No rational business entrepreneur starts a business with the intent of having to close it at ‘the drop of a hat’ due to a cataclysm. Yet, a cataclysm of that order seems to have recently emerged throughout the world’s commercial marketplace due to the Novel Coronavirus/COVID-19 pandemic. A Main Street economic outcome of the pandemic, and the affiliated quarantines that have been put in-place to ‘flatten the curve’ of the disease’s spread, is that untold businesses of all sizes have either closed or reduced their scope of operations, resulting in job losses, and curtailed or completely cut-off income. If convincing is needed, one need only review the U.S. and state governments’ newly enacted measures to support employers, employees, and other workers whose livelihoods have come to an immediate ‘grinding halt’.1
It should now be obvious that a central focus of this series is the value in business, and life in general, of designing and implementing of proactive risk management plans.2
The core tenet of proactive risk management is that a better use of one’s physical, fiscal, and human resources is to take what one has learned to-date, to apply that maturing knowledge-base against the constantly evolving business, economic, regulatory, and scientific environments, and to develop measures to address repeat, incremental, or drastic changes in those environments, and, again and perhaps most important, to implement those plans on regular routine, and pre-scheduled basis (often with the support of checklists), at all times with a keen eye towards being flexible to update those plans to meet further environmental changes.
Now… It seems entirely counterintuitive that a fundamental element of a well-prepared proactive risk management plan is the intentional inclusion of reactive risk management devices, such as procuring insurance policies. Yet, up-front attention to that function can serve as a protective blanket (or parachute – choose ‘your’ favorite metaphor) to make-one whole for predictable damages and losses. It is much easier to review one’s insurance policies up-front and periodically before a loss to determine if and to what extent one is covered for various sorts of damage, than it is to dig deep into one’s own pockets for resources to remedy that damage.3
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Back to the facts of the day. Meaning the sudden – spontaneous perhaps – complete shuttering of a business’ operations due to the pandemic. ‘Hitting the brakes that hard, that fast’ can affect an owner’s and partners’ investments in the enterprise, employees’ and vendors’ (such as landlords) incomes, and customers’ supply needs. In the ‘big picture’, a dislocation of the supply chain; at the personal level, an inability to pay one’s debts in the ordinary course as they become due (‘aka’, insolvency).
One type of insurance which can be obtained up-front to address severe financial losses is business interruption coverage (sometimes known as business income coverage 4 ), which is an adjunct to general liability coverage. As described by the International Risk Management Institute:
A typical business interruption policy provides that the insurer “will pay the actual loss of business income the insured sustains during the necessary suspension of its operations during the period of restoration.” A typical definition of “period of restoration” is the period of time that begins immediately after the direct physical loss and ends on the earlier of the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or the date when business is resumed at a new permanent location. 4
IRMI continues to explaining the scope and timing of ‘BI’ coverage:
The typical business interruption adjustment calculates the compensable loss during the period of time from the date of loss until the property damage is, or should be, repaired…
Why is this relevant to the Novel Coronavirus/COVID-19 pandemic? Businesses have closed. Income has ceased.
Yet…To-date compensation for pandemic claims have largely been denied. Why?
Let us start with the premise that insurance is a form of contract. As a result, the parameters of insurance coverage are defined by the terms of the contract under consideration. Accordingly, a carefully detail-oriented reading of an insurance policy, including its definitions, permitted coverage areas, and exclusions from coverage, must be conducted.5 (From experience, this sort of reading requires a ruler and colored highlighters to coordinate the numerous internally related provisions and incorporations-by-reference from other source documents.)
Most commercial policies are somewhat generic in scope. And, as a general manner they require a direct physical loss. As a factual matter, there is none in a pandemic situation. The building is there (no fire, no explosions, no wayward satellites landing on the roof), the power is on and the water is flowing, and the furniture and fixtures stay in-place.6
And standard policies contain exclusions for viruses. For viruses.7
Further, a loss of business income can be caused by an external act of a government authority, also referred to as a civil authority. Acts by civil authorities can be covered under the following conditions:
- The existence of an order of civil authority that
- Prohibits access to the insurance premises;
- Is caused by or results from physical damage to property, other than insured property; and
- That damage to property must be due to a peril covered under the policy; and
- That denial of access must be the proximate cause of a loss of business income. (Underlining added.)8
Based upon the principles discussed above, the factors to be considered in making a business interruption claim include:
- Whether a direct physical loss occurred?
- Whether a civil authority’s preventing access to the specific place of business caused a loss which can be characterized as a direct physical loss (or even physical damage)?
- Whether specific or generic viruses are covered under a policy?
And, moreover, whether an insurance company’s analysis (most likely rejection) of a claim is so flawed as to constitute insurance bad faith.9
Not surprisingly, lawsuits have started over pandemic-related BI claim denials have begun. Several of them.10 And their outcomes will largely hinge on the wording of the relevant policies constituting the source of the denials laid against the facts motivating the claims to be made in the first place.
What, then, is a Florida business to do?
- Now: If the business has been closed, the language of one’s liability policies must be dissected regarding the matters addressed above. Does the loss one is suffering fall within, or without, the specific policy’s terms, conditions, and wording?
- Later: On a going forward basis, business owners should carefully discuss the full scope of their anticipated operating needs and risks (both specific and in the overall business eco-space) with their insurance brokers (or insurance company agents) to ensure they obtain suitable types of coverages and limits for potential roots of loss. Can a loss one may suffer fall within, or without, the specific policy’s terms, conditions, and wording?
The ‘rub’. It is in ‘B’ above that the proactive risk management object lesson emerges. It always does. Because it is always there. And that is why proactive risk management will continue to be addressed in this series.
Information about Bogin, Munns & Munns’ response to Coronavirus readiness.
Note: Citations are given to third-party sources to respect the original authors’ copyrights.
- See Another Timely Coronavirus/Covid-19 Update,
Additional Resources for Florida’s Businesses, Negotiation and Forbearance, A brief note for Florida’s individuals, families, and businesses about extensions, Coronavirus/COVID-19 pandemic state, The Paycheck Protection Program, Resources for Florida’s businesses, families, and individuals,Do You Count?, Life in Times of Coronavirus.
- See, for a few examples, On Turning 60 from a Legal Perspective, Handful of Activities for Florida Businesses to Undertake, September is National Preparedness Month, Time for a Bit of Business Planning, Weather Continues to Affect Florida, Contracts Should Be Built Around Risk Management Concepts.
- See Businesses Must Also Attend to Reactive Risk Management.
- Business Income Coverage
. Frequent references are made to IRMI in this article, which is a source the writer regularly uses in his academic materials, as well.
- It should be noted that the insurance companies prepare the policy contracts, which are not typically ‘open’ for negotiation. In that regard, an argument from general contract law can be made that ambiguities in an insurance policy are to be interpreted against the insurance carrier (the contract drafter) and in favor of the insured party (the purchaser).
- When Does Business Interruption Insurance Coverage Stop?.
- See Another Timely Coronavirus/Covid-19 Update,
- Coronavirus (COVID-19) Business Income Losses—Are They Covered?.
- COVID-19—When Civil Authorities Take over, Are You Covered?.
- Bad Faith.
- See Florida restaurant files class action seeking virus cover.
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For more information, call Philip N. Kabler, Esq. of the Gainesville, FL office of Bogin, Munns & Munns, P.A. at (352) 332-7688, Gainesville Real Estate Lawyer, where he practices in the areas of business, real estate, banking, and equine law. He has taught business and real estate law courses at the University of Florida Warrington College of Business Administration and Levin College of Law. And he is the President-Elect of the Eighth Judicial Circuit Bar Association.
And a note – Please visit (or even ‘bookmark’ or ‘favorite’) this writer’s business, real estate, and banking blog at kabler.
NOTICE: The article above is not intended to serve as legal advice, and readers should not rely on it as such. It is offered only as general information. Readers should consult with an attorney regarding their legal matters, as every situation is unique.