The COVID-19 pandemic has pushed many small business owners to the financial brink. Mandatory shutdowns have slashed their revenues, while local regulations are forcing them to spend more to super-clean their businesses and provide enhanced safety measures for their employees and customers. Even as states reopen their economies, many business owners are still forbidden from operating at full capacity, adding further economic strain to their suffering balance sheets.
When these business owners have turned to their business insurance policies for financial relief, many have found that their insurers aren't paying out, even if these owners have been spending on business interruption insurance for years. Can these business owners expect any financial relief from their insurance providers?
Unfortunately, the answer is complicated. State and federal legislators are looking for ways to require insurance companies to provide payouts for business owners who have invested in business interruption coverage. None of these measures have passed yet, though, and lawsuits filed on behalf of business owners are still in their early stages.
This suggests that business owners would be best off filing coronavirus-related claims anyway, in the hope that their insurers will provide at least some financial relief. Even if they don't, these business owners will at least have their claims on file in case legislative or legal efforts do eventually force insurers to start paying out.
The COVID-19 challenge
How difficult has life been for small businesses during the pandemic? In the latest MetLife & U.S. Chamber of Commerce Small Business Coronavirus Impact Poll, released in early June, 82% of small business owners said they were concerned about the impact of the pandemic on business, with 43% saying they were "very concerned."
In the same poll, 55% of small business owners said they think it will take six months to a year before the U.S. business climate returns to normal. That is up from 50% who said the same thing in May.
To make life even more difficult, insurers have largely refused to reimburse businesses for the losses they've sustained during the government-required shutdowns.
Why aren't insurers paying out?
Insurance policies, even those boosted by business interruption coverage, typically don't cover losses related to pandemics. Insurance companies argue that the costs of pandemic coverage would be so great that they wouldn't be able to cover them without suffering significant financial losses.
Much of their argument concerns the issue of physical losses. Insurers say that business interruption policies only provide coverage when businesses suffer an income loss because of actual physical damage. A policy would pay out, for instance, if a business suffers damage from a fire or flood and must shut down to make repairs.
But COVID-19 shutdowns were not the result of a physical loss. Because of this, insurers say they don't have to pay up even if owners have been paying for a business interruption policy for years.
Business interruption insurance typically doesn't cover income that businesses lose because they must scale down their operations, either. If a restaurant loses money because it can only offer pickup or delivery, insurers argue, this wouldn't be covered.
Insurance organizations have also argued that they can't cover pandemics because they are uninsurable. Earlier this year, the National Association of Insurance Commissioners released a statement urging lawmakers not to pass any legislation that forces them to pay for COVID-related business losses. The association said that business interruption policies were not designed to cover losses related to "communicable diseases."
This stalemate between small businesses and insurers is just one more challenge business owners are facing during the coronavirus outbreak. Is there any hope for small businesses seeking financial relief from their insurance companies?
Maybe. But small business owners shouldn't count too heavily on any insurance relief coming their way soon.
A movement brewing?
While many states have started slowly reopening their economies, many small businesses are still struggling. Restaurants and retailers must operate at reduced capacity to meet their state governments' guidelines. They need to implement new cleaning procedures and safety measures to protect their employees and customers, all of which can come with a hefty price tag.
These challenges continue to eat away at businesses' bottom lines. Because of this, there is a movement across the country to require insurers to provide financial coverage for businesses that have been forced to close or reduce their revenue streams during the COVID-19 pandemic. Several state legislatures have introduced bills requiring insurers to provide payouts to such small businesses.
In one of the more promising developments, a New York legislator has introduced federal legislation, the Pandemic Risk Insurance Act of 2020, that would create a pool of money the federal government would use to cover some of the losses insurance companies would suffer by providing pandemic-related business interruption and event cancellation insurance.
Insurance providers would not be required to participate in the program, but those that opt in could see a drop in the financial pressure of providing insurance coverage to suffering small businesses, because they'd be eligible to receive financial relief from the pool of money created by the act.
However, these proposals are still in their earliest stages. The odds aren't great that any of these measures will be approved anytime soon, which means that business owners won't see any quick financial relief as a result of these proposed bills.
Even if the bills are voted on, you can expect a legal challenge from the insurance industry, which opposes these measures. That would also delay any financial relief. Also, of course, there's no guarantee that any of these measures will ever become law, especially with the insurance industry fighting them.
Consider what happened in Washington, D.C., in May. The D.C. Council had been pushing for legislation that would have made it easier for small businesses to claim damages related to COVID-19 through their business interruption insurance policies. The insurance industry fought hard against this measure. In early May, the D.C. Council decided not to move ahead with its proposal after six of its 12 members expressed concerns that the measure would impose too much of a financial burden on insurance providers. The council's chairman eventually removed language about pandemic insurance coverage from a broader bill.
The upshot? Business owners shouldn't count on legislation providing them with an infusion of insurance coverage anytime soon.
What business owners should do
This is all grim news for business owners who are struggling financially because of state-ordered shutdowns. However, it's still important to file a claim if you have business interruption coverage, even if it's far from certain that you'll receive financial relief.
If your business had to shut down or drastically limit its services, review your insurance policy carefully to determine what it does and doesn't cover. Look for any exclusions, especially those relating to viruses or pandemics. It might make sense to ask an attorney to review your policy too. A recently published report from insuranceQuotes on the state of insurance in the age of the coronavirus further addresses best practices for business owners to review their policies and how they may be able to receive compensation.
It's important to build a case for a payout. Document for your insurer exactly how much money you lost. Collect any receipts, income statements or other documents that could help you prove your financial losses.
There's also the matter of the money it takes to reopen your business. You might have to pay for enhanced cleaning procedures or a more powerful air-purification system. Even if you can reopen, you might have to operate at a reduced capacity that limits your income potential. Continue to collect receipts for these expenses and any documents that show the financial pain the pandemic has caused you, even as state economies slowly reopen.
Then file that claim, even if you're far from certain that your insurer will pay out. This is an important step in the event that the federal government or state legislatures do enact relief measures. You'll be glad you filed your claim on time to take advantage of whatever protection governments might provide.
Remember that the insurance situation is fluid right now. The insurance industry refusing claims related to the pandemic doesn't necessarily mean financial relief won't come in the future. It might come as the result of lawsuits.
Several business owners are suing insurance providers, claiming that their business interruption coverage should entitle them to payouts. Claims Journal reported that 101 lawsuits related to business interruption insurance had been filed in a federal court as of May 20. That number did not include lawsuits filed in state courts.
A restaurant owner in Buffalo, New York, is suing Erie Insurance for refusing his claim for coronavirus-related relief. A hotel in Modesto, California, has filed a class-action lawsuit against all Farmers Insurance companies. The suit says that Farmers denied the hotel coverage under its business interruption policy during the COVID-19 outbreak. These are just two of many lawsuits that business owners are filing against insurers.
It's not certain if these lawsuits will bring any financial relief to business owners. But they do point to a larger movement to force insurers to reexamine their stances on pandemics and outbreaks.
Until legal measures and legislative efforts provide some relief (if they ever do), it's up to small business owners to file claims anyway, in the hope that maybe their insurer will provide some coverage.