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

According to The Organization for Economic Cooperation 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.

While most Central Pennsylvania businesses don’t need to be concerned about slower global growth, economic effects are already being felt at the local level:

  • School closures affect sandwich shops, delicatessens, pizzerias, frozen yogurt shops and any other business depending on student traffic. HACC, Millersville, Kutztown, Thaddeus Stevens, have already cancelled in-person instruction. 
  • Restaurants, coffee shops, diners and catering facilities are feeling the pinch as erstwhile patrons eat at home or rethink celebratory events. 
  • Both Main Street and mall-based retailers, who are already under severe duress due to online shopping alternatives, have seen foot traffic decrease.
  • Any local manufacturer, building contractor or assembly plant with a supply chain stretching to China, Italy and elsewhere is already experiencing, or will soon experience, a shortage of components.
  • Mass and private transportation systems are experiencing revenue shortfalls as passengers stay home.
  • Bowling alleys, movie theaters and other places of public assembly are learning to live with empty lanes and seats. Houston, San Francisco and Seattle have all banned mass gatherings. Ohio has banned indoor mass gatherings.
  • Schools, charitable organizations and trade associations either are or will be minus critical revenue due to cancelled events.

Forward thinking businesses and organizations have already anticipated risks attributable to collateral events such as COVID-19 through two types of insurance coverage: business interruption and contingent business interruption insurance. 

Business interruption insurance (also known as business income insurance) covers the loss of income a business suffers following a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster. Operating expenses, a move to a temporary location, payroll, taxes and loan payments will also be covered.

Contingent business interruption insurance takes effect when a company’s supplier unexpectedly ceases operations.

Unfortunately, few of these forward-thinking businesses and organizations will be covered for losses attributable to COVID-19 unless the COVID-19 event gets larger and results in the Governor or Mayor or other jurisdictional authority prohibiting travel or other interactions with your fellow human beings. Depending on the particular carrier and coverage negotiated, Acts of Civil Authority may then become part of an insurance solution.

Here’s why you may not be covered:

Companies purchase business interruption insurance as part of their property insurance policies. When a business is unexpectedly forced to cease operations due to external events, the insured company receives a cash payout from carriers to replace lost revenue. 

Because COVID-19 has caused quarantines resulting in overseas factory shutdowns, broken supply chain links and disrupted business activity for international, national and local businesses, you might expect insurance coverage to become effective.  This is where it gets complicated, though: 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, none of this will be the result of physical damage. It is as if there had been a phantom event, and physical damage is necessary to trigger a successful business interruption claim.  

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. Here, too, physical damage is necessary to trigger a successful contingent business interruption claim.  

While business interruption and contingent business interruption coverage may not transfer risks caused by COVID-19, they remain 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.
  • 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 kmcpoyle@kmrdpartners.com

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