COVID-19 Business Interruption Insurance Coverage Update

As the insurance industry continues to grapple with a rapidly changing landscape surrounding the coronavirus pandemic, the Federal government is attempting to step in. A discussion draft of a bill that would establish a Federal program for insurance industry losses related to the pandemic in excess of $250 million is in very early stages. This proposed legislation, preliminarily named Pandemic Risk Insurance Act of 2020, would provide shared public and private compensation for Business Interruption (“BI”) losses resulting from a pandemic or other outbreak. The Federal program would kick in when industry losses exceed $250 million and would be capped at $500 billion in a calendar year. Participating insurers would be charged an annual premium for reinsurance coverage.

How does this number stand up against the estimated economic toll of COVID-19? According to the American Property Casualty Insurance Association (“APCIA”), estimated losses in the United States could be between $220 billion and $383 billion per month for small business and the insurance industry could see an estimated 30 million claims from small business related to COVID-19. Comparatively, the Canadian restaurant industry has estimated approximately $10 billion (CAD) for the two-month shutdown of the restaurant industry in Canada.

While the Federal bill could provide necessarily relief, its delay in approval has resulted in several individual states putting forth their own solutions. Louisiana introduced S.B. 477: Mandatory Coverage for COVID-19 Business Losses and Notice of Exclusions and H.B. 858: Mandatory Coverage for COVID-19 Business Losses. Both of these proposed legislative bills aim to push insurers doing business in Louisiana to retroactively cover BI claims due to COVID-19 to March 11, 2020, or the date of Louisiana’s state of emergency. S.B 477 does not aim to restrict recovery to businesses below a certain number of employees. Louisiana has also proposed S.B. 495 which would allow insurers the option to deposit the greater of $50 million or 80 percent of the aggregate policy limits for “all commercial insurance policies” into a business compensation fund created for certain property insurance claims, coverage for COVID-19 related losses, and dispute resolution. By participating in this fund, insurers would be immune from bad faith claims made by claimants seeking compensation for losses associated with the COVID-19.

Louisiana’s proposed legislation would join other states including: New Jersey’s Bill A-3844, New York’s Bill A. 10226, and Ohio’s H.B. 589, all of which would generally require insurers offering business interruption insurance to cover losses attributable to COVID-19. In addition, as part of Bill SD. 2888, Massachusetts enacted an emergency law requiring certain insurance companies in the commonwealth to provide business interruption insurance coverage. 

While some states have introduced bills to get insurance companies to pay for BI coverage, other states have stopped short and instead have asked insurance companies to submit information surrounding BI policies provided to insureds. On March 27, 2020, the California Department of Insurance followed suit and asked insurance companies to submit data by April 9 regarding coverage of commercial BI related to COVID-19. The New York State Department of Financial Services issued similar instructions on March 10, 2020, seeking explanations regarding the commercial property insurance each insurer has written in New York as well as details of BI coverage provided.

As the Federal and state governments determine their path forward, more businesses have taken it upon themselves to file lawsuits in various courts across the country. Two groups of restaurants filed suit in the Northern District of Illinois against their insurance company. In Big Onion Tavern Group, LLC et al. v. Society Insurance, Inc., plaintiffs are seeking the Court to make declaratory judgment rulings. Plaintiffs are also alleging breach of contract and statutory penalty for bad faith denial of insurance under 215 ILCS 5/155. In Billy Goat Tavern I, LLC et al. v. Society Insurance, Inc., plaintiffs are seeking the Court to make declaratory judgment rulings. Plaintiffs are also alleging breach of contract and seeking damages in excess of $5 million.

These lawsuits would join others in states including: Oklahoma (Chickasaw Nation Department of Commerce v. Lexington Insurance Company, et al.), California (French Laundry Partners LP et al v. Hartford Fire Insurance Co. et al.) and Louisiana (Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al.).

While all the talk has been about covering retroactive BI losses due to COVID-19 either through legislative action or lawsuits, a business can still recover its BI losses IF – and this is a big “if” - it had specifically purchased pandemic insurance. It’s been recently reported that Wimbledon, the world-renowned tennis tournament, purchased a pandemic insurance package for each of the past 17 years despite annual premiums for this coverage exceeding approximately $2 million. Because this year’s tournament was cancelled due to COVID-19, Wimbledon will receive approximately $141 million under its pandemic insurance policy.

Notwithstanding the mechanism of recovery – whether through insurance or by state or federal law - businesses should proactively set up separate accounts in their internal accounting system and collect financial documents to support any losses related to COVID-19 expenses, such as: 

• Historical and current annual financial statements
• Federal and state annual tax returns
• Monthly profit and loss statements
• Budgets, forecasts, or projections done prior to and after the event
• Monthly bank statements
• Inventory reports
• Payroll records
• Invoices and purchase orders
• General ledger accounts established to account for any expenses related to the loss such as additional payroll, shipping, temporary facilities, etc.
• Documentation to support extra expenses including receipts, invoices, time sheets, advertising costs, etc.

Taking these steps will assist an insured in attaining the appropriate coverage during the BI insurance claim process.