What is Business Interruption Coverage?

Business Interruption Coverage is a type of insurance coverage that compensates you for lost revenue when your business is unable to operate for a period as result of some physical property loss or damage caused by a covered peril. The most common example is a fire that damages a business property. If that damage prevents a business from operating as usual, business interruption coverage could provide the revenue your company would have made during the time it was unable to operate because the building was being restored. While a fire could certainly damage a tech company’s property, a tech company might be more vulnerable than other companies to certain types of damage, such as a weather-related event that knocks out the temperature controls in a data center, thereby resulting in the loss of, or damage to, electronic data. While nearly all companies in this day and age store data electronically, a data center can be more of the heart and soul of tech company than other types of companies.

How do I know if I have it?

Business Interruption Coverage is usually found in a Commercial Property Policy. It usually is not a stand-alone insurance policy.

What are the potential challenges to coverage?

Whether a policy covers your business interruption loss ultimately comes down to its specific policy language. For that reason, policy language must be carefully analyzed. In that regard, there are some particular provisions on which you should be focused:

  • Was there a “Direct Physical Loss or Damage”? Business Interruption Coverage usually requires that your business was unable to operate because of a “direct physical loss or damage.” In the COVID-19 context, the distinction between “loss” and “damage” could prove to be significant. In the fire example referenced above, the physical damage usually is obvious—a building has burned down or is otherwise damaged by flame or smoke. The concept of a “physical loss” is less certain. In some jurisdictions, the inability to use physical property as the result of the presence of a contaminant, among other things, is considered a “physical loss” for insurance purposes. This question is being hotly debated, and several lawsuits have recently been filed to seek resolution of this issue.
  • Is there a Virus/Contaminant/Pollution Exclusion? Business Interruption Coverage requires that a loss be caused by what is referred to as a covered “peril.” This is true whether your policy lists specific covered causes of loss (a “named peril” policy) or simply states that it covers all perils unless excluded (an “all risks” policy). In either case, your business loss will not be covered if the peril (cause of loss) is excluded. Insurers have argued that there is no coverage for COVID-19 losses where the policies have express exclusions for viruses, micro-organisms, contaminants, and/or pollution. Many of these “virus-related” exclusions were put into place by insurers as a result of the SARS epidemic in 2003, which prompted numerous business interruption claims.With tech companies in particular, it is important to check whether a policy contains these exclusions. Policies issued to tech companies may not include these exclusions because some tech companies are considered more of a specialized risk. The lack of these very specific exclusions is significant because it could indicate that an insurer did intend to cover virus or pandemic-related losses. In other words, in light of the prevalence of such exclusions in the wake of SARS, any insurer’s decision not to include the exclusion could be interpreted as the insurer deciding NOT to exclude any such losses.Even in policies containing these exclusions, they ultimately might not apply as a matter of science. For example, a virus might arguably not be considered a “micro-organism” because, as a matter of science, a virus cannot survive as a separate entity. Again, this issue is currently being litigated, and several states have considered legislation to override these exclusions. Even still, it is important to note whether your policy contains these common exclusions.
  • Was your business completely inoperable? Insurers might argue that business interruption coverage requires that a business be completely inoperable. On the other hand, most policies require a policyholder to attempt to mitigate any loss, which could mean attempting to operate a business at a reduced capacity. For example, if a company’s data center is rendered inoperable, that company might be required to mitigate any business interruption loss by attempting to engage a vendor to host the data during the period of restoration. While that effort could reduce the loss, it might not avoid it altogether—there could still be a slowdown or increased costs.Insurers have argued the completely inoperable point in the past, prior to COVID-19, with varying results. On the whole, courts tend to favor coverage in the case where the insured attempted to mitigate loss. The presence of “extra expense coverage” (coverage for extra expenses incurred in mitigating loss by, for example, using a different third-party vendor at a premium due to challenges in the supply chain) may also indicate that the policy contemplated the insured’s attempts to mitigate loss.

What should I be doing now to increase my chances for recovery?

Whether you ultimately will have Business Interruption Coverage for your loss depends on a close reading of your insurance policy, possible consideration of any relevant legislation or case law, and the details of your company’s particular loss. That said, there are certain things that can be done to maximize your chances of recovery.

  • Provide notice to your insurer: Notify your insurer of the loss as soon as possible. This is true even if there are possible obstacles to coverage, such as a virus exclusion in your policy. Your policy should contain instructions on where and how to send notice.
  • Document lost revenue: Document all revenue that your business has lost and keep a careful timeline of those losses. Also keep track of anything you could later use as evidence of those losses. Accountants may be necessary to assist with this.
  • Document causes of loss: Document all the possible causes of your business loss. While COVID-19 may be responsible on a large scale for the loss, keep track of what other causes specific to your business took place. For example, was your office building shut down as a result of COVID-19, making it impossible to operate? Were any suppliers to your business affected? Were employees ill and unable to come in? Did you close in response to an order from a governmental authority? All of these causes are potentially relevant to coverage.
  • Document any physical loss or damage: As mentioned above, one of the main defenses to coverage that insurers may raise arises from whether the policyholder can show “direct physical loss or damage” to its business. If the virus that causes COVID-19 was detected on any physical property—belonging to your business or, potentially, within the same office building—that’s easy. The argument can also be made (and probably should be made) that the virus is ubiquitous and, therefore, should be presumed to be present on all property. But, even without that, a policyholder should carefully document which physical property was rendered unusable, for whatever reason.

What other types of insurance coverage should I consider?

Business Interruption Coverage may be the most immediately relevant type of insurance if your business has seen a loss in profits. Long-term, though, other types of insurance may come into play. Keep in mind that all these types of insurance will have their own unique parameters, so read the policy closely and consult with coverage counsel if possible. Other potential coverage types include, but are not limited to:

  • Event Cancellation Insurance
  • Travel Insurance
  • Contingent Business Interruption/Supply Chain Insurance—If a supplier could not deliver because it was impacted, thus reducing your business’s ability to operate.
  • Cyber Insurance—Given the increased cyber-risks associated with working-from-home.
  • Workers Compensation Insurance
  • Employment Practices Liability Insurance—Potentially relevant if, for example, your business lays people off.
  • Commercial General Liability Insurance—If your business is later sued by someone alleging, for example, that they became sick on your company property.
  • Directors and Officers Liability Insurance—If, for example, your business is later sued based on allegations that your company mismanaged its response to COVID-19 or misrepresented its ability to handle the pandemic.