As businesses work to get back on their feet during the coronavirus pandemic, insurance claims continue to rise, as do questions regarding policies and procedures. Though it may not be explicitly mentioned within business interruption clauses, deductibles likely still apply for many claims. In addition to everything else business owners have to learn and manage right now, knowing how deductibles apply to business interruption claims is another technical aspect of insurance policies they must understand during this difficult time.
Understanding Deductibles
An insurance deductible refers to the amount of money the insured will be responsible for paying on an insurance claim before coverage kicks in and the carrier starts paying. Once the deductible is paid, the insurer will pay the rest of the claim value up to the policy limits, subject to any applicable conditions within the policy language.
A deductible can be calculated either as a specific dollar amount or as a percentage of the premises’ insured value. The latter is typically more common with coverage for earthquake or windstorm damage or for properties with increased risks.
When businesses purchase insurance policies, they seek to protect themselves from unforeseen financial risks due to losses or damages. The deductible takes the financial form of the ‘risks’ the business can afford to pay for itself, which results in the insurer calculating how much to charge the business – the higher the deductible, the lower the cost of the insurance. A policy can also contain multiple deductibles.
Deductibles and Business Interruption Claims
When it comes to deductibles and business interruption insurance claims, it’s important for policyholders to remember that deductibles are not explicitly listed as such. That is because there is a waiting period in place before the deductibles go into effect.
Many insurance carriers offer business interruption policies containing civil authority provisions. This coverage applies when a civil authority – such as a state, local, or federal government – prohibits access to an insured’s premises due to direct physical loss of or damage to property other than at the insured’s premises from a covered cause of loss. Many policies do not begin covering losses caused by a civil authority order until a “waiting period” has concluded. That timeframe is usually 72 hours after the civil authority action and is sometimes referred to as a temporal or “waiting period” deductible.
“Waiting Period” Deductible Distinguished From Percentage or Fixed Dollar Amount Deductibles
Before we get back to what a “waiting period” deductible is, let’s contrasting it with more common deductibles such as percentage-based or fixed dollar amount deductibles.
In most property insurance policies, a deductible is defined either by a fixed dollar amount or a percentage. For example, policies often contain a “wind/hail” deductible defined by a percentage of something, such as a percentage of the entire limit of insurance procured or a percentage of the value of the property as determined by the insurance company’s underwriters. In other situations, the deductible is set as a fixed dollar amount (e.g., $5,000, $10,000, or much higher depending on the amount of insurance and the value of the property).
These deductibles are usually applied on “per occurrence” basis. To illustrate what this means, let’s say a windstorm strikes a house, damaging its roof. The policy has a $10,000 “per occurrence” wind/hail deductible. Incredibly, one week later – before the insured can file a claim – a second hailstorm strikes a barn in the back of the house, causing significant damage to the barn’s roof. Unfortunately for this (very unlucky) homeowner, the $10,000 deductible will apply twice: once, for the first storm “occurrence” striking the house, and again for the second “occurrence” to the barn. In order to be compensated under their policy, the homeowner must show the damage exceeds $10,000 for both the roof on the house and the roof of the barn.
With a “waiting period” deductible, coverage for business interruption will not begin at all until, for example, 72 hours after the triggering event for coverage under the policy. With a percentage or fixed dollar amount deductible, the insurance company will not pay unless the damage exceeds the deductible. With a “waiting period” deductible, the insurance company will not pay unless the damage continues after the 72-hour waiting period ends.
It is important to note that the policy does not always list the waiting period as a “deductible” per se, but it functions as one. In fact, because the waiting period is a condition precedent to coverage for business interruption insurance, some have argued that a waiting period is in fact a deductible. One such instance occurred in a 2006 case where California wildfires led to evacuation orders for several towns. The policyholder in that case closed its business and claimed it lost revenue during and following the evacuation period. The claim was denied, as the business was not closed for the 72-hour period necessary to activate the insurance.
Another item to consider with the waiting period is when it actually begins. Policy language typically states the waiting period “will begin immediately following the time the civil authority prohibits access as a direct result of physical loss or damage to property.” With regard to COVID-19, this means the waiting period would begin until damage caused by the virus was present within the property.
COVID-19 Insurance Claims Attorneys
During the ongoing coronavirus pandemic, we understand the frustrations many business owners feel as revenue is lost and insurance companies deny or delay the payment of valid business interruption insurance claims. At Raizner Law, our experienced attorneys have successfully handled complex cases against many of the world’s top insurance carriers. Our team will help your business get back on its feet. Contact us today to see how we can help you with your COVID-19 insurance claims.
