If your hotel has been forced to close due to the outbreak of the novel coronavirus (COVID-19), you might be thinking about turning to your commercial property insurance to help you cover your losses. After all, the reason you have insurance is to pay for losses due to unforeseen threats to your business’s survival. However, insurance matters are rarely straightforward, and this is no exception.
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At first glance, business interruption coverage would appear to be an easy claim to file for the COVID-19 crisis. After all businesses were forced to close down for a period due to no reason of their own and therefore coverage should be afforded. Many insurance companies, however, have already begun to signal their intent to deny pandemic-related claims.
What Is Business Interruption Insurance?
In many states, first-party commercial property insurance policies typically include coverage for decreased or lost earnings due to a covered peril that necessitated suspending business operations. In other words, if you have to shut down your business because of a covered peril, such as a fire, your insurance company will cover your fixed costs and profit loss during the time it takes to repair or restore your property.
This business interruption coverage may be included in an endorsement in your commercial all-risk property insurance, or it may be a separate, standalone policy. Whatever the case, the loss of earnings has to have occurred due to the suspension of business that resulted from a covered cause of loss, and insurance companies usually require direct physical damage to covered property for this type of coverage to apply.
This might seem clear cut but determining what constitutes “direct physical damage” is not always easy. For example, if a business closes its doors because the building it’s housed in is on the verge of collapsing, can the resulting loss of profits be interpreted as a loss due to direct physical damage? The damage has not yet occurred, but the threat of damage is very real. In cases like this, ambiguities arise that may be applicable to the current situation.
COVID-19 and Business Interruption Insurance
Since it appears that the existence of COVID-19 in a commercial environment poses a direct threat to employees, customers and the business itself, we might be tempted to conclude that it constitutes direct physical damage. Again, however, the applicability of the concept of direct physical damage to the existence of the virus in a particular context is not straightforward.
To analyze the applicability of the concept of direct physical damage, we have to answer questions about the effect of the virus’s presence on a business. Does the virus’s presence mean that the business is inoperable, or the physical property is uninhabitable? Perhaps not, since the environment could be sanitized. Does the fact that people who came in contact with the virus at a place of business became infected mean that the business must close and therefore suffer losses? Again, perhaps not.
Another thing to consider is that your insurance policy most likely has exclusions for pollution and contaminants that could be interpreted to exclude coverage for losses due to a virus. In addition, even if viruses are not explicitly included in the exclusions, your insurance carrier could hold that they are indeed a pollutant.
The Insurance Industry’s Statement on Business Interruption Coverage
The response of four national insurance industry organizations’ leaders to a letter from a bipartisan group of U.S. House members provides guidance on this issue. The representatives argued that COVID-19 related losses should not be included in business interruption coverage. The insurance industry leaders responded in no uncertain terms, saying: “Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”
Here’s what we still don’t know, though: Does this “decree” apply to all business interruption policies? Will there be special instances of applicability? Will different insurance companies apply different criteria in determining applicability? Will the courts side with insurers on this issue?
What Hotels Should Do Now
To get answers to your questions about business interruption insurance, you should have an experienced insurance claim attorney examine your policy. Like the industry organization leaders who responded negatively to the congressional representatives’ request, your insurance agent and insurance company representatives might quickly tell you your business is not covered for COVID-19 related losses. However, there might still be situations in which filing and litigating a claim might makes sense. Consider connecting with a qualified insurance attorney in your state who can closely and carefully analyze your policy, looking for specific ambiguities or omissions that could allow for coverage. As hotels look to the future of travel, exploring all of your available insurance options can provide both short-term relief and ensure your hotel’s long-term recovery from the COVID-19 crisis.
Imran Malik is the founding member of Malik Law in Orlando. He can be reached at [email protected] or 407-527-0217.