Lockton Companies: Evaluating Business Interruption Protection Amid COVID-19

The COVID-19 pandemic is having a tremendous impact on the already challenged insurance market. Many businesses are wondering if business interruption coverage within their insurance policy can help their business through the crisis. Lockton Companies experts Quinn Damon, vice president, and Nate Wiest, vice president and unit leader, provided an update on the Pandemic Risk Insurance Act of 2020 and offered recommendations for tracking and recording expenses that are unique to COVID-19.

What is Business Interruption Coverage?

“The business interruption component of commercial insurance covers the reduction of income when an operation is interrupted due to property coverage by a covered peril,” said Damon.

Carriers use a strategy called the “chain rule” to determine whether or not coverage applies in a certain instance. Of this line of questioning, two considerations are especially pertinent in light of COVID-19 – if there was insured peril or event of physical loss or damage, and if policy exclusions apply.

“If there was no actual property damage present, then that’s where insurance carriers have denied claims because they’re pointing to this policy language saying, ‘yes, there is a suspension of your operations due to – you know – government shutdowns, and what have you however, there is no direct physical loss that created that suspension,’” said Damon. “So that’s the initial stance that insurance carriers have been taking in any sort of business interruption claim.”

Regarding policy exclusions, communicable disease exclusions may apply. If on a property policy, it negates the debate on if there was a direct physical loss, providing an out that if there is any claim for damages due to communicable disease, it is fully excluded. Such exclusions were brought about 14 years ago when SARS was an issue but aligns with what is going on now with COVID-19.

How Business Interruption Claims Are Adjusted

Business interruption is calculated as gross earnings less non-continuing expenses or net income plus continuing expenses. Another factor considered in this evaluation is the period of restoration, which is the time required to restore normal levels of operations of the affected business. Further, insurance adjusters consider continuing expenses including payroll, rent, taxes, professional fees, heat, light, and the like. As part of this process, the Lockton experts recommend hiring a forensic accountant.

“Most property policies will provide reimbursement for the expenses of a forensic accountant to come in and look at the books and audit the books to see what the true loss was,” said Wiest.

In the claim evaluation process, insurance carriers will look back at the past two years. It is important to pay close attention to any increase in costs related to events like COVID-19, documenting the timing as accurately as possible as you go. Wiest also recommends establishing a distinct account number for COVID-19-specific expenses for documentation in the event of a claim.

Litigation Developments of Open Case Law

“Most courts have provided a summary judgment, meaning there’s no trial, they just look at the facts of the case presented by both parties,” said Wiest.

Courts do not want to move forward with trials for these cases. While those Insured can sue the carriers, it doesn’t guarantee victory, just that the case can be heard. Ultimately, litigation during this time comes down to the property damage trigger and pollution or virus exclusions to determine whether or not rulings are in favor of the insured.

What Lies Ahead in Legislation and Private Market

As legislators at all levels of government explore this issue, they continue to encounter two sticking points: cost – to business and government – and ease of administration. Legislation in discussion is targeted at future solutions.

“Any efforts to go back and retroactively pay COVID losses at this point – despite contract language that would be to the contrary – that train has pretty much left the station,” said Wiest.

There are several policy options currently on the table. First is the Pandemic Risk Insurance Act, which states outlines that carriers would be required to offer coverage for pandemic-related business interruption losses, including event cancellations. This mimics regulations around property and casualty losses. Another option is the Business Continuity Protection Plan, which allows businesses to purchase coverage for up to 80% of payroll, benefits, and other limited expenses for three months. This plan is government-funded and administered by FEMA. A favored option, according to Lockton, is the Pandemic Business Interruption Program. This program is similar to the aforementioned Business Continuity Protection Plan for businesses under 500 employees. Carriers and the federal government would share the risk for the first $250 billion in losses. Larger businesses are also able to opt-in for up to $50 million.

There are also a number of private market solutions in the works. The Payroll and Rent Expense Protections for Pandemics is a six-month policy term. It is subject to state restrictions and is triggered by an official pandemic declaration by the Centers for Disease Control and Prevention. There is also the pandemic policy for business enterprises to cover expenses and lost revenue, which is targeted at health care, hotels, casinos, and similar industries and venues. Parametrix insurance is a business interruption policy for small and medium businesses related exclusively to IT disruption and downtime, building different triggers around business interruption coverage that may help lead the way for COVID-19-related adjustments.

In closing, the Lockton experts advise businesses to look closely at the specific wording in their policies and contracts to find breaks in coverage and applicable triggers that may implement coverage.