COVID-19 Resources

Business Interruption Claims During COVID-19: Three Key Points to Keep in Mind

Written by Jeff Plank, Billy Minch and Tammie Lunceford on July 27, 2020

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Since early 2020, many businesses have been gravely impacted by COVID-19. The Brookings Institution estimates that “the pandemic is expected to trigger the deepest global recession since World War II, with global GDP contracting by 5.2 percent.” For companies, the implications have the potential to be severe.

While the CARES Act, passed by Congress earlier this year, has provided much needed relief through the Paycheck Protection Program and other vehicles, it still may not be enough for your business. As a result, many companies are considering filing business interruption claims with their insurance carriers as a method to receive additional financial assistance.

Business interruption coverage is offered by many insurers to help businesses recover after suffering damages, yet COVID-19 has raised many questions as businesses have considered their damages and filed claims relating to losses that occurred during and because of the pandemic.

If you have recently filed a business interruption insurance claim and you were denied, or if you are considering filing a claim, here are three key points to keep in mind:

1. You may be able to recover damages despite roadblocks.

Even if there is a virus exclusion in your policy, or if the insurance company says a virus cannot constitute a physical loss or damage to your business, you still may be able to claim and recover damages.

As far as the virus exclusion is concerned, there may be other considerations that would allow coverage under a policy including civil authority coverage (covering losses caused by shutdowns due to a civil authority) and arguments that the exclusion doesn’t cover pandemics (claiming the loss was not caused by the virus itself, but the risk of pandemic).

As far as physical loss or damage is concerned, in other situations the presence of harmful substances on a property, such as carbon monoxide and pesticide, can constitute a “physical loss or damage.” In some cases, a valid argument could be made that the coronavirus itself is a harmful substance, that if spread on the premises can lead to physical loss or damage.

The terms of the policy and laws in force will determine if any of these are cause for a claim.

We strongly recommend working with your insurance broker or consulting an advisor such as an attorney who specializes in insurance claims to be certain all options are explored specific to your situation.

2. Be aware of how lost profits damages are calculated.

It’s important to know how lost profits damages are calculated. The amount of lost profits is determined by estimating the revenue that would have been earned during the loss period if the damaging act had not occurred. These estimated revenues are then adjusted by the costs (direct and indirect) that would have been necessary to generate that revenue.

The two most common methodologies that analysts use are the “before-and-after” method and the “yardstick” or “benchmark” method. In some cases, if the loss is so severe that the business has no hope of reopening, the entire value of the business might be claimed.

Knowing how lost profits damages are calculated can position your business to have a fuller understanding of how a business interruption claim may impact your company if your claim is approved.

3. Don’t let net losses discourage you from filing a claim.

A business that had net losses before the damages may still be able to claim lost profits. Some business owners mistakenly believe that if they had negative earnings before a shutdown, then they cannot claim lost profits.

Although every situation is unique, it is certainly possible to make a claim for lost profits in this case, especially if the business was still incurring expenses during the shutdown.  Or perhaps the business was relatively new, had a solid history of monthly revenue growth and was about to turn a profit, but was ordered to shut down by a civil authority.

Even if your business had net losses before the pandemic, it doesn’t disqualify you from making a business interruption claim, so it could still be an option worth considering.

Learn More about Business Interruption Claims and Connect with an Advisor

As businesses continue to navigate the effects of COVID-19 on their employees, operations and finances, it’s important to stay informed about the options available to your business when it comes to financial relief and assistance.

Warren Averett has experience in calculating lost profits, which is a good first step in determining whether or not to file a claim and/or consult with an attorney.

To learn more about making business interruption claims during the COVID-19 pandemic or to receive a free consultation, connect with your Warren Averett advisor directly or ask a member of our team to reach out to you.

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