Many businesses have insurance packages that include coverage for business interruption. Now, because of the coronavirus shutdowns, many of those insured businesses face an interruption of business of a magnitude and duration never before contemplated. Can those businesses make a claim under their business interruption insurance coverage, because of the interruptions of their businesses?
At first blush, it sounds logical: business got interrupted; there’s business interruption insurance; it should pay for the interruption. That “logic” reflects a total misunderstanding of how property insurance and business interruption coverage work.
Business interruption insurance is only an extension of property insurance.
Businesses often buy property insurance. It ordinarily covers “direct physical loss” of buildings and certain other property because of a fire or many other possible causes of loss. So if the insured factory burns down or gets destroyed from some other peril the policy covers, the insurance company will pay to rebuild it.
Rebuilding the factory isn’t enough, though. During rebuilding, the factory owner will lose all the income the factory would have produced. Without that income, the factory owner might go out of business. To address that problem, many property insurance policies will pay the factory owner enough to make up for the lost income from the burnt-down factory while it is rebuilt. If the shutdown of the factory produced savings for the owner (for example, by avoiding the cost of utilities during the rebuilding period), then those savings get subtracted from whatever the insurance company will pay.
The insurance company’s payments to cover lost income are referred to in the insurance policy as business interruption payments. They compensate for the interruption of business resulting from the time it took to rebuild a building that got destroyed by a peril covered by the policy.
Business interruption coverage is not a stand-alone insurance policy that covers just any interruption of business. If such a policy were to exist, how would one define the interruptions of business that trigger coverage? Would the policy cover shutdowns because the business could not obtain inventory? What if the business shut down because inventory became too expensive? Or a strong competitor took away all the customers? What about shutdowns because of street closures? Utility failures? Picketing and protests? Overaggressive municipal inspectors? Inability to hire staff? The owner’s illness or getting stuck in a foreign country? It’s just not practical for an ordinary property insurance policy to cover every possible business interruption, except one arising from direct physical loss.
Instead, under the words of a typical property insurance policy, business interruption coverage is nothing more than an extra element of property insurance, covering an important element of the loss a business suffers when its building is damaged or destroyed and takes time to be rebuilt. For that reason, this sort of coverage is sometimes called time element coverage. Its existence, scope, and duration will depend in part on how much of a premium the business decides to pay for its insurance coverage. A higher premium payment might entitle the business to a longer period of business interruption coverage or a higher monthly payout after a fire.
Whatever the scope of business interruption coverage, the insurance premium paid by the business compensated the insurance company only for assuming the risk it agreed in the insurance policy to assume. The business interruption risk relates only to lost income during reconstruction of a damaged building. It doesn’t relate to any and all possible interruption of the business.
Politicians and others have recently proposed that that we should legally require insurance companies to pay for the business interruption caused by today’s shutdowns. After all, insurance companies have plenty of money and are everyone’s favorite target, second only to residential landlords.
Any such retroactive rewrite of insurance policies would be just like retroactively revising a construction contract to say that the contractor must build a two-story house instead of the one-story house the contract required, but the contractor can’t charge a penny more for the extra work. It makes no sense at all.
