Business Interruption Insurance

A common question for SCORE mentors these past few days has been in response to some information put out by some of our Nation’s leaders that have suggested that if a small business has a business liability policy they may be covered for “business interruption” if they lose business during this Coronavirus pandemic emergency.

All of this will certainly mean serious financial hardship for small business owners. An add-on insurance called “business interruption” may help—"but this is the exception, not the rule” cautions Drake Forester, Legal Strategy Officer, Northwest Registered Agent as he blogs on SCORE’s website.

Forester explains that countless businesses across the nation are experiencing disruptions due to stalled supply chains, decreased consumer demand, absent employees or travel restrictions. If your business insurance policy includes a type of coverage called business interruption (BI), you may be looking to this policy for financial assistance.

Unfortunately, most small and medium-sized businesses are unlikely to find relief through their existing BI insurance. That said, there are some exceptions. Whether your claim is accepted will depend largely on your policy’s specific terms and conditions.

Why isn’t BI coverage automatically triggered by the current crisis?  According to Forester, following the SARS outbreak in 2003, insurance companies across the world revised their business interruption policies to exclude lost revenue due to communicable diseases. This means that—in order for you to make a successful claim—your BI policy would probably need to contain a pre-negotiated communicable disease provision. Additionally, most BI claims are triggered by quantifiable physical damage to the insured place of business, and the damage caused by contagious diseases can be difficult to quantify.

Some CEOs have explained that “my place of business is uninhabitable due to coronavirus—does this constitute physical damage?  The answer according to Forester is that It depends”.  BI policies cover the interruption that occurs when a property is damaged or lost due to a fire, hurricane or other natural disasters. But judges in various jurisdictions have ruled that when a business becomes contaminated or otherwise “uninhabitable,” the resultant loss of use of that business constitutes physical damage. If an outbreak forces you to close and/or sanitize your business, you may be able to argue that physical damage has occurred. This will depend on the generally agreed-upon definition of physical damage in your jurisdiction, and also on whether your policy’s wording specifically excludes communicable diseases—which would render such a claim null.

To find out if your BI insurance coverage applies to the impact of the coronavirus outbreak on your business, you’ll need to carefully review the wording of your current policy. Thorough documentation of your financial losses is essential. If your policy does not have an addendum that specifically excludes communicable diseases, it’s worth contacting your insurance provider to find out if you qualify for any financial relief.

We suggest that you plan for the future now.  If your business is in financial straits it may be difficult to think beyond staying afloat for the next few months. However, planning ahead can help your business become more resilient and better able to weather a future crisis.

When the time comes to renew your insurance policy, think about purchasing a contingent business interruption provision that covers communicable diseases, if this is financially feasible for your business. If your provider does not offer a contingent business interruption add-on, consider shopping around until you find a provider that does.

About the Author(s)

Dean Swanson

Dean is a Certified SCORE Mentor and former SCORE Chapter Chair, District Director, and Regional Vice President for the North West Region, and has developed and managed many businesses. The Rochester Post Bulletin publishes his weekly article on a topic geared toward the small business community. The articles here are printed in their entirety.

Certified SCORE Mentor for the Southeast Minnesota Chapter
Will Business Interruption Insurance Help Small Businesses in this Crisis?