Are my business losses covered during the Coronavirus Disease 19 (COVID-19) outbreak? Is there a way for me to recover what I will lose during this unprecedented time? How will I move forward when this is all over?
These questions have no doubt been on the minds of business owners far and wide since the global pandemic of COVID-19 became a stark reality over the past few weeks. Countless businesses have moved to telework and remote access, while others have closed their doors—temporarily and perhaps in some cases permanently—while we navigate through this extraordinary time in American history.
The conversation needs to begin with the question of whether businesses possess business interruption insurance and contingent business interruption insurance, a question best asked of that company’s insurance broker and/or attorney. There are a variety of tests that can be run to determine if a certain loss due to this outbreak is covered; while the COVID-19 outbreak is largely uncharted territory for everyone, there is still some guidance that can be issued and some misconceptions that can be cleared up.
The conventional wisdom seems to be that business interruption insurance covers loss of income and loss of profits as a result of physical damage to property covered under property insurance provisions—with certain exclusions covered in the policy and period of restoration defined. However, there is a common misconception that only direct physical losses can be covered as property damage; this is where a broker or attorney’s advice should be sought, because given the massive disruption caused by COVID-19 where some businesses have been forced to close, a case for coverage may be made.
In terms of contingent business interruption insurance, this provides insurance for losses resulting from disruptions to a business’s customers or suppliers, as long as the underlying cause of damage to the customer or supplier is of the type covered by the insured business owner’s own property policy. As an example, let’s say your business depends on suppliers to run properly, and suppliers are unable to deliver necessary products/services to you because of the damage to their property due to the current situation. Under a contingent business interruption policy, you and your suppliers may be covered in this circumstance.
An interruption claim will assess how your business looked before the interrupting event and what it looks like after. But claims to be filed following the eventual conclusion of the COVID-19 outbreak will not be “typical” interruption claims, such as those filed following a hurricane or natural disaster. In those cases, the disaster and the ensuing period of restoration are known far quicker than in this case, where we simply do not know right now when the end will come. In cases like these, another commonly accepted method of estimating lost profits when the before and after method is not suitable is the projected sales method. This method is more commonly seen when the damaging event is incurable, not yet cured, or a more precise estimation of the revenues lost by the plaintiff are needed. The loss claim generally utilizes more sophisticated econometric modeling and often involves extensive evaluation of the market, suppliers, competitors, and political economic events that may affect the future of the plaintiff. For a closer analogy, people can look to 2005’s Hurricane Katrina, where restoration efforts lingered for years after the event.
So, with a basic understanding of how business interruption is defined in terms of insurance recovery, what can businesses experiencing a partial or complete shutdown do to prepare for eventual restoration efforts?
One of the most important things a business can do right now is keep detailed records of everything that occurs once the event begins, as well as records of where the business was before the event occurred. Unlike hurricanes or floods, there is no danger of physically losing files or documents with the COVID-19 outbreak, which could prove valuable in recovery efforts. But meticulous tracking of records of the business is essential.
From there, you can then begin to calculate where sales were before COVID-19 began, what out–of–pocket expenses were spent during the shutdown and begin to recreate where sales and income were prior to the outbreak. Modeling can then be used to estimate the length of the interruption and losses incurred.
Continuity plans are also essential at a time like this; the crisis will pass, but memories will linger in terms of how well you communicated and how you are able to talk to your customers and suppliers involving the flow of goods. Other factors that could help a business successfully endure an interruption like this one include how you managed your resources and employees, how you replaced workers who became ill, and how you were able to get your product out.
One particular model that has drawn much public attention since the COVID-19 outbreak began is the Amazon model, where the company has basically brought in its own supply chain of resources. Again, communication is critical—to suppliers, to customers and to employees—and if done properly can keep your reputation intact despite the interruption.
It is fair to say that none of us have seen a crisis disrupt so many parts of our daily lives, and for such a potentially lengthy period of time, as the COVID-19 outbreak seems to be doing now. For businesses that suffer as a result, there could be solutions that allow them to emerge successfully once this is over. Having a keen awareness of the type of insurance coverage you have right now and what this may mean for you is a good place to start.