Insurance and Risk Management Considerations During COVID-19 - Part 1

This is the first in a series of 3 articles.

Stay at Home and Essential Business limitations have become a race against time for many small businesses, particularly restaurants and bars.  Although society is inching closer to opening up, restaurants and bars are still not given a green light.  The debate over opening seems part political and part medical, and neither of these groups has consensus within it.

In the meantime, what can a restaurant owner do?  SBA loans can help, but are limited, and offset by broadened paid sick leave obligations.  Most restaurants are working with a skeleton crew selling to-go meals, if they are open at all.  I saw a couple bars last weekend in Sunset Beach selling food and drinks at the door to groups of customers carrying them to the beach or tailgating in the parking lot. 

Could a business have purchased insurance to cover this shutdown?   Property insurance often comes with Business Income coverage which “will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations during the period of recovery”(*1).  Sounds good, so far.  The next sentence reads “The suspension must be caused by direct physical loss of or damage to property…”.  Hard to identify a direct physical loss here.  In addition to this language, insurance carriers are citing one or two exclusions, depending on the policy, in their Business Income claim denial letters.  First, “We will not pay for loss or damage caused directly or indirectly by…the enforcement of or compliance with any ordinance or law”(*2).  This exclusion, or one very similar, is found in most every property insurance policy.  Some policies have an additional exclusion,  “We will not pay for loss or damage caused by or resulting from any virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness, or disease”(*3). 

There are several high-profile lawsuits, many brought by the restaurant industry, challenging these exclusions.  Some suits are challenging the just the Ordinance or Law exclusion but not the Virus or Bacteria exclusion.  These suits are being watched closely by both insured businesses and the insurance industry.  Whatever the courts decide may well mean the end for some in both groups.  We should know something soon.

CA Insurance Commissioner Ricardo Lara recently issued a letter to all licensed insurance companies and agents instructing us to formally file every business income claim received from policyholders.  Each claim is to be formally evaluated, and if denied, done so in writing and citing specific policy language upholding the denial.

George O'Hara

gohara@colony-west.com

(714) 476-3934