Business Interruption Insurance 101 (The Short Version)

By Ben Conrad & Allen Fricks | April 9, 2020

With all the businesses that are reducing hours or even closing, business interruption insurance is the new hot topic everywhere.  Business interruption insurance, a.k.a. business income insurance, provides protection for loss of a business’s income due to a covered peril for a certain time period. This coverage is usually written along with a commercial property policy for both owners and tenants but is also included in commercial multi-peril polices, a.k.a. businessowners policy. Business interruption insurance, when attached to a commercial property policy, usually has the same covered causes of losses as the underlying policy.

There are two main items that makes this coverage the current hot topic du jour. First, starting in 2006, ISO and other companies started to include a “virus” exclusion, meaning that there would be no coverage for a virus, bacteria, or other microorganism that causes physical loss, illness, or disease. The standard ISO business interruption coverage form includes a similar exclusion. Second, under the standard commercial property and business interruption policy forms, coverage is provided for a loss due to civil authority that prohibits access to your business. However, this coverage is triggered by a covered cause of loss at a location and not the insured property.

Because of these two policy sections, insurance companies are denying coverage and people are starting to take notice.  As of this writing, there are no less than five states that are currently reviewing legislation pertaining directly to the exclusion language that insurance companies are identifying as the reason for not paying.  A couple of these states would require the insurance company to pay business interruption losses but will set up a fund for them to recoup their losses.  Other states are simply looking to overturn the exclusion.

And of course, attorneys are getting involved. Most of these legal actions look to overturn the “virus” exclusion or extend the “civil authority” clause. There are already law suits that seek judgments for bad faith due to a company’s lack of investigation; suits that seek a declaratory judgment that the virus has caused property damage as it has damaged the air and surfaces of a restaurant; and many others.  

Over the next few weeks and months, we expect more law suits will be filed and more state legislators will get involved. Buckle your seatbelt as it will be a bumpy ride for some.   

Using Captive Insurance for Business Interruption Coverage 

For others who have identified the gaps in the ISO coverage, the road may not be so bumpy.  This is because those companies may have purchased supplemental business interruption insurance. Many main street insurance carriers offer supplement endorsements that can help fill some of the gaps, but there might be a better way to address specific coverage needs. Captive insurance is a form of self-insurance that allows highly customizable policy language to provide coverage that is not available in traditional insurance packages.  This means that the captive policy could be designed to cover the ISO exclusions mentioned above or any other gap in coverage.  Generally, a captive could be used to supplement or replace commercial policies in the following ways:

  • Deductible Reimbursement — Commercial business interruption coverage may contain deductibles that are too high for the risk appetite of the company.  A captive policy can target some or all of the deductible included in a commercial policy to make the risk more acceptable for management.  This could include a time deductible (e.g. 48 hours after loss) or a dollar deductible (e.g. first $100,000 of loss). 
  • Excess — Commercial business interruption endorsements may be structured with a separate sub-limit that does not provide the coverage needed for a company.  Alternatively, the commercial business interruption coverage may be included within the limits of a larger property policy.  If a company sustains a catastrophic property loss, the limit may not allow for additional recoupment of losses related to business interruption.  A captive policy can provide additional coverage in excess of limits in the commercial policy. 
  • Difference in Conditions — Commercial business interruption coverage may include conditions or exclusions that prohibit coverage in a wide variety of circumstances.  These circumstances may include significant risks known to the company.  A captive policy can provide coverage for many of these gaps in coverage.

Conclusion

When considering business interruption insurance, the total coverage available must be understood every step of the way.  Figuring out the gaps in coverage is crucial to protect companies from catastrophic loss.  With the denial of coverage lawsuits pending and the total damages from this pandemic still unknown, the real gaps in coverage are still a bit fuzzy.  As events unfold, the future of this product will become more clear and companies will be able to better assess their insurance packages.  In the meantime, understanding how and where this coverage can be found allows you to prepare for the next phase of business once things settle in to the new normal.

Ben Conrad has more than 12 years of actuarial experience both as a consultant as as an insurance regulator.

Allen Fricks has more than 30 years of insurance and actuarial experience that includes insurance company operations.