The advice some lawyers give commercial clients over pandemic BI coverage

Brokers advising commercial clients that business interruption is not usually covered during a pandemic should not be surprised if those clients are hearing something different from their lawyers.

“I would caution policyholders to thoroughly review their specific policy language before they assume that they don’t have coverage,” said Kim Winter, Kansas City, Mo.-based partner and insurance recovery practice group leader with Lathrop GPM.

“If their insurer or broker says, ‘You don’t have coverage,’ I would caution policyholders not to take no for an answer without coverage counsel looking over the policies to help make that determination,” Winter said of business interruption losses arising from the COVID-19 pandemic.

Lathrop GPM is hearing from policyholders that they are being told that BI losses arising out of COVID-19 closures are not covered.

But some U.S. courts have found that, depending on the nuances of the policy language, even the mere loss of use of the covered property is enough to trigger coverage, Winter told Canadian Underwriter. She was not commenting on Canadian law. However, in some coverage disputes, Canadian courts will cite American rulings because the United States uses British common law.

“Some policies say there is coverage if there is direct physical loss of or damage to property,” Winter said. “There must be a difference between ‘loss of’ and ‘damage to.’ And therefore, loss of use — for example, because of an order from a civil authority — could trigger coverage for business interruption due to loss of use, even if there is no traditional physical damage such as by fire or flood. When in doubt, err on the side of giving notice.”

Generally speaking, business interruption insurance is triggered only as a result of a peril covered under a property policy. But not all policies are worded the same way.

“By far the biggest coverage issue is over this question, ‘When there is a virus, and either there is contamination or the threat of contamination, does that constitute direct physical damage under the policy language?” said Winter.

Closure as a precaution to reduce the risk of transmitting a virus is not what insurers intend to cover with BI, Hub International told Canadian Underwriter. But Hub takes the position that the broker does not decide whether or not there is coverage, and it can be in the client’s interest to at least report the losses.

For its part, the Insurance Brokers Association of Ontario is saying clients should not automatically report all claims directly to the insurer, though it is prudent to fully document losses. With the state of emergency in Ontario, IBAO is asking business clients not to flood insurance companies with BI claims if they are looking for written confirmation that the COVID-19 income loss is not covered. Instead, the industry needs to work together to ensure it responds to the public in the most effective, efficient way that it can, IBAO CEO Colin Simpson told Canadian Underwriter earlier.