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Covid-19 & Small Business: Business Interruption Insurance

Covid-19 And Small Business, Business Interruption Insurance

What is Business Interruption Insurance?

Business interruption insurance is commercial property insurance that covers income losses and other expenses, like operating expenses and payroll, if a business is forced to close due to physical loss or damage by a covered risk in the policy.  For example, if a fire destroys a business’ property, this type of insurance covers lost income and any additional expenses while the store is closed.

Litigation and the COVID-19 Pandemic

Due to the shutdown of nonessential businesses during the COVID-19 pandemic, many of these businesses turned to their business interruption policies as a lifeline to keep them afloat.  Unfortunately for these businesses, insurance carriers around the country have denied coverage for business interruption claims related to COVID-19. This prompted businesses to file lawsuits against their carriers for coverage. Chicago businesses such as  Billy Goat Tavern and Lettuce Entertain You Restaurant Group are among those who have filed. In their denials of the claims, insurance companies argue COVID-19 has not caused any direct physical damage or loss to property and is thus not covered under the business interruption policy.

How are the courts ruling?

Courts throughout the country have begun to issue rulings in these matters in the recent months. The vast majority of rulings have either dismissed the complaints or ruled in favor of the insurance carriers on summary judgment.  In many cases, the plaintiffs failed to allege COVID-19 caused direct physical damage and loss to their premises and property. Instead, they alleged the shutdown orders limiting in-person dining satisfied the physical loss requirement.  The courts have found these pleadings inadequate.

However, a case in the U.S. District Court for the Western District of Missouri was recently been allowed to proceed to discovery after the judge ruled in favor of the policyholders in a motion to dismiss, finding the businesses adequately alleged they suffered a physical loss to the premises and property as a result of COVID-19.  In Studio 417, Inc. et al. v. The Cincinnati Insurance Company, Case No. 20-cv-03127, the plaintiffs – operators of hair salons and restaurants – alleged it was likely that people infected with COVID-19 entered and infected the premises.  They further allege that COVID-19 is a physical substance that lives and is active on physical surfaces making it unsafe and unusable, resulting in direct physical loss of the property.  Like the many insurance carriers in their position, Cincinnati Insurance argued that there must be tangible or structural damage to property to satisfy the physical loss or damage requirement.

The court disagreed.  The court ruled in favor of the businesses, highlighting that the contract language provides coverage for physical loss or damage, and it must give meaning to both terms.  Relying on the definition of the term “loss” – defined as “the act of losing possession” and “deprivation” – the court ruled that the businesses provided sufficient allegations of the physical presence of COVID-19 at the premises, rendering the property unsafe and unusable, and therefore, satisfying the direct physical loss requirement of the policy.  It should be noted that there have been no rulings made on the merits of this case.  However, we will be following this case throughout litigation process, and encourage others to do the same, as it could provide hope should these businesses survive summary judgment and emerge victorious at trial in their fight to secure coverage

This case highlights the importance of sufficiently pleading and establishing direct physical loss to a business’ insured premises for businesses interruption claims.

Other Avenues of Recovery – State Legislation

The continued denial of these business interruption claims will undoubtedly prevent many businesses the ability to survive this pandemic.  Not only will this affect those businesses and business owners, but the communities in which they reside.  Some state legislatures have begun to take notice and introduce bills that, if passed, would force many commercial property insurers to provide retroactive coverage to these business owners for losses resulting from the COVID-19 pandemic.  California, Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, South Carolina, and the District of Columbia have all introduced a version of this legislation, although none of these bills have yet to become law.

While these bills offer a glimmer of hope to business owners across the country, they would also, if passed, undoubtedly create new legal challenges that would have to be litigated in a court of law.  For one, these bills would unilaterally change the terms of existing contracts, which could be a potential violation of the contracts clause, among other potential applicable clauses, in the U.S. Constitution.

Despite the potential hurdles, policyholders should be prepared in the event these proposals become law, and take proactive measures to collect any evidence supporting their loss claims, including tax returns, bank statements, expense reports, and any other documentation that demonstrates the finances of the business before and after the mandatory shutdown orders.

Business Interruption in Illinois

Governor J.B. Pritzker has recently rolled out his plan to help struggling Illinois businesses through the Business Interruption Grant (“BIG”) program.  In August, State officials awarded $46 million in grants to over 2,600 small businesses throughout the state, with each grant between $10,000 and $20,000.  These first set of grants were aimed towards businesses most severely impacted by COVID-19 and looting since the first shut down orders in the spring.  In September, Governor Pritzker made an additional $220 million available for Business Interruption Grants.  The State began accepting applications for these grants on September 17, and will continue to do so until all funds are exhausted. Click here for more information regarding BIG, including how to apply.

Should Businesses Continue to Pay For Business Interruption Coverage?

Many frustrated, struggling, businesses owners wonder whether or not they should drop their business interruption insurance as a cost saving measure.  Business owners should be aware that due to the uncertainty of whether business interruption insurance covers losses due to the current pandemic, insurance carriers are reluctant to bind or offer new commercial insurance policies with business interruption included.   As a result, it may be extremely difficult to secure a new business interruption policy in the future.

We are living in unprecedented times.  The ongoing litigation and legislation pertaining to business interruption insurance coverage will have far reaching effects on the U.S. economy, shaping the insurance industry, and determining whether businesses across the country will be able to survive this pandemic.  We will post updates periodically on these issues whenever noteworthy decisions on litigation or legislation have been made.

If your business has been denied coverage, you should contact an experienced small business litigation attorney to discuss the options available to you.

Authored by: Jack Carmody, Associate

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