The COVID-19 Pandemic and Business Interruption Claims

The COVID-19 pandemic has had a devastating impact on hardworking residents and small business owners in New Jersey. Retail stores, restaurants and other direct-customer-facing businesses have been especially hard hit. A third of small businesses in New Jersey closed down in 2020, according to a report from The Star-Ledger newspaper and The New Jersey Business & Industry Association.

In an effort to mitigate the spread of the virus, the New Jersey government issued “shut down” orders in mid-March 2020 to businesses – and businesses suffered tremendous losses as a result.

Many business owners filed claims with their commercial liability insurers claims, often referred to as “business interruption insurance claims”, because they believed that their losses would be covered under those policies. Those provisions were supposed to provide coverage as follows:

• Business Interruption Coverage: covers loss of business income sustained due to suspension of business operations due to “direct physical loss” or “direct physical damage”; and
• Civil Authority Coverage: covers loss of business income sustained when access to the insured property is prohibited by order of a civil authority as a result of “direct physical loss” or “direct physical damage” to properties adjacent to the insured property which prevent the insured from accessing the property.

But two recent court rulings in New Jersey brought bad news for the small businesses that were shut down during the COVID-19 pandemic and sought reimbursement for their losses by insurance. On November 5^th, 2020, New Jersey Federal District Court granted an application to dismiss a lawsuit by the owners of the Cara Mia restaurant in Millburn, which was seeking business interruption coverage from its insurance company. Similarly, a judge in the Camden County Superior Court granted an application to dismiss a case by The Cake Boutique of Mullica Hill seeking business interruption coverage from its insurance company. In both cases, the Courts based their rulings on policy language that specifically excluded coverage for losses covered by viruses.

In the Cara Mia case, the insurance company said that it was not obligated to cover the claim because the restaurant did not experience any direct physical loss or damage. But the Court held that it was not even necessary to address that issue because the “Virus Exclusion” in the policy plainly barred coverage. In response, Cara Mia contended that the Virus Exclusion did not apply because the “cause of its loss was the Closure Orders, not the coronavirus.” Because the closure orders from Governor Murphy caused the loss of business income, “the Policy still applies, and the insurance company must provide coverage.”

However, the Court hold found Cara Mia’s arguments “unpersuasive,” and held that:

“The anti-concurrent causation clause specifically states that loss caused directly or indirectly by a virus is excluded. (emphasis added.) This is true regardless of any other event in any other sequence that contributes to the loss. (emphasis added.) There is no doubt that COVID-19, a virus, caused Governor Murphy to issue the Executive Order mandating closure of Plaintiff’s restaurant. Therefore, COVID-19 is still a cause of the closure because the Virus Exclusion specifically provides for such indirect causation. There is no requirement, as Plaintiff suggests, for the virus to have physically caused the loss, such as via contamination of the property. Although costs for decontamination would certainly be a direct loss caused by the virus, this is not the only possible loss that would trigger the Virus Exclusion. By its plain language, the Virus Exclusion applies, barring coverage.”

That was harsh. But it’s important to remember that different policies can have different language. So what defeated Cara Mia and in The Cake Boutique won’t necessarily impact on other businesses claims. What is probably the same is that the policies have a statute of limitations clause giving a policyholder a specific deadline to sue the insurance company for coverage.

If nothing else, the Covid crisis has given businesses some lessons on the importance of insurance coverage. What are those lessons?

What Is Business Interruption Insurance?

Running a company can be difficult without the right business insurance. One type of coverage most business owners need is “business interruption insurance”, also known as business income insurance and contingent business interruption coverage. It can help replace income you lose if you can’t open temporarily after a covered loss, like property damage. For example, if a tree falls on your office roof and you need to shut down for repairs, this policy can help cover the costs of your lost income while they restore it. Your business income insurance may also cover a civil authority, like a government-mandated road closure that temporarily shuts down your company.

What Does Business Interruption Insurance Cover?

If a covered loss forces your business to shut down, your interruption insurance can help cover your operating expenses, like:

• Revenue you’d normally make if your business was open;
• Mortgage, rent and lease payments for the space your business operates from;
• Loan payments that you need to make during that time;
• Taxes, whether you pay them monthly or quarterly;
• Payroll for your employees;
• Relocation costs if you have to move to a new or temporary location because of physical damages;
• Extra expenses if, for example, you need to rent another space to temporarily run your business after a covered loss;
• Training costs for employees to learn how to use new machinery or equipment after a covered loss.

Business Interruption Insurance Exclusions

As demonstrated in the above Cara Mia case, it is also important to keep in mind that business interruption insurance often doesn’t cover:

• Broken itemsresulting from a covered event or loss.
• Flood or earthquake damage, which you’ll need a separate policy for.
• Undocumented incomethat’s not listed on your business’ financial records.
• Utilities, because they’re usually turned off when your business closes due to damage.
• Communicable diseasesthat cause a shutdown in your operation.

How Much Coverage Do You Need?

Business interruption insurance typically has a coverage dollar limit. A limit is the maximum amount your insurer will pay toward a covered claim. Financial losses that exceed your coverage limit are typically your responsibility. That’s why it’s important to choose coverage limits that are appropriate for your business.

Here are a few things you may want to consider as you’re choosing the amount of business interruption coverage for your business:

• About how long would it take to get your business back up and running after a loss?
• If you rent your office space, how well protected is the building?
• Are the fire alarms and sprinkler systems in the building up-to-date and functional?
• Is comparable commercial space readily available in your area, or would it take weeks to find a suitable temporary location?

Understanding how business interruption coverage helps protect your business, it can also help you be more prepared if you ever need to file a claim. Policyholders should consult with experienced coverage counsel to determine whether they have a strong claim that is worthy of pursuit.

Zhen Liu is a recent graduate from Seton Hall Law School, where she was a member of the Asian Pacific American Lawyers Association. She specializes in Family Law and serves as research assistant to associate reporters of The American Law Institute.