With state mandates pushing restaurants to limit operations or close entirely during the coronavirus pandemic, operators are turning to insurers to see how they can recoup losses.
Erik Josowitz, an analyst from InsuranceQuotes, says restaurant owners should focus on the “business interruption” portion of their policy.
“Most restaurants are going to have liability and property insurance, and then hopefully in most cases they’re going to have some sort of policy in place for cases of business interruption,” Josowitz says. “And specifically what that type of policy does is protect income during a suspension of operations and so bingo, right? That’s what we’re looking at now.”
Josowitz says there’s good news and bad news tied to business interruption policies. The good news is that most businesses have it. The analyst says these types of policies were originally designed for things like fire and wind damage. The policies are meant to cover tangible property damage occurring and the income loss associated with it.
“So one of the questions, of course, is if there’s tangible property damage associated with being shut down,” Josowitz says.
The bad news, Josowitz explains, is that many business interruption policies have exclusions, including ones for communicable and infectious diseases such as COVID-19.
He notes that much of it was added after the SARS epidemic in the early 2000s. There are also exclusions for civil authority, like a government-mandated closure.
“if any of these exclusions are in place and a business owner tries to make a claim, it’s probably going to be denied pretty quickly,” Josowitz says. “… The first thing that any business owner, especially restaurant owners, need to be doing is looking at their policy, looking at their BI [business interruption] policy for any exclusions and flagging anything associated with viruses, bacteria, communicable or infectious disease, or civil authority. And get on the phone with your agent and talk about what’s happening and what sort of claim you’re looking to make.”
As claims get denied, Josowitz expects a slew of lawsuits between businesses and insurers.
The COVID-19 pandemic could potentially bring forth 30 million or more claims.
An early example is Oceana Grill in New Orleans, which wants to prove that insurance company Lloyd’s of London should cover business losses due to civil authority, or the government-mandated shut down of dining areas.
Renowned chef Thomas Keller, owner of roughly a dozen restaurants across the country, argued in a lawsuit that Hartford Fire Insurance Company should cover COVID-19 related losses. Keller’s lawyer told CNN that the case is intended to set a precedent for future battles that other small businesses will have against insurance companies.
“A lot of this is going to take some time to work out,” Josowitz says. “There’s probably going to be a lot of lawsuits. There’s going to be attempt at legislation. There’s an attempt in New Jersey right now for the legislature to require insurance companies to effectively override any of these exclusions that exist in these policies. And of course the insurance companies and their industry organizations and lobbyists are not very happy about that. … A lot of this is going to get more confused before it becomes more clear.”
The American Property Casualty Insurance Association estimated that for small businesses with 100 employees or fewer, losses could cost between $220 billion and $383 billion per month. Meanwhile, U.S. insurers have an $800 billion surplus to pay future losses.
David Sampson, CEO of the American Property Casualty Insurance Association, said that retroactively rewriting policies could have “dramatic repercussions” and compromise an insurer’s ability to meet existing promises.
Drawing a comparison, Sampson said the insurance industry responded to more than three million claims after the 2005 hurricane season, including Hurricane Katrina. The virus pandemic could potentially bring forth 30 million or more claims.
“If policymakers force insurers to pay for losses that are not covered under existing insurance policies, the stability of the sector could be impacted and that could affect the ability of consumers to address everyday risks that are covered by the property casualty industry,” Sampson said in a statement.
“Any action to fundamentally alter business interruption provisions specifically, or property insurance generally, to retroactively mandate insurance coverage for viruses by voiding those exclusions, would immediately subject insurers to claim payment liability that threatens solvency and the ability to make good on the actual promises made in existing insurance policies,” he added.
Josowitz believes two things will happen once the U.S. comes out of the virus pandemic. The analyst thinks there will be a large push by insurers to put even more exclusions into business interruption policies and other business insurance-related policies moving forward. He also thinks there will be a push by the small business community to reject the notion that they should carry the risk.
He prefers not to speculate as to whether insurance companies will become overwhelmed, but he does believe that lawsuits will continue to mount and that many things are going to be worked out once businesses reopen.
“So I think you’re going to see a real push/pull between the insurers and the business owners,” Josowitz says. “The world’s becoming riskier with more of these sorts of things and business owners need ways to purchase insurance to cover these sorts of risks. So if it’s not a typical BI policy, then is it a special rider that can be purchased or is it another type of policy altogether and what does that policy cost? I think, when all is said and done, you’re going to see a very, very loud conversation between the insurers and the business owners about who’s supposed to carry this risk going forward.”