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How your business may or may not be able to tap insurance help for coronavirus shutdown

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Commentary

Raymond H. Sheen is a Partner at Farella Braun + Martel (rsheen@fbm.com or 415-954-49720; Patrick S. Loi is a Senior Associate at Farella Braun + Martel (ploi@fbm.com or 415-954-4996); and David B. Smith is an Insurance & Risk Management Consultant at Farella Braun + Martel (dsmith@fbm.com or 415-954-4435).


Read more business coverage of the COVID-19 outbreak.

Check out how business-interruption coverage has been used in previous North Bay disasters.

The new coronavirus, COVID-19, is causing severe disruption to the economy, to businesses large and small. Governmental entities as well as the private sector are implementing more and more drastic measures to contain the coronavirus.

California and all Bay Area counties have issued orders for residents to stay home and many businesses not deemed "essential" to close. While these efforts may be wise in light of the substantial public health concerns, they threaten to bring parts of the economy to a virtual halt, adversely impacting most every business and resulting in substantial losses.

What is considered business interruption?

As a company determines the impact of the coronavirus on its business, it should assess the business-interruption coverage available under its commercial property (or “first-party”) insurance policies. Property policies usually contain “civil authority” or “civil order” coverage which encompasses losses caused by the actions of local, state, or federal authorities.

Specifically, a property insurer may cover the loss of income that results when a government entity restricts access to a “location” covered by the policy — for example, a tasting room, a shopping center, or a processing facility owned by the company — or significantly impairs the company’s operations at that “location.”

This “civil authority” coverage may also require that the government action result from “physical damage,” but this raises two important points.

First, the term “physical damage” (or “direct physical damage”) is broadly construed in California and many states as including, for example, a location that is contaminated with a virus or disease, or is unfit for its intended use.

Second, under many policies the contamination need not occur at a property owned by the company; instead, these policies provide that the contamination may exist anywhere within a defined radius around the company’s property of, say, 5 or 10 miles.

Finally, if the company’s own property is contaminated with the coronavirus — for example, because an employee (or customer) infected with the coronavirus recently was at its premises — then the policy may cover business interruption even in the absence of government action. The bottom line is that scope of business interruption coverage will depend on the language of your property policy and the specifics of the disruption to your business.

Is there coverage for supply chain impacts?

Many businesses depend on parts or products that are manufactured in China, Italy, or other areas impacted by the coronavirus, and have suffered losses due to disruption of their supply chain. Commercial property policies often contain “supply chain” or “contingent business interruption” coverage. Like the business interruption coverage for the company itself, this coverage may be triggered where there is contamination or other “physical damage” to links in the supply chain (for example, manufacturers, distributors, or customers), or there is a government order barring access to, or impairing the operations of, those upstream or downstream suppliers, service providers, and customers.

What should I do now?

The coronavirus has already resulted in government orders, cancellations, and closures that were unthinkable just weeks ago.

As companies assess the disruptive effects of the coronavirus, they should consider the business interruption and contingent business interruption coverage available under their insurance programs. They should also consult with their insurance brokers and counsel, because the insurance industry is likely to take a hard line on coronavirus claims as they are confronted with more and more of them.

Bear in mind that business interruption claims can be complex and insurers typically challenge the amount that is covered. It will be useful for any future claim to keep records of your business’s expenses incurred in mitigating losses now as well as in getting back up to speed later.

Commentary

Raymond H. Sheen is a Partner at Farella Braun + Martel (rsheen@fbm.com or 415-954-49720; Patrick S. Loi is a Senior Associate at Farella Braun + Martel (ploi@fbm.com or 415-954-4996); and David B. Smith is an Insurance & Risk Management Consultant at Farella Braun + Martel (dsmith@fbm.com or 415-954-4435).


Read more business coverage of the COVID-19 outbreak.

Check out how business-interruption coverage has been used in previous North Bay disasters.

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