Is Coronavirus Covered by Business Interruption Insurance?

As the coronavirus continues to spread, so do the concerns of individuals and business owners. For many businesses, the virus threatens to disrupt supply chains, production, and revenue. Many are looking to business disruption insurance to cushion the blow. But the safety net they thought they’d purchased may not be there.

Businesses, large and small, could experience an interruption to their business due to the coronavirus outbreak. Many will seek relief through their business insurance, specifically through policies that cover business interruptions. But while many policies do have business interruption coverage, a significant number of these policies exclude compensation for communicable disease outbreaks, a change many insurers made after the SARS outbreak of 2003.

What is business disruption insurance?

Most small and medium-sized businesses (SMBs) carry some form of business disruption insurance. This includes coverage in the event of a natural disaster or fire.

Business disruption insurance is typically not a stand alone policy, but part of an overall comprehensive insurance or property/casualty policy. Depending on the type of policy your business holds, coverage is limited to certain types of disruptions and exclusions.

How communicable diseases changed business interruption insurance

The Severe Acute Respiratory Syndrome (SARS) outbreak in 2003 put insurance companies on notice.

After Mandarin Oriental International Ltd. received $16 million from its insurers to pay for business interruption losses due to SARS, policies were quickly updated to exclude certain types of disasters — specifically communicable diseases.

In another SARS-related case, the Court of Final Appeal ruled the insurance company’s liability was limited to the amount of disruption caused after the contagious disease was “required by law to be notified to an authority.”

This “trigger date” limits the amount of payment a carrier has to pay to the insured, even if the disruption began before the official reporting date. On January 8,2020, COVID-19 was included in the Prevention and Control of Disease Regulation 2020 and the Prevention and Control of Disease Ordinance, making it a notifiable disease.

But after SARS, the insurance industry began to exclude losses incurred by communicable disease in most policies. The only coverage that pays for such losses are specifically pre-negotiated.

After SARS, the insurance industry began to exclude losses incurred by communicable disease in most policies. The only coverage that pays for such losses are specifically pre-negotiated. 

How business disruption insurance could recover losses

For businesses that have interruption insurance, the threshold for recovery generally depends on a series of factors:

• The property has to sustain damage (e.g., a lightning strike)
• The property must be insured (so renters might not be covered)
• The peril itself must be insured (not specifically excluded)
• The loss must be quantifiable

If all these conditions exist, coverage could pay out for the entire period of time it takes to restore the damaged property and put the company back in business.

But many existing business disruption coverage pays only for quantifiable physical losses, like repairing and replacement of damaged property and inventory. 

But many existing business disruption coverage pays only for quantifiable physical losses, like repairing and replacement of damaged property and inventory.

If the coronavirus disrupts business, there may be no physical damage to the organization.

Companies may see business slowdown, incur a loss of revenue, experience disruptions in the supply chain, or completely close due to the need to disinfect. But none of these would be the result of physical damage, and none would trigger payout from a typical business disruption policy.

Communicable disease coverage

Some industries remember the SARS losses and negotiated communicable disease coverage.

This specific rider must be negotiated and accepted at the time the policy goes into effect. Even for these, there may be limitations on the amount of recovery an organization can realize. A trigger event may be outlined in the policy and may be required from a qualified agency to begin the disruption recovery.

This could include a closure to sanitize facilities or protect employees or consumers.

Organizations impacted by coronavirus or other pathogens — and carry communicable disease coverage — may still have to wait for an appropriate authority to inspect and certify their facility.

A second order from that authority may be needed to lift the closure — but even then, some policies predetermine a maximum amount of days that are reimbursable.

Even with communicable disease coverage, many policies limit the amount of recovery to physical costs (cleanup) and exclude loss of revenue inflicted by the outbreak in the policy.

Specific, pre-negotiated terms that cover customer or supply chain losses would be needed, but may be cost-prohibitive to most businesses.

Contingent business interruption coverage

For an SMB to get full coverage for business disruption due to a communicable disease, they will need to purchase “contingent business interruption coverage” that specifically includes loss of commerce caused by disease as well as other disasters.

CBI could include loss of revenue due to disruptions from customers, the cost to repair or replace facilities or equipment, and costs to clean and sanitize.

Another area may be disruption in the supply chain. Your company may be ready to manufacture, but if vendors or distributors are having issues, third-party CBI coverage could help business keep afloat until things improve.

Unlike general business disruption coverage, this special clause or rider to a policy would cover the lost revenue an organization experiences during the disruption.

A third area CBI can cover is losses due to proximity. Your small business may be located close to a nearby attraction or business, driving revenue because this secondary location is your primary source of customers.

Foot traffic near a museum or a restaurant located near a busy factory could be a major source of revenue. For these organizations, a shutdown of the proximal location could create a major disruption in revenue. CBI could cover these losses until the situation has returned to normal.

What to look for in a CBI policy

The challenge for SMBs who look for business disruption coverage is to assure the policy specifically includes any types of disasters they may experience, including communicable diseases.

According to Aon, these types of plan clauses may be referred to as Loss of Attraction, prevalent in the hospitality and entertainment industries; Communicable Diseases or Special Perils Business Interruption.

These plans are typically subject to a maximum payout and can be costly. Work closely with your insurance broker or representative to look at all aspects of the policy, all exclusions and all potential contingencies, before you decide what’s the best plan to meet your needs.

Making it over the hump

As the coronavirus continues to spread, individuals, business, governments, and healthcare providers will see its impact and fallout.

For SMBs, loss of commerce can have significant, long-term effects, but many won’t be able to get assistance with their existing insurance coverage.

Planning for the next problem may be key, but in the interim, the federal government is increasing the amount of small business loans available to help companies weather the storm.

Contact your insurance carriers and carefully look through existing policies to see what coverage, if any, you have today, and what coverage you may want to purchase for the future.

If your business is impacted by coronavirus, review your insurance policies now and be sure to document coronavirus-related business impacts.