Courts Rule COVID-19 Business Interruption Claims Invalid

business interruption

As second court has ruled that an insurer does not have to pay business interruption claims by businesses that saw their revenues run dry due to the COVID-19 pandemic, which will further make it difficult for business to successfully file such claims.

In the most recent case, a Superior Court judge in the District of Colombia in August ruled that an insurer is not obligated to pay business interruption claims of the owner of several restaurants after the mayor ordered all restaurants to close in response to the coronavirus. The judge ruled that in order for the business interruption claims to be valid there must have been physical loss or damage and that the plaintiffs failed to prove any they suffered any such losses.

The ruling comes on the heels of a Michigan state court decision in July that also sided with Michigan Insurance Company in a case brought by the owner of two restaurants whose $650,000 business interruption claim the insurer had denied.

These two cases are closely following the wording of typical business property policies that also include business interruption coverage caused by physical damage.

In the D.C. case, there were several plaintiffs: Lead plaintiff Rose 1 LLC, which is owned by chef Aaron Silverman, and which operates a number of upscale restaurants including Rose’s Luxury, Elaine’s One, Pineapple and Pearl’s and Little Pearl. Other plaintiffs included Buttercream Bakeshop, Karma Modern Indian, El Cucho, Bar Charley, La Vie and Beuchert’s Saloon.

Mayor Muriel Bowser had issued orders on banning indoor dining, for residents to shelter at home and for all non-essential businesses to close. The restaurants filed claims on their commercial property policy with Eire Insurance Company, which included coverage for loss of income and/or rental income from a partial or total interruption of business that results directly from loss or damage to the insured property.

The restaurants after the claim was rejected, arguing that the loss of use of their restaurants was a direct physical loss because the closures were the direct result of the mayor’s orders.

The plaintiffs argued that the losses were physical because the coronavirus is “material” and “tangible.” But, the judge pointed out that the plaintiffs failed to show that the virus was present in their properties and that the mayor’s orders did not materially or tangibly affect the restaurants.

Business interruption cover

Business law attorneys say business around the country have filed hundreds of coronavirus-related business interruption lawsuits after seeing their claims rejected. The issue mainly comes down to policy wording.

Most business property policies also cover business interruption claims, but policies usually specify that there must be physical damage to property. The policies are typically tapped to losses resulting from damage to a business caused by a natural catastrophe. Additionally, most business interruption portions of policies explicitly exclude pandemic.

Most policies require there to be some type of direct physical loss or damage to either your premises or some part of your supply chain in order to trigger business interruption coverage. Without that trigger, insurers would likely argue that a virus in your facility is not physical loss or damage.

But these are early days in the litigation front as more cases are decided and appealed, we should have a clearer picture of COVID-19 business interruption coverage.

What Business Insurance Policies Cover Rioting, Looting

looting

As protests around the country descended into rioting and civil unrest, many businesses that have been looted, or seen their shops damaged or completely destroyed, will obviously be turning to their insurance to file a claim.

While many companies were unsuccessful in filing business interruption claims for the COVID-19 crisis, claims for damage and theft from rioting and looting are more likely to be paid. A number of coverages will come into play depending on the damage and lost income a business suffers at the hands of rioters, vandals and looters.

Property damage

Standard commercial property policies cover damage to a business property caused by fire, explosion, riot or civil commotion, vandalism or malicious mischief. This would include coverage to the structure of the business, as well as any inventory, fixtures and other contents. Business owner’s policies also include this risk.

The business personal property coverage portion of the policy would cover damage and theft if rioters break into a real estate office, for example, and steal computers, burn furniture and destroy office equipment. That said, the damage would be subject to limits (specific or blanket), as well as any deductibles required by the policy.

Commercial vehicle damage

Automobiles are covered under the optional comprehensive portion of a commercial auto policy, which you should have for all your vehicles. This will pay for damage to the vehicle and its contents caused by fire, falling objects, vandalism or rioting.

Comprehensive coverage will cover the gamut and will pay you if a vehicle is:

  • Stolen,
  • Damaged, or
  • Destroyed (for example, burned).

One of the most common damages to vehicles during riots is broken windshields, which you can usually get covered with an optional glass coverage rider.

Business interruption coverage

Companies that are forced to close as a result of riot and looting damage may have coverage for business interruption under a business property policy.

The policy may also cover lost income because a business had to close after riots. It would often cover dependent properties or have contingent business extensions of coverage. Also, coverage can apply if a business suffers a loss of income because of curfews or if authorities bar access to a property.

Coverage is typically triggered if there is direct physical damage to the premises.

You should note that many policies require a 72-hour waiting period before a policyholder can begin making a claim. That’s because the first three days of business shutdown, access constraints or limited hours of operation because of a civil authority action are often excluded from coverage.

There may also be a limit to the claim period. A standard limit is up to three weeks of losses.

Filing a claim

When filing a claim, read your policy in its entirety to determine how to best present it. It’s important to understand the policy’s limits and deductibles before spending time documenting losses that may not be covered.

If you are going to file a claim, document all damage. You should have receipts for all your inventory and fixtures. Here’s what you should do:

  • Take photos of all damage.
  • Contact your agent and file a claim immediately.
  • Clean up to protect your building, but do not make major repairs until you talk to the insurance company.
  • Keep receipts for any remediation work.

If you’re going to file a business interruption insurance claim, you will need:

  • Pre-riot financial statements and income tax returns.
  • Post-riot business records.
  • Copies of current utility bills, employee wage and benefit statements, and other records showing continuing operating expenses.
  • Receipts for building materials, a portable generator and other supplies needed for immediate repairs.
  • Paid invoices from contractors, security personnel, media outlets and other service providers.
  • Receipts for rental payments, if you move your business to a temporary location.

A final thought: Filing a business interruption claim is not easy, particularly when estimating losses. The process is highly complex and can be contentious. If the insurer disagrees with your loss estimates, they may have specialists audit your claim.

 

Coverage Disputes Over Online Attacks Grow

cyber coverage

A federal court has ruled that an insurer’s professional liability policy must pay out $6 million for a company’s losses from a business e-mail compromise scam, even though the business lacked cyber coverage.

The ruling is part of a growing trend of businesses that haven’t purchased cyber insurance seeking coverage for cyber-related losses from other policies they do have, such as business liability, professional liability, and directors & officers (D&O) coverage.

Seeking coverage for cyber losses and for e-mail compromise scams from other than cyber policies is not often successful, and whether the insurer will pay out can depend on the nature of the loss.

In this latest case however, a judge in the U.S. District Court in the Southern District of New York ruled that American International Group must cover $5.9 million that a company had been duped out of by Chinese hackers in 2016.

AIG had disputed the claim saying that the professional liability policy the business had does not cover “criminal acts,” adding that it had never sold the company a cyber policy.

These disputes are becoming more common and you should pay attention to your policy exclusions, as well as consider cyber insurance, if you have assets that could be exposed through a cyber attack or fraud.

How was the business scammed?

SS&C Technologies received spoof e-mails that purported to come from one of the company’s clients, Tillage Commodities Fund, a commodities investment firm. The e-mails instructed the company to make six wire transfers to a bank account in Hong Kong.

The scammers masqueraded as Tillage employees with e-mail addresses that spelled “Tillage” as “Tilllage.”

But according to court documents, there were telltale warning signs that the e-mails were fishy:

  • One e-mail asking SS&C to wire $3 million contained only the words “How was your weekend?” and then the wire transfer details.
  • E-mails included grammatical errors and unusual syntax like “Let’s round up business today.”

Based on the above, staff at SS&C were not too diligent in looking out for possible

business e-mail compromise scams involving a third party hacker posing as someone else (a client, a vendor or even a manager or president of the targeted company) via e-mail and requesting a wire transfer into a bank account.

This type of scam, which cost organizations $300 million every month in 2018, according to the U.S. Department of Treasury, is covered by a standard cyber insurance policy.

SS&C did not have a cyber policy, so it sought coverage under its professional liability policy for the losses it sustained when transferring those funds. AIG did pay for SS&C’s legal defense costs after Tillage Commodities sued, but refused to cover the $5.9 million in stolen funds.

According to court documents, AIG’s policy included a clause that it would not provide indemnity coverage for losses arising from “dishonest, fraudulent or criminal acts.”

What this means for your firm

While this case worked out for the insured party, businesses should not rely on their non-cyber insurance policies to continue paying claims. As costs for cyber attacks like ransomware, malware, stolen data and business e-mail compromise scams grow, insurers are increasingly including clauses that explicitly exclude coverage for those risks.

If you have any important company assets in digital form and/or make or receive payments online, it would be wise to secure a cyber insurance policy.

If you don’t, you can try to seek coverage under other policies. That it may be difficult to obtain, but not impossible.

For example, if your company has D&O liability insurance and/or crime insurance, it may be able to seek coverage for any ransomware events since those policies will typically include coverage for kidnapping and ransom.

Some insurers are now providing — either deliberately or unintentionally — kidnapping and ransom coverage that applies to ransoms paid in response to cyber extortion. Among the events that these policies may consider cyber extortion are:

  • Threats to poison a computer system with malware.
  • Threats to change, damage or destroy programs or data stored on a system if the owner does not pay a ransom.

That said, many insurers who provide this coverage likely did not anticipate covering ransomware losses and have started changing their D&O and crime policies to specifically exclude ransomware.

Other insurers have added deductibles to the coverage, mirroring the terms of cyber policies, while others have capped the amount of business interruption coverage they will provide for cyber-extortion losses.

Struggling for Survival: Businesses That Went Thin on Insurance

business insurance

Imagine several small businesses located around the country. Each is well-established and profitable. Each of them bought business insurance – property, liability, automobile and workers’ compensation.

They told their agents they wanted the lowest possible price for coverage, and the agents came through. But they didn’t also take their agents’ recommendations to purchase additional coverage.

Unfortunately, they each suffered losses that threatened the very survival of their businesses. This is how they each got into such a fix:

The underwater restaurateur

The owner of a restaurant on the south shore of Long Island, NY, rejects his agent’s offer of flood insurance when he sees the price.

He relies on property insurance instead. Superstorm Sandy hits in 2012, and the restaurant has 38 inches of water in it, causing tens of thousands of dollars in damage.

That’s when he learns that his property insurance provides no coverage for flood losses.

Sofa seller on shaky ground

A furniture wholesaler in Modesto, California, buys an “all risks” property insurance policy at a low premium.

One day, a major earthquake shakes his building, breaking internal water pipes, collapsing racks of furniture, and damaging several high-priced pieces and some forklifts.

He has to close until city engineers can certify the building as safe. The losses from water damage and breakage are well into six figures, not including the lost sales.

But, when he submits an insurance claim, he learns that his policy does not provide any coverage for earthquake damage.

Tech trouble

A Pennsylvania contractor does work for a national chain of retail stores. Employees in the contractor’s office receive e-mails from what they believe are trusted sources.

However, the e-mails contain malicious software that steals network passwords. The perpetrators of the e-mails use the stolen passwords to log in to the retailer’s networks.

Credit card and personal information records on 110 million people are exposed. The contractor never even considered buying cyber liability insurance.

Tragedy on the grounds

The owner of a small apartment complex in Kentucky considers himself well-insured with commercial general liability insurance limits of $1 million for each occurrence, and an umbrella policy with another $1 million limit.

One night, a 29-year-old woman visiting a friend is attacked in a dark parking lot. Because of her injuries, she will never be able to resume her practice as a hospital pediatrician. She sues the apartment complex for more than $20 million, including medical costs, pain and suffering, and lost future earnings.

The owner finds himself significantly underinsured.

Small shop, big troubles

A Virginia tool and die manufacturer suffers a major fire. The owners carried $20,000 of business interruption insurance, assuming they could be back in business within a couple of months in case of a disruption.

However, the shop cannot produce anything without two special machines made by a German manufacturer. It will take six months for the replacements to be ordered, manufactured, shipped, installed and tested.

The shop’s lost revenue will far exceed the $20,000 of business interruption insurance.

The takeaway

All of these situations could have been avoided had the businesses not limited themselves to securing the minimal insurance they could get by on. The key is knowing what your risk is, and then seeing if it can be addressed with insurance.

There is certainly going to be a greater cost with securing the insurances a business truly needs, but the cost of not having necessary coverage can be much greater.

Worse yet, it can put you out of business. If you think you may have some blind spots, give us a call so we can go over your coverage with you.

Property Coverage for Businesses with Changing Needs

Some businesses have very stable property insurance needs as the value of their non-building assets, equipment and inventory doesn’t vary much during the year.

Other types of business experience wide variations in the value of their property. Florists tend to carry more stock around Valentine’s Day and Mothers’ Day than they do on most days of the year. Many retailers earn most of their profits during the holiday shopping season, so they keep larger amounts of stock on hand during that period.

Warehouses and manufacturers may have variable amounts of product on their premises with vastly different values. Depending on the flow of orders, the value of their stock may change greatly from month to month, or even more frequently.

A traditional property insurance policy will not meet the needs of businesses like these. To secure enough coverage, they would have to buy an amount large enough to cover those times when values are at their peak. But, for much of the year that would leave them paying for more insurance than they need.

Businesses in this situation may want to consider two coverage options:

Peak season coverage – This coverage is appropriate for firms that can predict those periods when their values will increase. Examples are florists, toy, electronics and clothing retailers during the holiday season, school supply stores in late summer, and costume shops in October.

The coverage form states the location and type of the property, the amount of additional insurance, and the period during which the higher amount applies. For example, it might show that insurance on goods for sale will increase by $100,000 from Oct. 1 to Jan. 1. This gives the business plenty of coverage for the busy time, but saves it from having to pay for all that coverage the rest of the year.

Value-reporting coverage – This coverage is for those firms with asset and inventory values that fluctuate all year long. It requires the business to buy an amount of insurance large enough to take care of the peak periods.

But, the insurance company will charge a lower initial premium than that amount would ordinarily require. The firm then must make periodic reports of its values to the insurer. Depending on the option chosen, this will mean sending reports monthly, quarterly or once per year.

Again, depending on the chosen option, the reports can show values as of the end of each business day, week, month, quarter or year. After the firm has submitted all of its reports for the policy period, the insurance company determines the business’s average values and calculates the final premium.

Firms that choose value-reporting coverage must take care to submit the required reports on time and accurately. The form gives the insurance company the right to reduce claim payments for losses to the property when reports are late.

The insurer can also reduce a loss payment if it finds that the policyholder underreported its values. The limit of insurance does not automatically increase if the reports show values higher than the limit; the firm must request an increase in coverage.

The takeaway

Any company with variable property values would be wise to consider purchasing one of these types of coverage. With some careful planning, a business can limit its insurance costs while still getting the coverage it needs. Call us if you have questions about this type of coverage or to discuss whether it’s appropriate for your operations.