Is Pandemic an Interruption?

By ANDREW FOERCH Staff Reporter Valley businesses suffering revenue disruptions related to the coronavirus pandemic and resulting restrictions from government regulators are looking to their insurance policies to see if a business interruption claim would cover their losses. According to two local brokers, determining coverage isn’t a simple task. It depends on the circumstances of the losses incurred by a business, the specific verbiage in the written policy and the inclusion of exemptions in the policy or in additional endorsements and declarations. In short, “it varies from carrier to carrier,” said Danone Simpson, chief executive of Montage Insurance Solutions in Woodland Hills. However, she added, “(business interruption) policies are really meant to cover fires and other types of casualties. … Some carriers, like The Hartford, have explicit language that excludes viruses.” An exclusion means that a certain type of event – in this case a virus-based pandemic – does not qualify for coverage under a given insurance policy. Insurance Services Office Inc. in New Jersey, another major national carrier, also includes virus-related losses as a mandatory exclusion in its business interruption policies. “The virus itself is excluded in just about all the policies,” Mitzi Like, chief executive at LBW Insurance & Financial Services in Santa Clarita, told the Business Journal. “I haven’t seen any policies that don’t have a virus or bacteria exclusion. … That’s a problem.“ According to James Fitzgerald, an insurance attorney with Faegre Drinker Biddle & Reath LLP in Los Angeles, most business’ claims related to the outbreak of SARS – another coronavirus strain – in 2003 were not covered because their business interruption policies contained such specific exclusions. Policy particulars Nonetheless, Fitzgerald said the first thing businesses need to do to evaluate whether they have a claim is to read their insurance policies. “People buy an insurance policy and they don’t know what it covers. It’s just something that’s endemic to society,” he said. “Insurance companies will quickly say, ‘we don’t think (coronavirus is) covered.’ … Get out your insurance policies.” According to LBW’s Like, it’s rare for business interruption policies – also called loss of income or business income policies – to be issued alone. They normally come as part of a business insurance or property package that covers a number of risks under one umbrella. The primary trigger for these packaged policies, Like said, is “direct physical loss or damage to property,” which applies if, for example, a fire burns a building down or a flood weakens the structural foundation. Preventative closures due to a viral or bacterial outbreak, then, don’t directly apply. However, business insurance packages sometimes include a civil authority provision that kicks in when a government entity such as a city, fire department or state agency denies access to a business’ property or forces a business to stop operating. For L.A. restaurants, bars, clubs and entertainment venues, L.A. Mayor Eric Garcetti’s executive order to close for at least two weeks checks that box. So does that mean businesses are covered under the civil authority provision? For many, exclusion clauses still mean their claims won’t be covered, Like said. However, “(LBW is) telling our clients to put the claim in anyway if they think they’ve been damaged,” she said. “Every policy reads different.” If a policy has vague wording or doesn’t specifically exclude viruses, a court could decide the carrier is responsible and must pay out a claim. If a claim is covered, the payout would be calculated based on the business’ income forms and past revenues for the months in question. Like added that certain policies, particularly for entertainment or event-related clients, include a marginal sublimit, or maximum payout, for claims related to communicable diseases or viruses. In times of crisis, carriers and brokers share the understanding that it is better to file a claim than not, even if a policyholder isn’t sure it has coverage. “All carriers are saying file the claim and we will underwrite it,” Simpson said. “It doesn’t hurt to drive it through,” Like added. Both Simpson and Like said the outlook could change dramatically if the government decides to intervene. New Jersey’s Department of Insurance, for example, is considering a controversial bill that would require carriers to pay all business interruption claims related to coronavirus despite written exclusions in policies. In California, the Greater San Fernando Valley Chamber of Commerce has organized a coalition of about 60 chambers throughout the U.S., about two-thirds of which are from California, urging their state insurance departments to pass extraordinary emergency actions that would mandate carriers to offer at least some level of coverage. “Small businesses need funds right now to stay afloat,” said Chamber Chief Executive Nancy Vanyek. At press time, though, the California Insurance Department’s only order was for health insurance carriers to waive all out-of-pocket costs for coronavirus testing for their policyholders. Workers’ compensation Another way insurance companies could end up shouldering the outbreak’s economic fallout is workers’ compensation. “If an employee, while in the course of business, contracts coronavirus … you have a possible claim,” said Like. Simpson said most carriers are likely to cover worker’s comp claims if two or more people from the client’s workplace contract the virus. “Workers’ compensation is the most lenient coverage we have,” she said. “(An employer has) to disprove that the virus came from the workplace. … They’re going to be held responsible and they’re going to pay out.” LBW’s Like said it’s too early to see what full effect the coronavirus outbreak will have on the insurance industry. But even at this stage, she said, it’s safe to predict premiums will rise. “Before all this happened, certain areas in the marketplace hardened – property coverage due to the fires and so forth. Auto insurance has hardened because people are getting in more accidents because of texting. … It’s been going on for a few months,” Like explained. Now with even more risk and less cash on hand than usual, she added, expect premiums to go even higher.