Business Interruption Insurance Lawyers 

While these measures may be necessary to protect public health, they have devastated large and small businesses alike. Many business owners are looking to their insurance policies to help cushion the financial loss. If you are a business owner, a business interruption policy may provide you the financial relief you need. The area of insurance law is complicated, however, and it can be difficult to understand your policy’s language. These frequently asked questions are intended to guide you through the complexities of your insurance policy and explain your rights to reimbursement for COVID-19 losses. This information is not a substitute for seeking legal counsel. It is best to consult an attorney to review your policy’s language, the facts of your case, and your state’s laws.

FAQ’s Regarding Business Interruption Insurance

Q: What is business interruption insurance?

A: Business interruption insurance, also called use and occupancy insurance, or business income insurance, is a type of coverage typically included in commercial property insurance policies. The purpose of business interruption insurance is to protect business owners from lost profits incurred while they are unable to continue normal business operations. If the interruption is caused by a covered peril, the business owner is entitled to the income they would have earned without the interruption and continuing expenses incurred during the interruption. Continuing expenses are expenses that do not change during a business interruption. They include rent, mortgage payments, payroll, taxes, insurance premiums, and interest on debt.  However, non-continuing expenses, such as the salaries of hourly workers, employment taxes, and some utilities, are not covered in business interruption policies.

Q: Do I need to have a specific business interruption policy to get coverage?

A: All business interruption policies provide some reimbursement for a covered business interruption. However, the amount of money a business can recover depends on the type of policy. Business interruption insurance policies typically provide three levels of coverage.[1] The most basic business interruption policy will provide coverage for loss of net income plus continuing expenses during a business interruption. Extra expense coverage pays for accommodations that are necessary to continue business operations during an interruption. Contingent business interruption insurance provides coverage beyond the insured property and reimburses lost profits incurred when the business’ consumer or supplier experiences a business interruption. However, the insured’s policy must cover the underlying cause of damage to the consumer or supplier.

Q: How do I know if I have business interruption insurance?

A: Business interruption insurance may be included as a clause of a commercial property insurance plan or a stand-alone policy. The policy will likely explain the extent of coverage, limit reimbursement to a specific time period, and exclude certain perils from coverage. However, policy language will differ, and it may be difficult to discern the extent of your coverage. Thus, it is best to review your policy with an attorney.

Q: Does the COVID-19 pandemic qualify for potential coverage under a business interruption policy?

A: It is unclear whether businesses can receive compensation for lost profits due to COVID-19 under a business interruption policy. Coverage will likely depend on whether your policy includes a contaminant exclusion, a court’s view on the physical loss requirement and civil authority clause, and the potential for legislation extending insurance coverage for COVID-19 losses in your state. Ultimately, an attorney will need to review your policy’s language, the facts of your case, and the case law in your jurisdiction to determine whether you qualify for coverage.

Contaminant Exclusion
The first consideration is whether your policy expressly excludes coverage for contaminants, pandemics, viruses, or infectious diseases. When interpreting exclusion clauses, courts will interpret clear language according to its plain and ordinary meaning. Thus, if a policy explicitly excludes coverage for viruses or pandemics, such as the policy in Meyer Natural Foods LLC v. Liberty Mutual Insurance Company, a court will likely bar coverage. However, a court is less likely to exclude coverage for COVID-19 under a pollution exclusion that merely includes “contaminants or irritants” in its definition. Courts have found such clauses ambiguous and construed them against the insurer. A close review of your policy will be necessary to determine coverage for viruses or pandemics such as COVID-19.

Physical Loss Requirement
If a contaminant exclusion is not present or does not apply, courts will likely consider whether COVID-19 constitutes physical loss or damage. Business interruption policies often require “direct loss of or damage to physical property” to qualify for coverage. A court’s interpretation of what constitutes “loss or damage” differs by state. Some courts have held that physical loss requires structural damage. In Universal Image Productions v. Federal Insurance Co., a court concluded that a mold and bacterial contamination was not covered in a business interruption policy because it did not cause structural damage. There were high levels of bacteria on the premises and an air quality expert even recommended the employees wear respirators. Regardless, the court refused to extend coverage, explaining that the insured failed to show evidence of structural damage.

Other courts have found that damage to a building is not necessary to satisfy the direct physical loss or damage requirement. A loss that renders a building uninhabitable is sufficient. For example, in Murray v. State Farm Fire and Casualty Co., a West Virginia court concluded that the “direct physical loss” requirement of a family’s property insurance policy did not require physical damage to their home. After a nearby rockslide threatened the family’s home and safety, they filed a claim under their property insurance. The insurance company denied the family’s property insurance claim because no “direct physical loss” had occurred. Although the rockslide had damaged nearby properties, the family’s home remained unharmed. The court, however, ruled in favor of the family. The court explained that the rockslide posed an imminent threat to the family’s safety and rendered their property uninhabitable. Consequently, the family experienced a “direct physical loss” as required by the policy, and the insurance company was liable.

Thus, coverage for COVID-19 related losses will likely depend on a court’s interpretation of physical loss or damage. Courts that require structural damage are unlikely to find COVID-19 losses qualify for coverage. While highly contagious, COVID-19 does not cause structural damage to buildings. Courts that do not require proof of structural damage, however, may find that COVID-19 qualifies for coverage because it poses a threat to public safety that renders buildings uninhabitable. Government-mandated shutdowns may provide sufficient proof that the threat of spreading COVID-19 renders business buildings uninhabitable. Accordingly, a business interruption policy may cover COVID-19 related losses. However, the determination of whether “loss or damage to physical property” has occurred under your policy will require a close examination of the policy’s language and the facts of your case.

Civil Authority Clause
A “civil authority” clause of a business interruption policy is another potential way to qualify for coverage. Under this clause, a business can receive compensation for damages incurred when the government prohibits access to their business. However, courts differ in their interpretations of civil authority clauses. Some courts interpret the clauses narrowly, finding that a civil authority clause only requires physical damage if explicitly stated. For example, in Sloan v. Phoenix of Hartford Insurance Co., a court concluded that a civil authority clause did not require physical damage. The government restricting access to the business was sufficient. A business owner filed a claim under his business interruption policy for lost profits incurred during a government-mandated curfew following the assassination of Martin Luther King. The insurance company denied the claim because the building was not physically damaged. Finding for the business, the court explained that a plain reading of the policy’s civil authority clause did not require physical damage to the insured property; the government restricting access to the property was sufficient. However, other courts have found that identical civil authority clauses required property damage. In fact, one of these cases involved the same MLK government-mandated curfew. The court interpreted the clause broadly, explaining that physical damage to property was a condition precedent to coverage for the entire policy. Thus, an express requirement for physical damage within the civil authority clause was not necessary.

Accordingly, coverage for COVID-19 related losses under a civil authority clause may depend on a court’s interpretation of the policy’s language. If the clause expressly requires physical damage, a court will likely enforce this language and require you to prove physical damage. As previously discussed, it is unclear whether COVID-19 will qualify. However, if the clause does not explicitly require physical damage, a court may find that it is not necessary to qualify for coverage. Under this interpretation, proof of the government restricting access to your business due to COVID-19 should be sufficient to qualify for coverage.

Proposed Legislation
Notwithstanding the implications of the policy language, members of Congress and some state legislators, including lawmakers in New Jersey, New York, Ohio, Louisiana, and Pennsylvania, have proposed legislation requiring insurance companies to cover COVID-19 losses under business interruption policies. Insurance companies strongly oppose the legislation, and it is unclear whether it will pass. However, if it does, business owners may receive reimbursement for their COVID-19 losses.

Q: What defenses may an insurance company have?

A: An insurance company’s best defense for denying COVID-19 business interruption claims is that COVID-19 does not constitute a physical loss or damage. The insurance company will likely urge a court to adopt a structural damage requirement for physical loss or damage. Under this standard, a court will likely find that COVID-19 losses do not qualify for coverage. However, policyholders can urge a court to adopt the more lenient standard for physical damage, which only requires a loss to render a building uninhabitable. COVID-19 losses will likely qualify for coverage under this standard. Thus, the merit of the insurance company’s defense will likely depend on a court’s standard for physical loss or damage.

An insurance company may also claim that the policy excludes coverage for damages resulting from contaminants, such as COVID-19. The persuasiveness of this argument depends on the clause’s specificity. If the clause expressly excludes viruses and pandemics, COVID-19 losses are unlikely to qualify for coverage. However, if contaminants are merely part of a broader exclusion clause, a court is more likely to find that COVID-19 losses qualify for coverage.

Q: What losses from COVID-19 may be covered under a business interruption policy or clause?

A: The extent of your coverage for COVID-19 related losses likely depends on the type of business interruption policy. Basic business interruption insurance will cover loss of net income and continuing expenses incurred during the interruption. Under this policy, you may be entitled to reimbursement for lost net income, rent, wages of salaried employees, or insurance premiums incurred during a government-ordered shutdown due to COVID-19. Extra expense coverage provides additional coverage, including the cost of continuing operations after a business’ property is damaged or lost. Under this policy, you may be entitled to the costs of altering your normal business practices to comply with COVID-19 restrictions. Contingent business interruption insurance, which provides the most coverage, reimburses policyholders for lost profits incurred during a customer or supplier’s business interruption. Thus, even if COVID-19 did not directly interrupt your business operations, you may still be entitled to compensation for lost profits.

Q: Are business interruption claims covered under a commercial general liability (CGL) policy?

A: A commercial general liability policy (CGL) is unlikely to cover a business interruption claim. However, it may cover third-party claims related to COVID-19. Commercial general liability provides coverage for third-party claims alleging bodily injury, property damage, or physical injury. For example, a CGL policy may cover customer claims alleging a company’s negligence caused COVID-19 exposure or infection. Additionally, CGL may protect a company from product liability claims – for example, a claim that a company’s air filtration system failed, causing COVID-19 exposure or illness.

Q: If I make a claim and my insurance company denies coverage, what are my options?

A: If an insurance company denies you coverage, you can file a bad faith claim. Every insurance policy imposes a legal duty upon insurance companies to act in good faith. The duty of good faith prohibits insurance companies from intentionally denying coverage or failing to fully pay claims without a reasonable basis for doing so. Therefore, if an insurance company wrongfully denies you coverage, they have violated their implied legal duty, and you can sue them for bad faith.

Q: What is a bad faith claim?

A: A bad faith claim is a claim that an insured can file against an insurance company for violating their duty to act in good faith. Bad faith claims arise from a breach of contract; however, the type of claim you can file depends on your state’s laws. Some states, such as Arizona, California, and North Dakota, recognize bad faith claims as a tort and breach of contract. Other states, including New Hampshire and New York, do not recognize bad faith actions as independent tort claims and only allow policyholders to sue under breach of contract. Alternatively, some states allow or require policyholders to sue for bad faith under a specific statute. Some examples include Florida, Georgia, Louisiana, Maine, Maryland, and Massachusetts.

Q: What are the elements of a bad faith claim?

A: The elements of a bad faith claim depend on whether the policyholder is suing under tort, breach of contract, or a state statute. When suing for a tort, the requirements for a bad faith claim will likely vary by state. Some states’ laws are more lenient for policy holders than others. For example, Arizona, Colorado, and California require a policy holder to prove that the insurance company knowingly and/or unreasonably denied, failed to process, or failed to fully pay the benefits of a policy.Alternatively, states such as Iowa, North Dakota, and Rhode Island define bad faith more narrowly and only hold insurance companies responsible for denying claims that are not “fairly debatable.”

States that only allow bad faith claims for breach of contract require policyholders to prove that the insurance company breached their implied contractual duty to act in good faith. When an insurance company fails to pay a covered claim under a policy, they have typically breached this duty. Thus, to succeed on a breach of contract claim, the policyholder must prove that the insurance company is obligated to pay under the policy and have failed to do so.

Alternatively, if a state has enacted a bad faith statute that includes a right to sue, the statute will dictate the elements of the bad faith claim. It is important to note that not all bad faith statutes include a right to sue. Thus, it is best to consult with an attorney to determine the elements of a bad faith claim in your state.

Q: What damages may I recover in a bad faith claim?

A: The types of damages a policyholder may recover in a bad faith claim also vary by state. Compensatory damages, or damages that compensate plaintiffs for the breach of contract, are always available. If a policyholder can prove that the insurance company acted in bad faith, they can recover the compensation set forth in the policy.

Depending on the state, policyholders may also recover consequential or punitive damages for a bad faith claim. Consequential damages reimburse plaintiffs for the reasonably foreseeable costs of the defendant’s breach of contract. For example, if a handyman did a poor job of fixing a leak in a house, and as a result, the house flooded, the handyman may be liable for the flood because it was a foreseeable consequence of his shoddy workmanship. In the insurance context, many states will require policyholders to prove that the insurance company contemplated liability for consequential damages when they wrote the contract. Nevertheless, courts have held insurers liable for consequential damages caused by late payments. In Bi-Economy Market, Inc. v. Harleysville Insurance Company of New York, the court explained that businesses purchase business interruption insurance with the expectation of receiving prompt compensation for a covered calamitous event. Insurers are fully aware of this expectation and are liable for the consequences of late payments. Thus, if an insurer fails to pay a covered loss under a business interruption insurance policy, and the business suffers as a result, the policyholder may be entitled to consequential damages.

Punitive damages aim to punish a defendant for their conduct and deter them from repeat offenses. Punitive damages are likely not available if your state only recognizes bad faith claims as breach of contract or prohibits punitive damages altogether (see for example, Nebraska). Most states, however, allow plaintiffs to recover punitive damages for bad faith claims if they can prove an insurer acted maliciously or intentionally. Ultimately, determining whether your case is a good candidate for punitive damages will require a close examination of the facts of your case, your insurance policy, and your state’s laws.

In special circumstances, courts may also grant damages for emotional distress. However, these damages are often reserved for especially egregious conduct, or where a plaintiff suffered “severe and substantial hardship” as a result of the denied insurance claim. For example, see Anderson v. Continental Insurance Co.and Pickett v. Lloyds.

Many states also allow the policyholder to receive compensation for attorney’s fees. Courts will sometimes require a policyholder to prove that the insurance company wantonly denied a claim covered in the insurance policy.

Q: Do I need to file a lawsuit to get covered?

A: You may not need to file a lawsuit to receive compensation under your policy. Sometimes filing a demand letter is enough to make the insurance company pay. A demand letter states your legal claim and informs the insurance company that you will pursue legal action if they do not timely pay the claim. If the insurance company still refuses to pay, then filing a lawsuit may be necessary.

Q: How do insurance companies and courts value a business interruption claim?

A: Business interruption insurance compensates business owners for the net income that the business would have earned without the interruption and the continuing expenses incurred. Business interruption insurance policies typically include a clause briefly stating how the insurance company will calculate a business’ lost net income. A common method is to use a business’ financial records from before the loss to estimate how the business would have performed had no loss occurred.

Insurance companies and policyholders commonly dispute whether to consider changed market conditions when calculating lost net income. Courts are split on this issue. Some courts interpret the valuation language to only include a business’ historical financial records. This approach, favored by the Fifth Circuit (the Federal Court system for Louisiana, Mississippi, and Texas), does not take into account changed market conditions after the loss. Policyholders can benefit from this interpretation because a slowdown in sales after a catastrophe will not affect their lost income recovery.

Other courts will allow an insurance company to consider post-catastrophe economic conditions. Ultimately, the court’s calculation will likely depend on the laws of your state and the particular language of your policy. Courts give deference to the language of the policy. Thus, if the policy unambiguously proscribes a certain loss income calculation, a court will likely uphold it.

It is also important to note that most business interruption policies will only provide coverage for net income and continuing expenses until the business should, with reasonable efforts, resume normal operations. Determining a reasonable time period to resume operations is a source of dispute between insurers and insureds and depends on the particular facts of the case. Ultimately, it is best to consult with an attorney to determine the value of your business interruption claim.

Q: What steps do I need to take to submit a claim under my business interruption policy?

A: Business interruption policies often require policyholders to provide prompt notice of a loss and submit a sworn statement within sixty to ninety days after the incident. Failure to follow these reporting requirements can provide the insurance company a basis for denying your claim. Most policies will also require policyholders to submit documentation to prove the amount of loss. Thus, it is imperative to keep track of all expenses and losses incurred and gather your business financial records. Insurance companies will likely request your profit and loss statements, production reports, monthly inventory, cost accounting reports, and invoices and purchase orders. However, an insurance company’s requirements may differ depending on the type of business and particular policy in question.

Q: How are lawyers that hale business interruption claims paid?

A: Lawyers are typically paid for business interruption claims through contingent fees. When a lawyer charges a contingent fee, they are paid a percentage of the money recovered in the action. Thus, if the lawyer loses the case and the client is unable to recover, the client does not have to pay anything besides potential court costs or fees. Contingent fee percentages vary depending on the facts of the case, the amount of work involved, and the chances of recovery.

[1] See page 54.

[2] See GMG Capital Investments., LLC v. Athenian Venture Partners I, L.P. at *780.

[3] See page 56.

[4] See pages 473-477.

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