April 08, 2020 | Legal News
No Business Interruption Coverage? Not So Fast.
Many of you, both franchisors and franchisees, are being told by insurers and their surrogates that your business interruption policies don’t cover events related to the COVID-19 pandemic, because, either: (i) your policy specifically excludes pandemics, epidemics or viruses; or (ii) there hasn’t been a “property loss.” We’ve researched and assembled what a complaint against an insurer might look like regarding the latter, and we believe strong arguments can be made that coverage in fact exists.
Whether in the restaurant, fitness, travel or other service industry, franchisors and franchisees are facing dire circumstances due to the COVID-19 pandemic. Closures, executive shelter-in-place orders, and social distancing requirements are impacting the entire franchise world. As a result, policyholders are debating whether to make a claim against their business interruption insurance policy in light of these governmental-authority mandates that force closures of certain “non-essential” businesses.
If your policy excludes pandemics, epidemics or viruses, you likely will face an uphill battle to obtain coverage absent legislation to address pandemic-related exclusions, which certain states are already considering (and we expect more states will follow suit). However, these bills will likely face drawn-out constitutional challenges and persistent lobbying from insurer groups. We recommend monitoring any pending activity from your respective state legislature.
If your policy doesn’t exclude pandemics, epidemics or viruses, typically, a successful claim under a business interruption insurance policy requires physical damage to property that has caused the interruption to the policyholder’s business, whether it’s their own property or property owned by a third-party that ultimately affected the policyholder’s business. Has the COVID-19 pandemic caused physical damage to property? Some courts have held that contaminants or pollution could fulfill this “physical damage to property” requirement, but whether COVID-19 will be sufficient for that requirement, an in-depth analysis of the policy’s language will be required.
We urge policyholders to be proactive and aggressive in pursuing business interruption coverage. We suggest you take immediate action to evaluate and prepare your claim:
- Review language of your insurance policy – the language, whether exclusions are present or not, will likely dictate whether you will be covered
- Collect and maintain proof of interruption/loss – document all relevant government communication (e.g., executive orders) and financial losses and remediation costs, and maintain a log of all individuals that enter and exit your premises (including delivery personnel)
- Carefully draft your claim– review with your counsel and broker prior to submission to ensure that the language is sufficiently broad enough to better your chances of being covered
- In the event you are denied coverage, evaluate whether to litigate – understand that typical insurance policies will have a statute of limitations for litigating a claim, and depending on the language of your contract, the period could already be running based on issued executive orders
We don’t know what the coming days and months will bring, but we will be here whenever you need us. We may be a team of franchise lawyers, but we’re people first, and we’re in this with you.