Article written by:
Mallory Ashbrook, CPA, CVA, JD
Manager, Forensic & Dispute Advisory Services
Many companies have submitted claims to their insurance companies related to the shutdowns caused by the coronavirus crisis. It started with the restaurants that were forced to close their doors and limit services to carry out and delivery, followed by gyms, dental practices, and even an NBA team that followed suit. These businesses are making claims for business interruption caused by coronavirus and the insurance companies are denying the claims. Both the businesses and the insurance companies are claiming that their actions are necessary for their survival.
This is not the first time that businesses and insurance companies have entered into this conflict. After the SARS outbreak, a number of insurance companies added an exception that excluded viruses and bacterial outbreaks from the business interruption coverage. Generally, damage to the physical property is necessary for a business interruption claim, thus even in policies where there is no specific exception for viruses, insurers are denying claims based on the argument that the virus does not constitute physical damage to the property. However, the businesses are arguing that coronavirus did damage their property as it has the potential for transmission on surfaces and the physical limitations of their businesses are what required them to close their doors or reduce their business.
According to the lobbying group for the insurance industry, the estimates of losses for businesses with 100 employees or less are as high as $431 billion compared to the annual premiums of $71 billion. The insurance industry is built on spreading risk so that the industry can sustain a localized or regional event (i.e. a hurricane or fire). However, this pandemic is causing a nationwide disruption across many industries with no end date in sight. In an article published by The Washington Post, the chief executive of the Insurance Information Institute is quoted as saying if insurance companies are required to pay these claims, it could cost the insurance industry $150 billion per month, which would quickly deplete its $800 billion surplus. With the parties unable to agree on the appropriate handling of these claims, the businesses have taken to the courts to settle the issue with more than 400 business interruption lawsuits filed.
It is expected to be a long and contentious litigation and the outcome will essentially decide who survives – businesses or the insurance industry. GBQ has helped both insurance companies and businesses navigate claims in the past and we will continue to monitor and update you on this situation as it develops.