Will Insurance Providers Cover Business Interruption Claims Under COVID-19?

Key Points

  • New York State Legislators have introduced a bill that would require insurance providers to pay COVID-19 business interruption claims.
  • As the bill currently stands, it would cover insureds with less than 100 eligible employees at the effective date of the bill.
  • A successful claim means maneuvering through the grey area, and being incredibly detailed, and prepared.

Short answer, it may not be up to them.  New York State legislators have introduced a bill to require insurers to pay COVID-19 business interruption claims.   Even if your policy currently has a virus exclusion, the law could override this, and force insurance providers to pay up.   In an article from Woods, Oviatt Gilman, a Law Firm in Rochester, NY, it is stated that the proponents of the bill also included a provision allowing insurers forced to pay for claims contemplated by the bill to seek reimbursement from the Department of Insurance using funds from a “special purpose apportionment” that the Superintendent would be authorized to collect from insurers doing business in New York State.

However, bills like this have been released in other states such as Ohio, Massachusetts and New Jersey, with much criticism.  Again according to Woods, Oviatt, Gilman, “critics of similar bills offered in other states have pointed out that an enactment which purports to change the terms and conditions of an existing contract, like an insurance policy between an insurance carrier and its insured, may be subject to challenge because the law would violate the Contract Clause of the United States Constitution.”  

Now for the question on many business owners’ minds, if this bill passes and/or if I am able to make a claim without the bill passing, how much will I get?

Business Interruption  = Time Units (hours, days) operations are shut down x the quantity of goods normally produced or sold per unit of time x the value of each unit of production (typically profit).

Essentially when you file a business interruption claim you are saying to your insurance provider, “pay me for the sales I would have had.”  Sounds simple enough, right? Not really. The business owner needs to prove the sales they would have had, and the projected or estimated amount can be a challenge to prove.  A successful claim means maneuvering through the grey area, and being incredibly detailed, and prepared. At a minimum, this means that you should have financial projections and detailed past and future research as it relates to consumer demand.  

Some questions that a business owner needs to consider when making a claim include:
  1. What is the most appropriate way to value lost inventory?
  2. Is third party assistance needed to establish fair market value?
  3. How do you plan to develop the financial analysis and deliver the most accurate and viable findings?
  4. How will you show that you made necessary efforts to reduce losses?
  5. What is the proper measurement or projection of the lost earnings and lost earnings period?  Note: It is important to understand the indemnity period. For example, if you had losses for 6 months, but the indemnity period is for 3 months some of the losses suffered will not be covered.  The indemnity period is typically defined in your policy or schedule.  
  6. How do you make a proper calculation of continuing and non-continuing expenses?  Note: these can be different from the accounting concepts of fixed, semi-variable and variable expenses.
  7. What expenses incurred during the business interruption, which would not have occurred during normal operations, can be properly included in a claim?

The New York State Bill that would require insurance companies to cover “certain perils under business interruption insurance during the Coronavirus disease (COVID-19) pandemic,” is still in the assembly.  As of right now we are keeping a close eye on it, and will continue to update you with new findings. As the bill is currently drafted, it would apply “to policies issued to insureds with less than 100 eligible employees in force on the effective date” of the Bill, and includes a proposed mechanism for reimbursement.

The COVID-19 pandemic is going to flood insurance providers with claims.  As we predicted in our article “Planning for Business Interruption Losses,” these claims may still be coming in 20 years from now.  Having a claim that insurers can quickly understand will maximize your chances of having a claim that is accepted, and payment that is received timely.  Having assistance in preparing your claim and/or having it reviewed by a forensic accountant or valuation professional, ensures it will be robust and easy to understand.  

If you have any questions please do not hesitate to reach out to me at mtota@teamdkb.com.