The full extent of the economic impact of the Covid-19 pandemic is yet to be determined, but many Massachusetts businesses are already suffering. Those businesses may have insurance coverage available to help them survive this unprecedented economic disaster. Unfortunately, however, insurance companies are already outright denying claims, often wrongfully, and may be exposing themselves to substantial lawsuits and verdicts for engaging in unfair and deceptive business practices.
What is Business Interruption Coverage?
Most commercial property insurance policies provide coverage for business income loss by adding an endorsement to the insured’s property policy. This endorsement is designed to protect the insured for losses of business income it sustains as a result of direct loss, damage, or destruction to insured property by a covered peril. Although many such clauses are in use today, a typical business income insurance clause reads as follows:
“We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
In order to better understand business income insurance let’s explore the three terms highlighted above:
Actual Loss: Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy.
The insurer is only obligated to pay if the insured actually sustained an interruption of business leading to a business income loss. If the insured does sustain a business income loss, the extent of the insurer’s obligation is limited to the dollar amount of loss actually sustained, but not to exceed the applicable policy limit.
Business Income: Usually, the insurance carrier is liable for the reduction in net income that results from suspension of operations—whether wholly or partially—due to a physical loss at the insured’s premises. The following commonly used definition of “business income” is intended to clarify what sums can be included when calculating the amount of loss:
“Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
Let’s take a logging company for example. A logging company with a successful business interruption claim would be reimbursed for lost profits, payroll costs, and rent so long as the company continued to pay those costs during the period of interruption. However, they would not be reimbursed for expenses not incurred during the period of interruption. In this example, if the company normally spent $10,000.00 per month on fuel to ship logs but was not shipping logs during the period of interruption, those fuel costs would not be reimbursable under the policy.
Period of Restoration: Insurers are liable for the loss of business income only during the “period of restoration”, which is often defined as the length of time required to rebuild, repair, or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced.
Expiration of the policy does not end the period of restoration. As long as the physical loss occurs during the policy period, the business income coverage will provide coverage for the duration of the period of restoration, even if the policy expires before the period of restoration ends.
The business income endorsement published by the Insurance Service Office (ISO)—as well as some insurer forms—includes a 30-day extended period of restoration beyond the standard period of restoration (the period from the time of loss until the time of repair or replacement).
However, the insured may require more than this 30-day limit. To address this issue, an insured may elect to increase this limit from 30 days to any multiple of 30 days up to 720 days. This is accomplished by purchasing the extended period of indemnity optional endorsement offered through ISO.
Other Types of Coverage for Damage to Property Under a Business Income Policy Endorsement
In addition to coverage for business income, the business income endorsement of the property policy can provide other coverages, known as “additional coverages.” An example of an “additional coverage” is extra expense, which is detailed below.
- Extra Expenseis defined as the necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril.
Note that when a business income loss occurs, the insured is obligated to take reasonable steps to try to avert or minimize such loss: Any expenses incurred to reduce the loss are covered as part of the business income loss. The insurer will typically limit such expenses to the point that such expenses reduce the business income claim. In other words, the insurer will not pay any part of the expense that is more than the claim itself.
For example, the insurer will reimburse the insured $100 to reduce the claim by $200; but the insurer will not reimburse the insured $100 if the claim is only reduced by $50. Any additional expenses above this that are incurred to continue the business may be recoverable under an extra expense provision in the insurance policy.
Additionally, the business income endorsement section of property policies can include “extensions of coverage,” wherein the insured’s policy will insure against business income losses resulting from a variety of causes, including the following. (Note a sub-limit typically applies for these optional, additional coverages.)
- Service Interruption provides coverage for an insured for direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations, and equipment of suppliers of such services.The owners, managers, or operators of such utilities or services cannot be a named insured under the policy. The loss, damage, or destruction at the location of the utility or service must be the result of a peril(s), similar to the peril(s) covered under the insured’s policy. Note that the policy may impose some limitations, such as:
- Limitations regarding distances (such as where the actual loss occurs to the utility’s property in relation to the insured’s premises where the business income loss occurs).
- Exclusion for certain perils such as earthquake.
- Exclusions for overhead transmission and distribution lines.
- Contingent Business Interruption (CBI) coverage is designed to cover an insured’s business income loss resulting from loss, damage, or destruction of property owned by others, including: direct “suppliers” of goods or services to the insured and/or direct “receivers” of goods or services manufactured or provided by the insured. The property damage to these suppliers or receivers must be of a type that would be covered by the insured’s policy had the damage happened to the insured’s property.As noted, CBI coverage provides coverage for the “direct” relationship between the insured’s “suppliers” or “receivers” of its goods or services. This can create a gap in coverage for insureds involved in multi-tiered supply chains.For example, consider that a supplier or customer of one of the insured’s direct suppliers experiences a loss resulting in an interruption to its operations, which in turn causes a disruption to the insured’s direct supplier/customer. Ultimately, this also causes a business income loss to the insured. Its policy will likely exclude coverage for this business income loss as the insured’s direct supplier did not experience direct physical damage/loss.
This coverage is typically added to a property policy by endorsement if requested by the insured. Commonly, the suppliers of the direct supplier—known as the “indirect” suppliers or “receivers”—must be identified.
- Leader Property is an endorsement that provides coverage to the insured for direct physical loss, damage, or destruction of the type insured by the insured’s property policy to property not owned or operated by the insured, but that is located within the stated distance to the insured’s property or business, and which attracts business to the insured. Examples would include a nearby amusement park, casino, mall, or destination retail store.
- Virus and Bacteria Exclusions. Some insurance policies contain Limited Fungi, Bacteria or Virus Coverage. This coverage endorsement can either exclude or limit losses caused by a virus. Many insurers use a form of this endorsement in the policy itself. For example, a “virus exclusion” would “not pay for losses or damages caused directly or indirectly by…bacteria or virus.” As an excluded peril, this endorsement would exclude any claim for business income under the policy. Other policies require surcharge premiums for this coverage, but contain sub-limits.
Coverage for Business Interruption Due to Civil or Military Authority
Interruption by civil or military authority coverage is provided to the insured for the actual loss sustained by the insured during the length of time when access to such described premises is specifically prohibited by order of civil authority as a direct result of damage as insured against in the insured’s policy, to covered property on the described premises or property adjacent to the premises described in the insured’s policy.
The coverage time period most commonly stated in this endorsement is either 14 or 30 consecutive days. The insurance carrier may also impose a waiting period that must be reached in order for coverage to attach. Common waiting periods are 24 hours, 48 hours, or 72 hours.
The language of Governor Baker’s order closing businesses in Massachusetts during the Covid-19 pandemic tends to suggest that businesses with interruption by civil or military authority should be covered, at the very least, for the prescribed period of coverage in the policy.
What Obligations Do Insurance Companies Have?
The Duty to Act in Good Faith
Under Massachusetts laws, insurers are required to handle claims “in good faith.” Legally, this is referred to as the insurer’s duty (or obligation) to act in good faith. Violating the duty of good faith by improperly denying claims, refusing to investigate claims, or causing undue burden on the insured in the claim handling process can be a violation of law and is commonly referred to as “unfair and deceptive business practices.”
Businesses do have recourse if their insurer engages in unfair and/or deceptive business practices by failing to investigate, causing unnecessary delays, or outright improper denial of a business interruption claims. Lawsuits brought pursuant to Massachusetts General Laws Chapter 93A and Chapter 176D entitle businesses to treble damages, costs, and attorney’s fees, if the insurer is found to have violated their duty of good faith. That means if the insurance company improperly refused to pay a claim for $100,000.00, they could be forced to reimburse the business $300,000.00. The insurance company would also be forced to pay the attorney’s fees and costs incurred by the plaintiff.
While some insurance companies are standing tall during the pandemic, many others are wrongfully abandoning their business customers. Many business owners are reporting that their business interruption claims are not covered under their policies, however, that may not necessarily be true in every case. For policy holders with virus and bacteria exclusions, the business is very likely still entitled to at least some coverage under the Civil Authority clause.
Additionally, policy holders with no virus and bacteria exclusions have reported that their claim has been denied because they cannot prove “actual damage” to their property. In these instances, the insurance company is often taking advantage of the policy-holder who, most likely, does not have the necessary legal expertise to present an insurance claim that establishes sufficient evidence to support the claim. There are many instances where courts have defined “actual damage to property” expansively. For example, “actual damage to property” covered a business forced to close due to smoke from forest fires because even though the business itself suffered no physical property damage, the smoke was so potentially dangerous that the business could not safely operate. The Covid-19 pandemic is similar.
Pending Massachusetts Legislation
The Massachusetts legislature has proposed a bill (which has not yet passed) to try and prevent the insurance industry from wrongfully denying business interruption claims. The Massachusetts bill — S.D. 2888 — if passed would explicitly mandate coverage, even in the face of unambiguous policy language:
“[E]very policy of insurance insuring against loss or damage to property, notwithstanding the terms of such policy (including any endorsement thereto or exclusions to coverage included therewith) which includes, as of the effective date of this act, the loss of use and occupancy and business interruption in force in the Commonwealth, shall be construed to include among the covered perils under such policy coverage for business interruption directly or indirectly resulting from the global pandemic known as COVID-19, including all mutated forms of the COVID-19 virus.”
Moreover, no insurer in Massachusetts may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property.
Section 1(a) (emphasis added).
The Massachusetts bill also states that “the coverage required by this section shall cover the insured for any loss of business or business interruption until such time as the emergency declaration issued by the governor, dated March 10, 2020, and designated as executive order number 591, is rescinded by the governor.” Section 1(b).
Insurers wouldn’t be liable for any payments beyond the “monetary limits of the policy,” and would be subject to “any maximum length of time set forth in the policy for such business interruption coverage.”
The Massachusetts bill would apply to policy holders with “150 or fewer full-time equivalent employees” in Massachusetts. Section 1(c).
Finally, “[f]or the avoidance of doubt,” the Massachusetts bill explicitly requires insurance companies that are making these mandatory payments to comply with Massachusetts General Laws Ch. 176D, which among other things, “provides a list of acts and omissions by insurance companies that constitute ‘unfair claim settlement practices.’”
This law is very aggressive and it is impossible to know at this time whether it will pass and, even if it does become law, it is impossible to know what changes, if any, will be made before it becomes law. There is no doubt that if the legislation passes, the insurance industry will challenge it in court. Legal analysts and scholars agree that it is impossible to predict how that legal challenge will be resolved. In any event, the only way to recover under a business interruption policy (no matter which type of policy and regardless of whether the pending legislation passes or not) must start with making a claim
How Do You File A Business Interruption Insurance Claim?
There is no doubt that the insurance companies are preparing to go to court over these claims in order to avoid fulfilling their obligations to business owners. The claims presentation process is absolutely critical to establishing that your business is entitled to coverage under your policy. The claims presentation process is also critical to proving that your insurance company wrongfully denied your claim, and in some cases, engaged in unfair and deceptive business practices.
Every claim should be carefully tailored to meet the requirements imposed by the specific terms in your insurance contract.
For claims with no virus or bacterial exclusion, each claim should establish sufficient factual and scientific evidence to establish that the Covid-19 virus does, in fact, pose such a danger to the business that it cannot operate. For those policies with bacterial and fungus exclusions, those provisions should be carefully scrutinized to determine if they are enforceable.
Every claim should also assert that coverage is available under the Civil Authority provision. Strong evidence to support the claim can be found in Governor Baker’s Order requiring that non-essential businesses cease operations.
Finally, every claim should set forth all actual and potential business losses (consistent with the definition of business income) and consequential losses.
Establishing each of these elements is critical to obtaining coverage and if the claim is wrongfully denied, will be critical evidence to establish that the insurer has engaged in unfair and/or deceptive business practices.
KJC stands with small businesses. We will review your policy and give you an opinion for FREE. We will make your business interruption insurance claim (in Massachusetts) for you for FREE. If your claim is denied we will, in appropriate cases, file lawsuits against the insurance company for bad faith on a contingent fee basis. In those case, our clients pay NOTHING unless we are successful in obtaining a judgment or settlement.