As the “new normal” fell upon operators, many restaurants suffered forced closures and extra expenses from changing business models. And when times get tough, businesses often look to insurance policies to ease the strain.

But the majority of the restaurant and hospitality industry is not being awarded any insurance benefits for losses incurred during (or because of) COVID-19, says Paul Migdal, a licensed public adjuster and principal at The Greenspan Co./Adjusters International. Currently, there are thousands of litigation cases filed throughout the U.S., and in most instances, the courts rule in favor of insurance policies, he says.

“A lot of rationale for that is, ‘Well listen, if we allow us this type of coverage, what happens if we close down because there’s a normal year-to-year flu? What happens if we lose business due to the flu, or cold or any other type of virus?’” Migdal says. “This is a very novel event.”

The most important part, he says, is to look at the language of each insurance policy. Even a variance by one word can make a difference. Migdal estimates fewer than 1 percent of restaurants have been able to gain any COVID-related insurance benefits from their policies, but lawsuits are pending. In the first jury trial on COVID coverage, restaurant group K.C. Hopps lost its legal battle against Cincinnati Insurance Company to cover pandemic-related losses.

The traditional business interruption insurance covers net income loss and extra expenses resulting from loss or damage to property at an insured premise. Some extra coverages include protection for income loss that results from loss or damage to other people’s property.

More specifically, civil authority coverage includes protection for lost income due to government orders that restrict access to a business. In theory, restaurants can call upon this type of coverage by arguing their losses were due to the government shutdown and not the virus itself. Many insurers, however, will argue there is no coverage unless there’s been damage to the restaurant building or things inside it.

Also, if a policy includes a virus exclusion, insurers will likely deny any coverage of impacts from COVID or from shutdowns caused by the pandemic, and most courts have upheld this position. 

Each state has its own set of rules, and interpretations vary. For example, California only considers the primary cause of damage and there must be some sort of structural change in the property. But other states evaluate concurrent causes, allowing policyholders to recover losses from both non-covered and covered causes if they happen at the same time.

Physical damage or loss is often necessary for coverage, but restaurants and insurers have different theories as to what constitutes such a loss.

“Some people are trying to make the argument that the virus does physically change my property, even though it’s microscopic, and I can’t see it,” Migdal says. “The courts are going to be ruling on all of these issues.”

Most policies also have a consequential damage provision, stating insurers will not pay for consequential losses, such as loss of profit due to direct physical damage.

“That raises the other issue. Is my business off as a direct result of COVID-19 or the pandemic? Or is it just because people are no longer dining out or fearful? What is the reason they’re not coming to my restaurant?” Migdal says. “‘I have said my restaurant is clean, and we sterilize every day, and then I have it tested every day and look, there is no virus here. People still may not be coming. Now is that because of reasons other than related to an insured event? I think it’s going to be tumultuous. And I think that those restaurants that continue their creativity will hopefully survive through this pandemic.”

Some states are proposing laws that would mandate coverage for business interruptions, even in the case of virus exclusions. In 2020, 16 states considered mandates, but they were ultimately not acted upon or defeated, according to the American Property Casualty Insurance Association.

Another solution is to have a federal national pandemic fund, similar to what happened after 9/11, Migdal says. At the moment, most restaurateurs are not getting assistance through insurance, and more than 177,000 restaurant owners were left without any grants from the depleted $28.6 billion Restaurant Revitalization Fund.

Brands can no longer rely on insurance money for crises, Migdal says. He adds that restaurants may start putting funds aside as self-insurance, form trade associations to assist in times of need, and lobby elected representatives for a state fund. 

“I think restaurants have to have a different funding for disasters—funding for events for which they don’t have insurance,” Migdal says. “We always say to our clients, ‘What would you do from a business standpoint, if you did not have insurance money, and you did not have tax money? What would you do as a businessman?’ And I think that’s how they have to start to look at it.”

In 2020 alone, more than 110,000 eating and drinking places closed for business temporarily or permanently in the U.S., according to the National Restaurant Association. And this year, food and drinking places have suffered from widespread labor shortages and significant commodity inflation.

As the insurance court battles wage on, Migdal believes the virus exclusions will generally hold up. In the future, insurance companies might even include additional specifics to prevent coverage for any kind of virus event.

“I think insurance companies, now that they know what can happen just like after [the] 2002 [SARS outbreak], will tighten up their exclusions,” Migdal says. “They will make it more difficult to get coverage for events such as this. They will change the wording, so maybe it becomes more clear and you will eliminate the ambiguity argument.”

“I think it’d be enormously difficult to get coverage as policies renew and in the future because we’re noticing every day in the news, of different variants, of different situations,” he continues. “I’m not sure we have control of this pandemic or really understand it definitely.”