Startup Survival: Can I claim insurance coverage for covid-related business losses?
Augie Rakow/Mike Nakamura
Most startup founders are familiar with common insurance policies — D&O, E&O, EPL, general liability and cybersecurity insurance. There are also lesser-known coverages such as benefits liability coverage and fiduciary coverage. And don’t forget that event insurance policy you bought for $300 for your product launch party.
Do any of these cover business losses due to coronavirus?
This article describes coverages you might have, what to look for, and how to prepare to negotiate with an insurer.
Do I have coverage?
Insurance is in new territory with COVID-19. Policyholders should be collecting complete copies of all their insurance policies and endorsements and reading them carefully. You’ll want to check for the following coverages—and for how long you have them:
• Business interruption
• Ordinary payroll
• Extended period of indemnity
• Civil authority
• Contingent business interruption
• Contingent extra expense (aka supply chain coverage for losses from interruption at a customer or supplier)
• Ingress/Egress (for losses from hindrances to entering or exiting your business property)
• Event Cancellation (trade shows, conventions, festivals, sports events, concerts)
• All Risks Coverage
No doubt, COVID-19 has seriously interrupted business.
But most policies covering business interruption require “direct physical loss or damage” or physical damage for short. Courts have been interpreting these words for decades to address non-structural and “invisible” damage of various types such as toxic gases, bacteria and odors. But policyholders, insurers and courts are only just now starting to examine whether physical damage includes the presence or threat of the coronavirus at an insured property.
What exclusions apply?
If you have a policy that might offer coverage, you then need to make sure no exclusions apply. This can be a tricky analysis. Many blogs discuss the “civil authority” exclusion that often applies when a government authority prohibits access to the insured premises. But you might avoid this exclusion if you operate an “essential” business. Another common exclusion is business losses resulting from pollutants. But pollutant exclusions often don’t exclude viruses. “A careful reading of the ‘hedge language’ is important here,” says Shulman Rogers’ insurance litigator Mike Nakamura. “You’ll want to see if the policy excludes just pollutants, or extends to things that are arguably similar to pollutants as well.” For policies that expressly exclude viruses, what exactly that means is still underdeveloped in the courts. He adds “the ‘Definitions’ section is also critical –many policies do not include or otherwise define key terms crucial to defeating exclusions or coverage limitations, such as virus, bacteria, disease, even civil authority. There is now an interplay between government-mandated business closures and essential businesses that must also be considered. Policies vary from carrier to carrier and state to state.”
Early indications from insurers suggest many insurers intend to deny claims stemming from the coronavirus pandemic based on policy exclusions. The final determination will likely be left to the courts.
Meanwhile, legislative attempts are underway in some states to bring COVID-19 related damages within the purview of business interruption insurance as a matter of statutory law.
This is one area where the battle lines are shifting quickly.
How do I prepare to make a claim?
Most claimants should start preparing now. Don’t assume that your claims will be denied. Not all policies exclude pandemics or viruses, and legislative developments may alter your negotiation options in your favor. Most policies require prompt notice to be given for a claim, and coverage may be denied if policyholders delay notifying their insurers of a claim. So start now.
Collect your policies and review them with an expert, evaluating your stronger and weaker arguments, until you find a wedge. You may have a strong argument for coverage, but a weaker argument on a potential exclusion, or vice-versa. An expert can help identify your best negotiating position. In most cases, you’ll also want to show that your company is a strong company and a good future customer for the insurance company. Show that you lead a strong company and negotiate a compromise—but you’ll need a strong advocate to advance the legal arguments as we all as business solutions to get there.
Negotiation can take 6-9 months or more, so be sure to consider more immediate sources of financial relief as well. See our article on How your law firm can help extend your cash runway.
Can NEXT help me?
YES! NEXT powered by Shulman Rogers is currently offering a flat fee arrangement to review your insurance policy and provide an analysis concerning potential coverage for your ongoing losses related to the coronavirus. We have extensive experience with insurance policy interpretation and coverage issues and are monitoring changes to state laws that may impact potential coverage.
This is a fast-moving area, and policies must be examined closely together with the law to ascertain coverage for claims. For additional information or to schedule a consultation, please contact NEXT at firstname.lastname@example.org.