Why restructuring firms are looking at their clients’ business interruption insurance 

Some clients who are in financial trouble because they had to close during the early days of the pandemic are having their business interruption insurance policies reviewed by consulting firms.

With COVID-19, many businesses have reached out to BDO for assistance with their insurance claims, said Chetan Sehgal, a partner for forensics and litigation support at BDO Canada.

“Some policies are vague. For example, the policy may not specifically read as if the insured is covered for infectious disease or a pandemic outbreak,” Sehgal said in an interview. “The coverage that may be considered applicable could relate to policy wording around restricted access to business’ premises and/or civil authority wording.”

When business interruption is the reason for a client’s insolvency, BDO will investigate whether the entity has an insurance policy covering business interruption or loss of income, said Josie Parisi, a BDO Canada partner whose specialties include corporate restructuring.

Tim Zimmerman, a partner with audit, tax and consulting firm RSM Canada, explained what can happen when a business is unable to pay its bills because of a COVID-19 closure.

In some cases, a restructuring and bankruptcy professional will “step into the shoes” of a debtor and look at whether the debtor is able to make a claim under its business interruption insurance policy, Zimmerman said in an interview.

Whether the business is entitled to coverage for BI is going to depend on each individual business’s circumstances, said Zimmerman, whose practice areas include business interruption claims.

“It is not a broad rule that would apply to everyone,” said Zimmerman. “It is definitely something that should be considered in the context of a company that went bankrupt, but it really has to be looked at through the lens of the policy – whether the policy is providing coverage or not – and whether the business was expected to continue on but for COVID knocking them down.”

For its part, BDO Canada recently worked with a restaurant that closed and became insolvent due to the pandemic, said Parisi. In that case, Sehgal reviewed the insurance policy and it turned out that the client did have business interruption coverage in the event of pandemics. That claim was handled by the company’s counsel.

“In another situation, a gas station did not have pandemic coverage, but we did tell the insurer on notice that in case legislation is brought in to mandate that insurers provide coverage for these situations, a claim will be made,” said Parisi.

Another BDO Canada client operates fitness centers across the country. That client had an insurance policy providing coverage if the business was shut down due to infection disease, whereby someone at the premises was infected and the business was ordered to be closed by the public health authority.

“In this particular case, the business had closed its doors as a precautionary measure and not aware of any specific case,” said Sehgal. “Strictly speaking, the policy wording may not have provided coverage for business interruption under the circumstances of the COVID-19 pandemic, but when discussing the matter with brokers, and coverage counsel, they are of the view there is some merit to pursuing the claim based on the specific case facts and existence of other coverage including Civil Authority and restricted access.”

Feature image via iStock.com/AlenaPaulus