By Don Scaramastra
As COVID-19 ravages our country and the world, perhaps no sector in the United States has suffered more than the hospitality industry. Government orders have effectively closed hotels and resulted in the widespread cancelation of meetings and events for the foreseeable future. While there is talk of “opening up” the economy, and while some states are taking measures to begin doing so, it’s unclear whether the public at large is ready to travel or meet in large groups anytime soon.
For some hotels, help may be on the way in the form of business interruption insurance. This insurance is typically included in a property insurance package, and kicks in when there has been physical loss of or damage to property. In abstract, the idea is simple. A property policy pays the policyholder some amount to cover some or all of the costs to repair or replace property, including the building itself, that has been damaged or destroyed in the fire.
But that is not enough to compensate a business that has been forced to temporarily slow down or cease operations while that property is being repaired or replaced. And for many, the resulting loss of income is the largest component of the loss. That’s where business interruption insurance (commonly referred to as “business income” and “extra expense” coverage) kicks in.
What is Covered?
Under many standard business income forms in the United States, business interruption coverage will pay the net income the policyholder would have earned absent interruption from an incident like a fire, plus costs that the business had to continue paying (e.g., rent or payroll) after the loss. Coverage kicks in after an initial “waiting period,” typically 24- to 72-hours after the loss and continues until the business is reasonably able to repair or replace the lost or damaged property and resume business. Businesses can also buy coverage for an additional period after it has resumed business if the company thinks it will take some time for the business to reach pre-loss financial performance. Most policies also cover the extra costs businesses incur to keep their business going in the meantime.
Basic business interruption insurance covers losses arising from property damage or loss at the insured premises. But some extra coverages can protect the business from income loss that results from loss or damage to other people’s property that isn’t on your premises. Because the truth is, in this interconnected world, a business can lose income as a result of loss or damage suffered by others.
For example, what if a key customer’s plant burned down, forcing them to lay off employees and to cancel a conference they were planning to host over two days at the hotel? Or what if that fire instead forced the hotel’s linen or sanitation product supplier out of business? Conventional business interruption wouldn’t cover this because the net income loss suffered didn’t result from physical loss or damage to property at your insured premises (assuming the hotel property was the only insured premises listed on your policy). But many policies contain so-called “contingent” insurance that covers a hotel when its direct suppliers and customers suffer a loss that leads to lost business for the hotel. Not all policies contain this coverage; hotel owners and operators need to read their policies carefully to see if it does.
Many policies also provide “civil authority” coverage. This covers lost income due to a government directive that restricts access to an establishment, even if it was unharmed, due to loss or damage to nearby property (usually within one- or two-miles, but sometimes more). For many businesses, civil authority coverage may be the tightest “fit” because their losses may have resulted most obviously from government orders to residents to shelter in place and government directives to shut down non-essential businesses.
Some policies effectively stack contingent and civil authority coverage, covering losses suffered when the government effectively prohibits access to a customer’s or supplier’s premises, causing them to shut down, disrupting the covered business.
Will COVID-19 Claims Be Covered?
Sounds great so far, but don’t expect insurance companies to quietly pay COVID-19 claims. Many insurers are doing quite the opposite, quickly signaling their intent to deny coverage. The more common grounds insurance companies have asserted are the following.
No physical damage. Many insurers wrongly claim that there is no coverage absent damage to the building structure or things inside it. In fact, anything that eliminates or impairs the usefulness of a structure may be covered. In the case of civil authority coverage, the question will typically be whether viral contamination caused the loss of use of property near the hotel, which in turn led to a government order that prevented customers from patronizing it. These days the virus seems to be everywhere, in hospitals, homes, public transportation, doctor’s offices, and stores. It may not prove difficult to trace government orders to nearby viral contamination.
Contaminant or pollutant exclusion. Some insurance companies have pointed to exclusions for pollutants or contaminants. But these rarely include viruses. Unless a policy clearly does so, this exclusion should not prevent a hotel from obtaining coverage.
No cessation of business. Some insurers have denied that a government order resulted in a cessation of business. But insurance policies commonly cover net income loss from business slowdowns as well as total shutdowns.
No prohibition or prevention of access to your hotel. Some insurers may argue that civil authority coverage isn’t triggered if government orders didn’t expressly prohibit the operation of your hotel. This argument will come in one or two assumptions.
The first is that the orders must be specifically directed at hotel closures. But a government order doesn’t have to formally prohibit access to your hotel. It simply has to have that effect. Government directives to a hotel’s customers to shelter in place certainly have the effect of preventing access to the hotel.
The second is that prohibiting access requires preventing any access by all potential entrants. In other words, the prohibition must be total, not partial. Cases in some jurisdictions appear to support this conclusion. But most jurisdictions have yet to weigh in. Because policies do not expressly require a total prohibition, and because it would have been easy to write a policy that did, courts in many jurisdictions, don’t expect courts in all 50 states to line up behind the insurance industry on this.
Virus, pathogen, and fungus exclusions. Other insurers will point to various exclusions for certain biological pathogens. Some may exclude “fungus,” including “micro-organisms.” Others may exclude “pathogens.” Some will exclude loss due to “virus.” If a policy contains one of these exclusions, you’ll need to give your coverage a closer look. If the exclusion is clear and clearly applies to a “virus” (“fungus” exclusions, for example, probably won’t qualify), and if the coronavirus caused the loss, then there might be trouble. But if some other covered event contributed to the viral contamination, which in turn led to a business interruption loss, it might be OK.
Important Considerations for Filing a Claim
Other issues may pop up. For example, if business income worksheets have not been thoughtfully prepared and submitted and insured values have not been checked and updated, there’s a good chance that even if the hotel is covered, it is under-insured.
Also, business interruption claims are well known for triggering disagreements about the amount of the loss. Other property coverages may require reimbursement of the replacement cost or adjusted cash value of damaged property, usually a relatively simple affair. Business interruption claims, in contrast, require a determination of how much income would have been earned absent a loss, which often leads to disagreements about how to reliably figure that out.
Given issues like this, hotel owners and operators are probably wondering whether to file a claim. Before deciding, check with an insurance lawyer. Unless the particular situation clearly rules out coverage, it will probably make sense to submit a claim, even if the insurance company will initially deny it. If it is decided to file a claim, be prepared to complete and submit a “proof of loss” form showing the amount of the loss, something beyond the scope of this article.
Meanwhile, a number of businesses have sued their insurers over business interruption losses. Many are restaurants, most notably perhaps, The French Laundry. Most of the current batch of plaintiffs appear to be small businesses; larger companies with greater litigation staying power will no doubt follow suit. Some of the current lawsuits have been filed in the hope that they will become class actions on behalf of other businesses whose insurance companies have denied coverage. It’s too early to say how these lawsuits will be resolved, but they will likely be hard and fought expensive affairs. It will be important to watch these cases as they may affect any claims submitted and the rights of hotel owners and operators moving forward
