Jonathan Theders, CEO of RiskSOURCE

As many operations close due to COVID-19 fears, there’s a growing question of whether or not business interruption insurance can help policyholders make up for lost revenue.

In the event of a loss, business interruption insurance provides coverage for income a business would have earned had it been operating normally. It can also help pay for expenses like employee wages, taxes, rent, loan payments and relocation expenses.

Unfortunately, in most cases, a business interruption policy won’t cover revenues lost due to the coronavirus shutdown.

Jonathan Theders, CEO of RiskSOURCE Clark-Theders, a Cincinnati-based agency that serves 4,000 customers nationwide, says business interruption insurance is typically triggered by a direct physical loss or damage to your insured location. Under this interpretation, contagious diseases like COVID-19 would not be considered a covered loss.

An example of direct physical damage would be damage to your building that keeps you from operating, typically from wind or fire.

“Pandemic risk, at least at this moment, has never been contemplated in direct physical loss,” Theders says. “Even businesses that are shut down, 99 out of 100 haven’t had an employee that has had coronavirus. They can’t even claim it’s been in their building.”

However, some argue that COVID-19 can contaminate physical objects like HVAC systems or assembly lines, which in turn would force businesses to cease operations. In these scenarios, business interruption insurance could provide some protection.

Additionally, it may seem like semantics, but the actual definitions and interpretations of “direct” and “physical” could matter on a case-by-case basis.

“Some companies define direct physical damage much better than others,” Theders says. “In some policies, if it’s not excluded, it’s covered. If there’s a virus exclusion on the policy, your chance of finding coverage is pretty low. But not all companies have virus exclusions. I think there will be a big argument that this does constitute direct physical damage.”

Supply chain issues

Business interruption insurance is a crucial component of risk management programs, but it does not extend to disruptions to a third party. That’s where contingent business interruption insurance (CBI) comes in.

Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI lets businesses transfer the risk of certain losses to the property of a third party. CBI is an optional extension of business interruption insurance that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a supplier.

In the event of a loss, business interruption insurance provides coverage for income a business would have earned had it been operating normally.”

Even if a business is not located in an area where COVID-19 has been detected, aspects of their supply chain might be, leading to potential disruptions. In fact, in China — where COVID-19 originated — many workers had been ordered to stay home, which forced some manufacturers to halt operations. Without access to the products or components they need, businesses that partner with these manufacturers also must stop distribution.

While CBI could provide coverage in this scenario, there are caveats. Theders says the covered third-party property may be specifically named, or the coverage may simply blanket all customers and suppliers. Companies will have to ensure their suppliers are included in the policy.

Additionally, like traditional business interruption policies, some form of direct physical damage to your supplier’s facility will need to occur before coverage is triggered. Again, contamination may constitute as property damage depending on the policy language and insurer.

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