In the Trenches, Covid 19 - An Adjuster’s Perspective on the Business Interruption Debate
As government officials report the increasing financial losses due to the shutdown of most commercial businesses across the United States, people are desperate for some type of relief and understandably so. So, what to do? Time to look under the hood to see what’s really happening on the prospect of a loss of income claim from your insurance company. Assuming you had the good financial sense to buy Business Income coverage to cover your financial losses before the country and commerce was shut down.
The go to place now for relief seems to focus on the private sector insurance industry in both the admitted and surplus lines market, the latter known as the E&S markets. Every day the media is full of press releases, articles, and op-ed articles positioning themselves on one side of the argument that private insurance carriers need to pay these claims, or to the contrary that they are not covered.
Make no mistake about it. A lot is at stake as billions upon billions of losses are mounting and businesses are all looking for a place to line up (hopefully within social distance guidelines) to collect MONEY. Lawsuits are being filed across the country and legislation is being written to retroactively rewrite previously agreed insurance policy terms that were accepted by both the insured and the insurer. So where do we go from here? The following are a few paths I think will unfold in the coming months and years as the losses continue and the outcome of a solution to this pandemic remains allusive, so here we go.
First up is the lawsuit path. While I’m not an attorney, if you follow this track you better get your expectations in line with a timetable of years and I mean a lot of years before the courts settle these complex insurance coverage issues. So, let’s look at some potential alternative options, good and bad, that may help you set or reset your expectations.
1. If you bought a policy that did not have the 2006 endorsement excluding virus, you possibly may have a better chance provided you can get over the physical damage to insured property requirement. This seems to be the course the lawyers are taking with these policies as they say without the 2006 endorsement there may be an argument to claim an ambiguity exists in these policies, thus all ambiguities are for the most part always resolved in the policyholder’s favor. But not so fast, we still have that little pesky wording that requires physical damage to the insured property. So far, I have not read where there is actual legitimate science after extensive peer review that confirms the virus causes physical damages. In summary, the lawyer route is married to the hip of the science solution as you likely can realize a lawyer will need to make his case with credible experts on science to support physical damage. Number one seems not good for a quick resolution to this unprecedented event.
2. If your policy has the 2006 virus endorsement, I see no chance your admitted carrier insurer will pay for your business income loss. Notice I mentioned admitted carrier, as there is a big difference in admitted versus non-admitted carriers such as Lloyd’s of London to name the best known and largest of this group. In their space, they can write any form that is agreeable to them and their customer.
But it’s here in the surplus lines (non -admitted market) that you might find a major slip up in underwriting that did not exclude a virus, opening the door to coverage, again assuming you can get over the physical damage requirement. So, if you are with a surplus lines carrier aka non-admitted, read your policy very carefully. Who knows what may be in the policy language? There are also manuscript policies written to cover unique risks which at times has a boat load of coverage available that you would not find in other forms of policies commonly sold in the retail market. To give you an example of how this works, we are currently working on a multi-million-dollar fire loss which involves this type of policy (manuscript surplus lines) that added a 10% additional equipment endorsement coverage kicked in should the underlying equipment limit be exhausted. In our case this fire is at a very large furniture plant involving millions in losses and they have the coverage. One payment has been made while they are slow paying the other amount on a separate factory building, because, well just because they can. My point is that you (or have a professional) read the policy, understand its wording, both the grant of coverage and the exclusions. I have also seen policies that gave coverage for a peril that was almost universally taken out, but some underwriter slipped up and the peril was included. Turns out for us we had an incredibly happy client.
3. The federal government steps in and back stops the private insurance companies and honors those businesses who bought B I insurance and lets the insurance industry administer the program. Payments would be paid based on their policy terms and conditions. This means that the time-tested methods used to arrive at a calculation for a B I payment would be applied to the insurance industry standard. The insurance industry would issue the checks and the government would pay them back.
Sounds simple should the government do this and the private carriers would agree if there is a handsome fee included for this service. Similar to how private carriers handle NFIP claims. This could be the best option but you must remember the business will still likely have to have had a policy in place before the loss occurred and the claim payment would only be for the amount of B I insurance that was purchased.
4. The government steps in, no need for the courts, and lengthy litigation. Congress just opens the spigots and pays all BI claims. The taxpayer funds all the losses via special or increased taxes, levies, or sells some sort of bonds. In the end, the U S Treasury gets its money back. Not a likely outcome in my opinion.
But let’s look under the hood to understand some of the issues that likely will come up if any semblance of the standard rules in the insurance industry are followed assuming some concessions are made available to pay these losses.
But first due to the timeliness of a recent State Supreme Court case, let’s review it to see how their thinking was applied to our current crisis. A special thanks to Public Adjuster Zach Flora of our Pittsburgh office who sent us a copy of the recent Pennsylvania State Supreme Court case .
This court’s argument is primarily based on the fact that Covid 19 is a “Natural Disaster” and as such should be covered in property insurance policies like other disasters such as fires, earthquakes, and many others as listed in this case’s summary. This article opines that because these natural disasters are routinely covered in property insurance policies, then it stands to reason this pandemic should also be covered as a NATURAL DISASTER! Of course, in the real world you need to have the proper property coverage for the perils involved in a natural disaster like flood, hurricane, earthquake and in the case of an all-risk policy any event that flows out of it that’s not excluded.
In any event, you need to read the summary of the case to get the full effect of how this court stretches the facts of our current pandemic to justify an argument that folks who are insured AND purchased insurance, qualify for business interruption coverage along with other add-on’s like extra expense, civil authority, etc. and should be given carte blanche access to insurance companies coffers for funding of their business all across the country. But again, IMHO the carriers will not likely willingly pay any claims based on this case or any other legal fiats in the near future. And I know some folks are pushing local and state governments to pass laws that would alter current policy terms and conditions retroactively. But remember the general consensus from the articles I have read is that roughly 30% to 40% of businesses actually purchased B I coverage. Put another way 60% to 70% did not buy business interruption coverage. For those that did buy business interruption (a minority) each policy would have to be read to see what is actually in the terms and conditions of the policy and then read the full text of this case (not just this author's summary), to see how this court relied on the facts, the policy, the law, and any precedents from other opinions, etc. used to arrive at the conclusion they reached.
As an aside, this author left out a lot of the nuances of business interruption coverage adjusting details such as exclusions and limitations typically attached to a standard business interruption form. As an example, I see no mention of a "LOSS OF MARKET" exclusion which is always a huge financial hit to any business trying to recover from an insurance policy that actually has a provision for loss of income. Loss of market insurance is a specialty type of coverage that from my experience is very seldom purchased. I have had a few clients who had the foresight to purchase this coverage, but most do not and for that matter were most likely not told by their agent/broker about this very important insurance product.
So, what exactly is LOSS OF MARKET and how does this play out even if there is a covered loss to an insured property? Loss of market to a lay person would most likely mean just that--the market for the goods and services being offered to the public or wholesaler has disappeared for whatever reason. But in the case of a business offering its products or services, the market may still be there, but their customers are gone because of the loss, or an event that prevents the customer to have access to the store or other venues where they previously shopped or placed orders such as a shopping center destroyed to the point access is denied. So, if a loss causes the business market to disappear, as often is the case, is that loss going to be covered in a standard loss of income policy? The short answer is no unless you had the foresight to purchase LOSS OF MARKET coverage.
As an example, following a hurricane or some other big natural disaster event, despite the notice of potential damage to the public of this major event, many hotels and other businesses who did not sufferer a loss are still open but people do not return until the memory of the losses have faded. Thus their market or customers are lost while their businesses are open for business. This same concept applies to individual businesses in a non-national disaster event such as a fire, water loss or other everyday event that happens across our country every day. Once the word is out, people will not likely rush back to a business that has had the misfortune of bad publicity that circulated through a community or a market that the business was severely damaged by a fire or some other peril.
So, in a case where B I coverage was purchased, the policy will generally only pay financial losses for the time of the loss to when the insured property given due diligence and dispatch and the conditions at hand such as labor and supplies can restore or is replaced by the insured to its pre-loss condition, also known as the suspension period. That's what a typical B I insurance product is all about. It only pays for the period to repair or replace the physical insured property, not the continuing loss of income due to customers staying away for any variety of reasons not related to access to a repaired building.
And do not forget there are many nuances of preparing the actual business income loss claim. The wording in the policy is of course important. But to actually calculate the loss, it often requires an analysis of historical financial data, as well as future business planning such as pro forma statements and contract commitments that were in place prior to the loss just to name a few.
So, if you think this through, IF and this is a big IF, the virus losses were covered in a standard B I coverage form, the specific policy form would have to be read for exclusions. Unless loss of market coverage was included, the suspension period would be the time to clean the property and restore it to its pre-loss condition. From what I am reading, the virus may contaminate a building and/ or its surfaces for three or more days before dying. Then you have the restoration (suspension period) to wipe, clean, and thoroughly disinfect the insured building/property. The suspension period or protocol will of course need to be based on an expert’s opinion which will vary based on the size and conditions of the insured property.
Thus, IMHO the big loss from this pandemic event financially speaking, is the loss of market which as stated above is typically, not insured. So, while seemingly everyone is trying to make a case for coverage for the virus damage, the real damage assuming there is BI coverage to start with, is a loss not likely covered which is the loss of the customers from the time of the shutdown until some as yet undetermined unforeseeable future when some sort of all clear is given to the public. And even at that time customers will likely still stay away until they have some sense of comfort that the goods and services are safe as well as the actual facility they may have to visit and shop.
In summary we all are in a tough spot and I do not think some government fiat issued to the insurance industry to pay for loss of business income will be a panacea to restore this country to its pre-loss financial position nor will it restore business owners to a level where they can return to the pre-loss level of operations they enjoyed before this catastrophic event.
In closing, remember, with insurance, the devil is always in the details, the big print giveth and the little print takes away. Donald Trump is not noted for reading the big or the little print but trust me the insurance industry is. But who knows, maybe the powers to be will waive a magic wand and money will flow like water and all is good, all losses will be covered, with no need to fret over those pesky insurance policy details. Let us know what you think.