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COVID-19 and Business Interruption Coverage

What is Business Interruption Insurance?

The significant economic ramifications caused by the COVID-19 pandemic have called into question the applicability of “business interruption insurance,” which is usually part of a commercial property insurance policy. Business interruption insurance protects a business from losses incurred as a result of its inability to continue normal operations and functions under a prescribed set of circumstances. Relatedly, “contingent business interruption insurance” provides protection from economic losses stemming from certain disruptions to the business’s suppliers and/or customers.  While the scope of these policies’ coverage varies significantly depending on the contract language, covered losses may include loss of earnings and additional expenses.

Is Business Interruption Coverage Triggered by COVID-19?

It is important to have an attorney closely analyze these policies, as coverage under many policies is only triggered where there is direct physical damage to, or destruction of, any insured business property.  Because Arizona courts usually interpret insurance policies in accordance with their plain and ordinary meaning, insurers may argue that business interruptions resulting from COVID-19 do not trigger coverage because of a lack of actual physical damage to the insured property.  Conversely, the lack of such a physical damage provision could significantly expand the scope of potential coverage.

Another important policy-specific consideration is what constitutes a “business interruption.”  In some policies, coverage may only be triggered when there has been total cessation of business, while in others coverage may be triggered by a slowdown or a significant reduction of business capacity.  Depending on the insurance policy language, changes in business caused by governmental order and/or action may suffice.  Policy language may also specifically exclude certain occurrences (e.g., civil disturbances and power service failures) or only cover certain business functions, locations, and the like.  Each of these factors is important in determining a business’s rights under its respective policy, and thus requires careful review and analysis by a competent attorney.

What Steps Should Businesses Take?

To expedite the analysis process, businesses should obtain complete copies of all potentially applicable insurance policies.  Usually, business interruption and contingent business interruption insurance policies are purchased as part of a business’s commercial property insurance policy.  Next, businesses should engage an attorney skilled in review of insurance policies to ascertain the scope and terms of any business interruption provision or endorsement, as well as any requirements for coverage to be triggered.  For as is the case with force majeure clauses, business interruption policies may have stringent notice and reporting requirements, which must be adhered to in order to trigger coverage.

It is prudent for businesses to keep detailed records of the causes of business interruption, as well as the nature and amount of attendant costs.  These proactive steps will significantly decrease a company’s costs in seeking coverage payments and should improve the chances of greater recovery under an applicable business interruption policy.

 

Disclaimer: This article is designed for general information only.  The information presented herein does not constitute legal advice or the formation of a lawyer/client relationship.