As unprecedented events are unfolding around the world individuals, businesses and governments are responding to the emergence of the COVID19 pandemic. During this time many business owners are turning to their insurance policies in search of coverage for lost income due to necessary business closures and/or reductions in operations.
Before we begin our discussion of how business insurance policies are likely to respond to the COVID19 event, let’s first unpack some basic components of most standard business insurance policies. Please also understand that each policy can be quite unique, and it’s important that you discuss your specific policy with your insurance provider to understand your coverage – this discussion is meant in the most general terms.
Most businesses insure contents (stock & equipment), and some will have insurance coverage for their buildings, these coverages form the foundation of the “property” section of the policy.
Some business owners may have chosen optional coverage extensions to their property coverages. Examples of such extensions could be buying coverage for sewer back up, the break down of equipment, flood, or business interruption insurance. It’s important to understand that these optional coverages are extensions of the core coverages mentioned above.
Many businesses are insured on a “broad form” basis, that is a policy that insures against direct physical loss or damage to the business premises. This coverage is defined by its exclusions, meaning all losses except those that are expressly excluded would be deemed to be insured.
There are many exclusions, and most are common to all insurance companies with only some variation in the insurance market place. One such common exclusion (meaning an event for which coverage is not afforded) is damage caused by pollutants often stated as:
“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including odour, vapour, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
This means there is no coverage afforded for damage to business property where such damage arises from the introduction of a contaminant to the property.
Now that we have discussed property insurance, and the most relevant exclusion for current events, let’s turn our discussion to coverage for lost income. Business interruption coverage is sometimes referred to as a “follow form” coverage, meaning its activation must follow the response of another coverage under the same policy to which it is attached (remember above we described this as an extension, rather than a coverage in its own right).
Business interruption coverage is triggered when a necessary loss of business income occurs, the loss must result from direct physical loss to the insured property, and such loss must be caused by an insured peril. In essence, business interruption coverage will respond when the building, or contents coverage responds first to pay for physical damage to insured premises.
In the case of COVID19, there is no direct physical loss to the business premises (think fire, wind, vandalism, pipe bursts). Additionally, the introduction of a contaminant is expressly excluded from coverage. Given that, it is unlikely that the property insurance coverage will respond, thus there is no trigger that would activate the business interruption coverage extension.
Some policies do include provisions for business interruption where access to a business premises is denied by act of civil authority (this coverage normally has an upper limit in terms of number of days for which it can respond). However, the vast majority of these coverages require physical damage to neighboring or adjacent properties such that access to the insured premises is denied. Once again, the requirement for physical damage occurring must be met, and in the case of COVID19 it is not.
Another way to look at it, is that property insurance is designed to insure property, the current situation with which we are faced is a necessary closure of business, to protect people. Given that measures are being taken to protect the health and wellness of human beings rather than the safe guarding or restoration of property, the insurance policies designed for property are not equipped to respond for the non property related losses the world is currently faced with.
Once again, each policy of insurance is different, and many insurers have gone to great lengths adding frill coverages and extensions of coverage to differentiate their policies from one another. These are usually low limit coverages and in few circumstances will they provide a different outcome than that discussed above.
For specific questions relating to your policy it’s best to speak with your insurance provider as they will be equipped to speak to the nature of your individual policy and coverage.
As is often the case with mass disasters that are widely uninsured, government assistance is likely. This has historically been the case with flood. Business owners would be well advised to stay apprised of potential assistance available to them as announcements from our political leaders are forthcoming.
From all of us at Cornerstone Insurance – Stay Well