Is Your Business Protected Against Coronavirus-Related Losses? by Daniel S. Hughes, CPA/CFF/CGMA, CVA
Posted on March 16, 2020
The novel coronavirus (COVID-19) is having a profound impact on lives, businesses and commerce across the globe. As the disease continues to spread, countries have closed their borders, financial markets have fallen, supply chains have become disrupted and businesses are facing the potential of mounting losses that may continue for some time. The longer it takes to contain the outbreak, the more severe the economic impact. At this time, businesses should assess their risks of coronavirus-related losses and carefully review their existing commercial insurance policies to determine if they have appropriate coverage to potentially recover financial losses.
Property, Business Interruption, Contingent Business Interruption Insurance, and Civil Authority Clauses
Commercial property insurance that covers direct physical loss or damage to business assets may also include business-interruption (BI) insurance. This type of coverage may compensate companies for income or profits lost as a result of an inability to continue normal operations due to direct physical loss or damage to business property. In these situations, coverage is triggered if the physical loss or damage results from a covered peril or a qualifying cause of loss, such as a flood, fire, hurricane or other natural disaster. However, many policies intentionally exclude communicable diseases from covered perils, and if the cause of a loss does not qualify as a covered peril, BI coverage may not be available.
Contingent business interruption insurance (CBI) provides expanded coverage for losses resulting from damages incurred by policyholders’ suppliers, customers and other partners on which those businesses rely to manufacture, distribute and buy their products and services. For example, a U.S. business that relies on a manufacturing facility in China or elsewhere will obviously feel the financial impact and loss of income if that facility closes and halts production. While the U.S. business may have a CBI insurance claim, the CBI endorsement may contain restrictive language that limits coverage to specific and qualifying causes of loss and/or specific suppliers, customers and other business partners identified in the policy advance. Similarly, it is common for claims under CBI endorsements, like BI, to require specialized coverage for infectious disease.
Another policy provision that businesses may pursue for COVID-19-related losses is the civil authority clause contained in many property insurance policies. Civil authority provisions define whether businesses can recover loss of income when a government entity denies access to the insured’s property. For example, local, state and/or federal governments may evacuate or prohibit access to certain areas after a natural disaster, act of terrorism or other-life-threatening event, especially if civil authorities deem the area a public-safety threat. This is already happening as a response to COVID-19 throughout the world. Under these circumstances, local business owners with civil authority coverage may recover potential losses during a specified period of time. Like most insurance policies, compensation under civil authority, BI or CBI will depend on the language contained in the insured’s policy.
Commercial General Liability, Directors & Officers, and Errors & Omission Insurance
Claims for other coronavirus-related business losses may exist under a business’s other insurance policies. Again, business owners and their advisors should dust off policy documents and carefully review the wording to determine their potential coverage or lack of coverage.
For example, commercial general liability insurance (CGL) offers businesses protection from third-party, non-employee claims of bodily injury or property damage. When evaluating these types of policies, companies should look for wording that may exclude claims resulting from infectious disease, and they must pay careful attention to all the conditions required to satisfy policy overage.
Director & officer insurance (D&O) and errors & omission policies (E&O) provide businesses, their executives and board members with potential coverage against allegations that they acted unreasonably, failed to act, or made errors that resulted in financial harm to a third-party. Essentially, these policies help entities and individuals cover the costs to defend themselves against allegations of legal liability, such as those relating to shareholder lawsuits over falling stock prices, as well as the costs for settlements and judgments imposed by the court.
Coverage under a worker’s compensation insurance policy generally requires employees to demonstrate that as a direct result of the terms of their employment, they incurred a “loss,” such as an injury on the employer’s property or illness resulting from business travel. The likelihood that a claim will be compensable depends on a variety of factors, including the worker’s compensation laws in the state where the business is located and the industry in which the employee works. For example, a hospital worker who contracts COVID-19 while caring for patients has a stronger worker’s compensation case than an infected lawyer who spends most of his or her time in an office building. Similarly, employers should take proper measures to limit employees’ risks of exposure to infectious disease. This may include restricting employee travel to infected regions and/or implementing work-from-home policies.
While savvy companies will likely have business-continuity plans in place to help them continue operations through perilous times, many have not given much thought to how they would respond to an infectious disease. Even with the outbreaks of SARS, Ebola and swine flu over the past two decades, most businesses have discounted the risk of a global pandemic and therefore not yet addressed how they could protect their operations from the impact of such a health crisis.
Businesses that are currently feeling the effects of the COVID-19 coronavirus should proactively meet with their advisors to review their existing insurance policies and determine if they may have recoverable claims for potential losses they incur before the virus is contained.
About the Author: Daniel S. Hughes, CPA/CFF/CGMA, CVA, is a director with Berkowitz Pollack Brant’s Transaction Advisory Services practice, where he assists buyers and sellers with merger and acquisition financial due diligence and quality of earnings studies as well as post-transaction earnout and closing net working capital analyses. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.