By Eric McGraw, CPA, Senior Tax Manager
As the world continues to suffer from the Coronavirus, the extensive restrictions imposed by various levels of government have had a dramatic impact on the business community. Many businesses have been forced to suspend or severely restrict operations, with severe consequences for both business owners and their employees.
While few people could have anticipated the effects of Covid-19, business owners as a group are highly aware of the many risks faced by their businesses, including the unknown. Because of this, some businesses have paid for business interruption insurance policies. Policies that many believed were a type of umbrella insurance that would cover any interruption to their business activity. However, many insurance companies have refused to pay, taking the general position that these policies only pay out when damage to property has occurred.
Comments from the Texas Department of Insurance:
Business interruption insurance generally covers financial losses due to property damage that prevents a company from doing business. A related product is contingency business interruption insurance, which covers indirect losses when suppliers or customers are affected. However, these coverages are usually based on direct physical loss of or damage to the property, which an epidemic may not trigger.
Some business interruption and business insurance policies are issued by surplus lines insurance companies. Surplus lines companies are required to settle claims promptly. However, they are generally not subject to state regulation. TDI doesn’t review surplus line policies or rates.
Read your policy language carefully and talk to your agent to see what might be covered:
- For a business that does have contaminated tangible property, then that contamination may qualify as direct physical loss of or damage to the property.
- Some business interruption policies extend coverage for “civil authority” orders that restrict access to the property or area that the business depends on for its operations.
- Some policies exclude epidemics and pandemics.
Event cancelation insurance covers economic losses due to unforeseen cancelation of a special event. Covered causes of loss are typically those that physically cause the event to be canceled. If the policyholder voluntarily cancels—even for a reasonable concern such as a communicable disease—the policy may not pay. Policies vary so it’s important to read the policy and check with your agent. Some policies exclude epidemics and pandemics. Some would only cover coronavirus if a communicable disease endorsement was added.
General liability insurance could cover bodily injury claims from third parties for harmful exposure or failure to guard against the risk of exposure to the virus. There could be exclusions for epidemics, pandemics, or communicable diseases.
Workers’ Compensation pays for medical bills and some lost-time income for employees who have been injured or contracted an occupational disease as a result of their employment. Claims are reviewed on a case-by-case basis to determine whether the exposure to a virus occurred in the course and scope of employment instead of a disease that the general public is exposed to outside of employment.
It is not difficult to understand why insurance companies are reluctant to pay Covid-19 related claims. David A. Sampson, a spokesman for American Property Casualty Insurance Association (APCIA), has estimated that claims on these types of policies would be as high as $430 billion per month.
As one might imagine, an intense battle between insurers and the insured has broken out in courts and legislatures all over the country. Lobbying groups from both sides are locked in a struggle to influence the outcome. At the national level, little action has occurred thus far. A bill (H.R. 6494) has been introduced by Mike Thompson, a Congressman from California, that would require insurers to include coverage of pandemics in business interruption policies. However, this bill would not retroactively apply to COVID-19 related claims.
Meanwhile in Texas, the first lawsuit related to this issue was filed by Barbara Lane Snowden DBA Hair Goals Club against Twin City Fire Insurance Company (a Hartford company) in Harris County (Houston) on March 26, 2020. The case is straightforward. Hair Goals Club paid for business interruption insurance and has suffered economic damages due to a stay-at-home order issued by government officials. Twin City Fire Insurance Company has refused to pay out for the claim. The case is undecided at this point.
Whether your insurer is working in good faith on your claim, or you anticipate legal action, we at ADKF are here to assist you. Our firm can quickly perform the initial calculations required by analyzing historical data and interviewing key personnel. We will work diligently with you and your team throughout the claim or legal process. If you are a current client of our firm, please contact your service team to begin this process. If you are not yet a client of our firm, we would be delighted to conduct an initial consultation at no charge.READ MORE