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As the response to the growing Coronavirus (COVID-19) pandemic escalates and states like New York, California, Pennsylvania, and many others are mandating restricted business operations and, even, mandatory closures, the livelihood, income, and very existence of franchisees and small business owners across the country is in jeopardy!

Legislative responses such as the Families First Coronavirus Response Act – the very first piece of legislation that the US Congress decided to offer the American people in response to this pandemic – has done nothing other than place additional restrictions, burdens, and obligations on the very same small businesses that potentially face extinction. While additional relief, hopefully will be coming from Congress, do small business owners have other forms of relief? Is Business Interruption Insurance a form of relief for small business during this pandemic?

What is Business Interruption Insurance
Business interruption insurance is a form of coverage purchased by business owners that is designed to compensate them from loss of income (defined as loss of net profit plus continuing expenses) arising out of a “covered event” or “covered cause of loss” that, typically, requires damage to the underlying insured property, i.e., retail store from which the business operates.

Can Small Businesses Claim Business Interruption Insurance to Replace their Lost Income?
Assuming that a small business maintains Business Interruption Insurance, the first action will be to file a claim for under your insurance policy. While policies vary and it is important to have your policy reviewed by your attorney, we expect insurance companies to deny coverage. Most likely, your insurance company will deny coverage based on one or both of the following grounds:

  • (1) Property Damage Limitation – That the Business Interruption Insurance is tied to damage to the underlying insured property (i.e., such as fire or water damage to the retail location of your business)  and that the current pandemic does not meet this damage criteria. In particular, using the language in my own Business Interruption Insurance Policy, coverage is tied to the “…direct physical loss of or physical damage to the property at the [insured property location]…” While policies are different, sample language includes:

“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 direct physical loss of or physical damage to property at the “scheduled premises”…”caused by or resulting from a Covered Cause of Loss.”

  • (2) Viruses and Bacteria Exclusion – That the Business Interruption Insurance includes damage caused by viruses and bacteria. Sample language of this potential coverage exemption, includes:

“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.”

So, if you are forced to close the doors of your restaurant, spa, salon, gym, studio, manufacturing facility…can you make a valid claim for Business Interruption Insurance? The answer is that you can. But the bigger question is whether or not you will be afforded coverage and benefits from your insurance company. The insurance companies will be fighting coverage and, by all accounts, appear to have the upper hand.

We recommend that small business owners who are faced with forced closures during the Coronavirus Pandemic follow these steps in evaluating their rights under their Business Interruption Insurance policies:

  1. Confirm that your business maintains a Business Interruption Insurance Policy;
  2. Request a copy of your current Business Interruption Insurance Policy from your insurance agent;
  3. Confirm that the underlying property (i.e., your business location) is an insured location under your policy;
  4. Review the policy with your lawyer to determine the scope of the Property Damage Limitation and whether or not a claim can be made that mandatory closures constitute a “physical loss” of your underlying retail location; and
  5. Review the policy with your lawyer to determine whether or not your policy includes a Virus and Bacterial exclusion.

For additional information feel free to reach out to our team by email.

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By Charles Internicola March 20, 2020

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