Business Interruption Insurance and COVID-19

There are many business owners who are anticipating business slowdowns, shutdowns and supply chain issues as COVID-19 peaks in the United States. Cannabis business owners should be reviewing their business interruption insurance and COVID-19. Here are some FAQs from our colleagues at Globe Midwest Adjusters International.

If my business is closed due to COVID-19 am I entitled to recover loss of income under my commercial property insurance policy?

Maybe. However, recovery under your commercial property insurance may be difficult. A detailed review of the language in your specific policy is the starting point. A standard loss of business income policy provides coverage for lost income when certain criteria are met. These include:

  • Necessary suspension of operations
  • The suspension must be caused by “direct physical loss or damage to property at the insured premises”
  • The loss or damage must be caused by a covered cause of loss.

Necessary Suspension
To qualify, your business must essentially be shut down and the shutdown must be “necessary” not voluntary. There would be a difference between a voluntary action, e.g., closing a building voluntarily, and complying with a municipal or governmental directive to close, e.g., being quarantined due to confirmed virus contamination in the building.

Direct Physical Damage
Next, that shutdown must be the result of direct physical loss or damage to the insured premises. So, if your staff is home sick, or afraid to come in, that is not physical damage to your property. There is a difference between “social distancing” and “physical damage”. If your building is actually contaminated with the virus the question becomes, is that physical loss or damage?

There is an argument that viral contamination on the surface of materials is direct physical damage and that it must be cleaned/decontaminated. It would be a strong argument to make if it can be proven that the virus has physically settled on your property.

Covered Cause of Loss
As mentioned above, there is a strong argument that property contaminated by the virus constitutes “physical damage to property.” Most commercial properties are “all-risk,” meaning they cover loss by all direct physical damage to the property unless excluded. It is important to note that insurance policies have numerous exclusions and other limitations, which may include “pollution”. How courts would interpret this exclusion in relation to a COVID-19 will depend on specific policy language, circumstances surrounding the shutdown, and the jurisdiction.

Additionally, coverage under other endorsements or provisions in your policy may also apply. 

If my business is shut down as a result of a governmental action related to COVID-19, such as prohibited access to my building, am I entitled to recover loss of income under my commercial property insurance policy?

Maybe. Some loss of income policies includes coverage for shutdown due to “Civil Authority.” For this to apply, the civil authority must issue an order barring access to your insured property; e.g., a government-mandated quarantine. The civil authority must also be based on direct physical loss or damage from a covered cause of loss to property other than your premises. The same requirements of “physical damage” and “covered cause of loss” as addressed in the FAQ above would apply here as well. As such, a thorough reading of your policy in conjunction with the applicable facts surrounding the prohibition of access to your business is essential to determine if this coverage would apply.

If my suppliers or clients are shut down due to COVID-19 and my business loses income, am I entitled to recover loss of income under my commercial property insurance policy?

Maybe. There are endorsements available to cover lost income as a result of damage to the property of your suppliers or clients. Some examples include:

Contingent Business Interruption (CBI)
CBI insurance covers lost income when your business has not sustained any physical damage but a business you depend on has been disrupted. For example, your supplier is shut down and can no longer supply materials necessary for your business, or a customer is shut down and is no longer purchasing from your business. As a result of the shutdown of your supplier or customer, your business is losing income. CBI Insurance may cover this lost income, however, the same hurdles of “physical damage” and “covered cause of loss” as addressed in the FAQs above would apply here as well.

Supply Chain Insurance
This is similar to CBI Insurance but would be more likely to respond to a loss due to a COVID-19-related shutdown. Supply Chain Insurance covers lost income as a result of a disruption to your supply chain. Significantly, unlike most other lost income insurance, the disruption does not have to result from physical damage to property. For example, if a manufacturer’s supplier were shut down due to a quarantine resulting from a viral or other disease outbreak, the manufacturer could recover lost income as a result of the disruption.

Is there insurance available that would cover lost income as a result of a shutdown caused by COVID-19?

Yes. There are several endorsements available that could potentially cover lost income as a result of your business being shut down due to COVID-19. In addition to the endorsements referenced in the FAQs above, there are “communicable disease” endorsements available that would cover these losses, under certain factual circumstances. If you do not have an endorsement that would apply to a virus outbreak now, you should consult your agent or broker to determine what products are available on the market to cover this type of loss. 

In conclusion…
The above FAQs are based on general scenarios with common policy language. Coverage or your loss will depend on the specific language in your policy and your facts and circumstances. If your business suffers a substantial loss of income due to a shutdown that can be linked to COVID-19 being physically present in the building or if you think the loss may be covered under another endorsement in your policy, then it is recommended that you consult an expert to determine if a claim should be made.

Ethan A. Gross, J.D.



Cannalex Law thanks guest blogger Ethan A. Gross, JD of Globe Midwest Adjusters International for this content.