Will business losses from COVID-19 be covered by insurance?

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This article has been updated to reflect changes in the status of the COVID-19 pandemic.

According to The Organization for Economic Cooperatio n and Development, 2020 global growth could be cut by half, to 1.5 percent for the year instead of the 2.9 percent that had been previously forecast if the coronavirus continues to spread. It will likely drop from there given the change in the last 96 hours.

Many Lehigh Valley businesses are not necessarily concerned about slower global growth. Some certainly are, but this rapidly changing event process is  already being felt at the local level. Here are a few simple examples:

• School closures affect sandwich shops, delicatessens, pizzerias, frozen yogurt shops and any other business depending on student traffic. Many universities including Lafayette, Lehigh, Kutztown, Villanova, Penn State and Muhlenberg College have already cancelled in-person instruction.
• Restaurants, coffee shops, diners and catering facilities are feeling the pinch as erstwhile patrons eat at home or postpone celebratory events.
• Both Main Street and mall-based retailers, who are already under severe duress due to online shopping alternatives, have been forced to close by governmental decree.
• Any local manufacturer, building contractor or assembly plant with a supply chain stretching to China, Italy and elsewhere is already likely experiencing, or will soon experience, a shortage of components.
• Mass and private transportation systems are experiencing revenue shortfalls as passengers stay home. Uber and Lyft have suspended driving in NYC and may extend the ban further. By the time you read this it may already have happened.
• Bowling alleys, movie theaters and other places of public assembly are learning to live with empty lanes and seats. Nationally, there is a strong recommendation to have no more than 10 people in any one gathering. .
• Schools, charitable organizations and trade associations either are or will be minus critical revenue due to cancelled events.

Let’s discuss insurance coverage

Business interruption and Extra expense insurance (also known as business income insurance) covers the loss of income a business suffers following a direct physical loss or damage to property. .A coverage trigger to access the limits and coverage in the policy is typically direct physical loss to property. Often, without direct physical loss, it is difficult to have a carrier involved in a loss. The income loss covered may be due to a disaster-related closing of the business facility or due to the rebuilding process after a disaster. Coverage follows direct physical loss to property. Operating expenses, a move to a temporary location, payroll, taxes and loan payments may also be covered.

Check with your trusted broker or insurance carrier to determine if your business or organization will be covered for losses attributable to COVID-19. Remember your Broker or Agent is not the ultimate authority in determining whether a carrier will accept or deny a claim. Claim determination will always remain the responsibility of the insurance carrier.

Consider the following when analyzing your coverage with your trusted broker or insurance carrier:

Companies purchase business interruption and extra expense insurance as part of their property insurance policy. When a business is unexpectedly forced to cease operations due to insurable external events, the insured company, if covered by the terms and conditions of the policy will be able to access the policy limits

While COVID-19 has caused quarantines resulting in overseas factory shutdowns, broken supply chain links and disrupted business activity for international, national and local businesses, that may not be enough of a reason  to expect insurance coverage to be useful. Again, both business interruption and contingent business interruption insurance typically cite “direct physical loss or damage” as a requirement for the insured to receive a cash payment.

While COVID-19 may cause customers to stay home, events to be cancelled and even complete business closures due to quarantine, in most cases none of this will currently be considered the result of physical damage.

And while COVID-19 may cause a business slowdown or even closure due to a supply chain interruption, slowdown or complete breakdown, there is no physical damage to the workplace.

Check with your trusted broker or insurance carrier regarding your organization’s coverage.

The fast moving COVID-19 crisis demonstrates how business interruption and contingent business interruption coverage are essential elements of a comprehensive risk management program. Actually, they become even more essential as extreme weather events become more the rule than the exception. Following are instances when these coverages would take effect:

• Business operations are interrupted and/or disrupted by fire.
• Business operations are interrupted and/or disrupted by a natural disaster, such as a hurricane, tornado or flood resulting in damage to property.
• Your supply chain has been interrupted or broken because plant, property and equipment of a supplier have been physically damaged.

Work with your trusted insurance broker to assess your business’ unique risk profile. He or she will guide you through these and other considerations:

• Since business interruption insurance covers revenue your company would have earned, based on your financial records, had the disaster not occurred, it is important to maintain detailed, comprehensive financial records.
• The price of business interruption coverage is related to the risk of fire or other disaster damaging your premises. For example, with all else being equal, price would probably be higher for a restaurant than for a nail salon. Why? Risk of fire is greater at a restaurant. Plus, a nail salon agency can more easily shift its operations to another location. Whatever business you are in, your trusted broker can help you identify and mitigate risk factors.
• Policy limits should be sufficient to cover your company for more than just a few days. It can take more time than anticipated to get back to business as usual following a disaster. Plus, be aware there is generally a 48-hour waiting period before business interruption coverage is initiated.

Kevin McPoyle, CIC, is President of KMRD Partners, Inc., a nationally recognized risk and human capital management consulting and insurance brokerage firm with offices throughout Pennsylvania. Kevin can be reached at [email protected]

Kevin McPoyle, CIC, is President of KMRD Partners, Inc., a nationally recognized risk and human capital management consulting and insurance brokerage firm with offices throughout Pennsylvania. Kevin can be reached at [email protected]