Is my business covered by business interruption insurance to
The Short Answer: Probably not.
The Long Answer: While you are not covered by business interruption insurance during the COVID-19 shutdown, there is information you should know about your business interruption insurance and business insurance coverage. Over the past 9 months, we’ve been examining the business insurance policies and whether or not there is coverage for business interruption if the government closes or restricts your business from operating due to COVID-19 mitigation efforts.
First, What Is Business Interruption Insurance?
A lot of you probably never heard of business interruption insurance (or loss of income insurance) prior to the COVID-19 shutdowns. It is usually part of a business insurance policy connected to your business’s property insurance. If your business were to suffer from a physical event that impacts your business so that it cannot operate, the interruption insurance pays for the lost profit during the “reconstruction” of your business.
Most business insurance policies with property insurance have coverage for business interruption. Business interruption insurance kicks in when a claim or occurrence shuts down or reduces the amount of income your business would have made if it remained open. In most cases, business interruption coverage requires there to be a specific “event” that results in real property damage either to you or to a neighboring property.
Examples of Business Interruption Insurance
- The easiest example is a fire or a roof collapse, causing you to close your business.
- A fire destroyed the back end of your warehouse and created an unsafe work environment. You are covered for the losses accrued during the repair and work done.
- Your grocery store is closed for repairs because the entrance collapsed.
Business interruption insurance would (typically after a 24-72 hour waiting period) compensate the owner and replace the lost income until the business reopens, the limit of coverage is exhausted, or the length of time that the coverage lasts, whichever comes first.
How Much Can I Claim From My Business Interruption Insurance?
The amount of time and coverage comes down to the wording of the business insurance policy. What can be claimed is typically your average revenue minus the cost of goods sold (and other expenses that are no longer occurring because you are closed.) For example, if you are a restaurant, and no longer operating due to an insurance claim, you do not have to purchase items like food, paper, and sanitary products. If your restaurant sales were an average of $5,000 per week, and food costs were 30%, the policy could potentially pay up to $3,500 per week. The $1,500 of food costs would not be covered because the expense is not incurred during the closure. Some policies will include payroll costs, while others don’t, even though the employees aren’t working. Contact Strickler Insurance to learn how business interruption insurance can protect your business.
How Much Does Interruption Insurance Cover?
This is so important to know. Would you buy a car without knowing its miles per gallon? No. At Strickler Insurance we want you to know the insurance you are purchasing and the amount of coverage your business receives. The payout from loss of income insurance depends on what your sales would have been. So what sales figures will your insurance company use?
They will look at past financial records of the previous two years during the period at which you were closed. If you made $1,000/week of profit over those last 2 years, that $1,000 would be covered as well as fixed expenses your business has. What fixed expenses would be covered.
- Rent: Your rent would be covered by loss of income insurance.
- Utilities: This is a fixed income that would be covered by the insurance.
- Taxes: Even taxes can be covered by interruption insurance.
- Insurance: Yes, believe it or not, your insurance can pay for your insurance.
What If I Had A Net Loss Over The Past 2 Years?
You will still receive insurance coverage, but the business’s coverage is equal to the income acquired. For instance, let’s say you had $1,000 in weekly covered expenses. And you were only able to pay an average of $600/week of those expenses in the past because you didn’t have enough income to pay all of it. The insurance would only cover the $600 of fixed expenses during the coverage period. Essentially your business is covered equal to the income it previously reported before the claim.
If you are in a cash-based business, it is crucial to make sure every transaction is recorded so that when you have a shutdown, all of your past income is considered in calculating the loss.
Why Doesn’t Business Interruption Insurance Cover My Business’s COVID-19 Closure?
What happens if your business does not have property damage but is forced to close by government order? This is the big question that many business owners are presently asking. They are required to shut down or reduce their operations and that has lowered their overall income. As mentioned above, the first hurdle with getting coverage under an insurance policy is the requirement that there must be property damage. The design of business interruption coverage is to protect you from a direct loss or damage to your property or business caused by natural disasters, damage, or theft. The virus typically does not fall under the variety of coverages that business interruption insurance includes.
As it stands right now, COVID-19 in the “air” or the “area” near or around you does not constitute property damage. Most of the court cases involving this definition have ruled the COVID-19 shutdowns as exempt from business interruption insurance coverage. Therefore, the majority of policies exclude coverage for the shutdown. Many policies actually have virus exclusions built-in. These cases clearly exclude any coverage for losses related to a virus.
Is There Any Insurance Coverage That Can Assist My Business During COVID-19?
There are a few instances where you may have coverage for other expenses related to a closure. Some business insurance policies offer coverage for clean up expenses related to a bacteria or virus. If your business was closed due to actual COVID-19 positive cases and exposures inside your business, you may be entitled to the sanitizing expenses related to the closure. There may also be coverage for expenses just to clean even if you are uncertain if COVID-19 was in your business or not.
Here are some additional ways your business can get financial relief or protect your assets through your insurance coverage.
- Property: Review your inventory to cross-check with your insurance company’s coverage. If you have less inventory, then there are fewer things that need to be covered.
- Workers’ Compensation: While having workers’ comp is legally required before covid-19 took effect in 2020, this coverage still functions as it always had. This will protect your employees and allow your business to continue to function even if employees are home sick.
- Commercial Liability Insurance: As COVID-19 restricts the number of people entering your business there are probably fewer employees and customers. You should contact your insurance company to review your business to see if your liability insurance will drop in cost.
- Personal Insurance Savings: On your personal insurance you can always save on your auto insurance policy if you are working from home and no longer driving that long commute to the city. Contact your insurance provider and see if the drop in miles added to your car can lower your car insurance premium.
Will The Government Require Insurance Companies To Cover COVID-19 Losses?
Legislation is being tossed around that may force insurance companies to consider COVID-19 shutdowns as property damage. As a result, the business interruption claims would be covered. So far none of this has succeeded, and most courts have ruled that business interruption policies are clear that there must be property damage. Regardless of this, we always recommend filing a claim so you know your policy does not cover anything related to COVID-19. If you wait to file a claim it could be denied because you waited too long to report it.
What Happens If COVID-19 Is To Be Covered By Business Interruption Insurance?
Because of the level of impact of the COVID-19 shutdown and the ongoing accruing loss of income, it would likely cause a massive collapse in the market. Essentially, insurance companies would be forced to shut down and declare bankruptcy because the financial impact of COVID-19 is so large.
Hope For Business Owner’s Future After COVID-19
Looking out into the future, we see a possible public-private solution that would cover “pandemic” insurance to businesses, just like there is for flood insurance and terrorism insurance. Pandemic insurance would require several years to be created and designed for businesses. Fear not, progress is already being made to find a solution that is both adequate and affordable. Ultimately, the market will figure out a solution. There is too much of a need and demand from the small business community for pandemic insurance.
Contact Strickler Insurance Today!