Will COVID Force Changes To Business Insurance Policies?

When disaster strikes, small businesses turn to their business insurance policies for help – and those policies cover a wide range of situations, from storms and flooding to fires and worker injuries. As shops are forced to close down due to COVID-19, however, many are discovering that their insurance is of little help.

Conventional business interruption policies don’t cover a pandemic, and could potentially bankrupt insurers if they did. Given how much support businesses need right now, though, these insurance companies need to reckon with their policies, because another pandemic, as well as another wave of COVID-19 closures, could be on the horizon.

Economic Impact

The coronavirus pandemic has caused an enormous economic downturn, decimating small businesses, which account for about half of all US jobs, and while the Payroll Protection Plan (PPP) helped some scrape by, it’s hardly enough. This is precisely the sort of situation that business insurance seems like it would be made for, yet many actually have exclusions written into the policies for just such circumstances, though businesses rarely took notice. This exclusion has left businesses in a battle against their insurance companies as they attempt to cover their rent and other bills in hopes of reopening.

The Scope Of Insurance

Different types of businesses carry different insurance policies, but the vast majority carry a suite of general liability, worker’s compensation, and business interruption insurance and then add specific policies based on their activities. Sounds comprehensive, right? Not quite.

Typically, business interruption policies kick in if a company’s physical location has suffered structural damage, due to events like a fire or earthquake, while a smaller portion also cover “civil authority interruptions” – cases in which the government orders the closure of a business. Businesses whose policies cover the latter may have some standing with their insurer, since most areas did experience some type of mandatory closure. For those whose policies only cover structural issues, however, getting coverage is an uphill battle.

Attempted Arguments

One way that businesses are trying to leverage their insurance companies to cover their COVID-19 related losses is by arguing that their properties have sustained physical damage: claiming that the presence of the virus on shop surfaces constituted damage. This is a stretch. After all, all kinds of germs are present in stores, especially during flu season, but businesses don’t close because of those. But while the argument may not succeed right now, businesses are raising an important point. New conditions force new types of insurance policies. Businesses didn’t have terrorism coverage before 9/11, for example, but it’s an option now. Is pandemic coverage next?

The Pressure Mounts

Though insurance company’s policies may not be readily paying out policies for COVID damages, as states struggle to support their struggling small businesses, they’re also stepping into the fray with insurance companies. In particular, state legislatures are introducing bills with the goal of forcing insurance companies to pay out to help small businesses recover. States view this as critical to local economic recovery – they can’t bail their small businesses out alone – but it’s an uphill battle in the statehouse. California seems to have the best chance of passing such a bill, but even there, it has stalled in the state Senate.

The outcome of such a bill could also put pressure on insurers in other states to support small businesses through their existing claims’ structuring, but that’s sure to still leave substantial gaps. Going forward, insurance companies will have to find ways to address such emerging crises because, while this pandemic may be an unprecedented situation, it’s likely setting the stage for similar outbreaks down the road.