The new coronavirus or COVID-19 has had a direct impact on business owners and employees across the nation and around the world. Now, as several states are beginning to reopen, the financial recovery of businesses is still a major concern for many. In several different previous posts, we have focused on potential coverages available to business owners as a result of COVID-19, along with. In this post, we focus on the types of financial compensation that are available if there is coverage.
Business Interruption Insurance – what funds are recoverable if there is coverage?
The most common type of insurance coverage available to a business falls under the blanket of “business interruption.” Although this general term has become pervasive in the media, there is confusion and misinformation about what types of financial compensation is actually recoverable under those policies. As with every insurance policy provision, the specific coverages vary from one policy to the next. The two most common types of funds recoverable under business interruption policies include business income and extra expense. We cover those below.
Calculating Lost Business Income and Extra Expense
One of the most important things employers must do during this time is to ensure they are formally accounting for and calculating any income lost and extra expenses incurred as a result of COVID-19 closures. A typical provision provides that an insurance company will pay for:
- Loss of business income during the period of restoration that results directly from the interruption or cessation of a business’s operations;
- Necessary expenses incurred during the period of restoration to reduce the company’s losses and to continue operations.
A couple of important notes here. First, “business income” is almost always defined to mean a net, not a gross, number. This often means net income (i.e., net profit or loss before income taxes). A policyholder therefore cannot make a claim and expect to recover all lost sales for the applicable time period.
Second, “extra expense” is a sometimes overlooked, but very important provision. If, for example, a policyholder must spend money just to keep its business operational, this could be a recoverable extra expense. In the COVID context, some good examples of potentially recoverable “extra expenses” include:
- Payroll expenses;
- Additional cleaning and sanitization costs that many businesses have had to employ to keep their businesses safe for their employees and customers;
- Additional loans and financing costs; and
- Additional security.
Period of Restoration
Another important concept of business income and extra expense coverage is known as the “period of restoration.” The recovery of income and extra expense is not unlimited in time; it is limited to the “period of restoration.” Although there is significantly more detail to this concept, the essence of what constitutes a period of restoration is as follows. It begins at or shortly after (e.g., 72 hours) the coverage triggering event, and ends at the earliest of when (1) the damage has been fixed, (2) the damage should have been fixed, or (3) the business resumed operations at a different location.
In the COVID-19 context, as we have blogged previously, one of the challenges in showing coverage initially is to prove “direct physical loss or damage.” And so, when a policy’s triggering event for the end of a “period of restoration” references the fixing of direct physical loss or damage, this challenge presents itself again when it is time to show recoverable damage.
Generally speaking, the purpose of the period of restoration is to define a time period during which the business needs insurance proceeds to stay up and running like normal. This is consistent with the purpose of insurance—to make the policyholder whole and allow a return to the status quo.
COVID-19 Insurance Claims Attorneys
As storefronts slowly open their doors across the nation, the need for insurance assistance and financial compensation for losses due to COVID-19 will only continue to grow. Unfortunately, insurers may wrongly deny or delay business interruption claims entirely, leaving struggling companies in the dark and unsure of how to fully recover. At Raizner Law, we understand these frustrations and have the experience to fight back against insurers who continue these unlawful practices and win. Contact us today to see how we can help you with your COVID-19 insurance claims.