete, end to the activity. These policies do not apply merely for a slowdown or reduction in operations. Similarly, coverage is not available just for the interruption of work on a particular project when the business as a whole continues.
While fire loss or damage causing a business's suspension is most frequently specified in the policies, business interruption resulting from riot, civil commotion, and order of civil authority, among others, have been included. (see National Children's Expositions Corp. v. Anchor Ins. Co. (2nd Cir. 1960) 279 F.2d 428 (fire, lightning strikes, riot, explosion, falling aircraft, collapse, earthquake, water, or the elements but excluding war); Altru Health System v. American Protection Ins. Co. (8th Cir. 2001) 238 F.3d 961 (wherein state health authorities closed a hospital for three weeks when the city water system failed during a flood).
Further, the suspension must be caused by the direct physical loss of or damage to property at the premises. Courts interpret these policies to require "physical" damage even when the policy does not contain the word "physical" in order to avoid transforming business interruption insurance into financial guarantee insurance.
This raises an interesting, and novel, question about whether the Coronavirus is present "at the premises." The California Governor's order declared that the Coronavirus is present "throughout California." https://covid19.ca.gov/img/Executive-Order-N-33-20.pdf.
What is Covered?
Commercial property insurance policies frequently cover losses from "loss of business income" and extend the time it takes to rebuild, repair, or replace the insured's operations with the exercise of due diligence, or up to a specified period of time.
Where a policy provides coverage for both losses of net income, and continuing operating expenses, these coverages apply separately. Thus, the insured may be entitled to recover normal operating expenses even when the business was operating at a net loss over operating costs when the business interruption event occurred.
Interestingly, policies insuring against loss from business interruption do not provide coverage of the actual loss of or damage to physical property.
When to Seek Coverage?
Under California Insurance Code section 2017, a business interruption policy may require that an action against the insurer be brought within one year "after the occurrence becomes known to the insured."
Accordingly, business owners, builders, and real estate developers should not delay in closely reviewing their insurance policies to determine whether losses from the Coronavirus may be covered. The coverage from these policies may make all the difference in whether the business or operation is able to survive the Coronavirus.