Why small business insurance won't cover COVID-19 losses

The coronavirus has taken a toll on businesses across the country. And many small businesses may be wondering if their insurance will help cover all—or at least some—of their financial losses from COVID-19. Unfortunately, the short answer is probably not.

Situations likely to cause damage to a business are termed "perils," and often include things like fire, wind, hail, volcanic eruptions, and lightning. Since a pandemic does not cause physical damage, it's not usually on the list of perils covered by small business insurance.

Of course, much depends on the specific type of insurance a business may carry. Here are the most common types.

Business interruption insurance

The most common type of insurance coverage that businesses buy is business interruption insurance.

"Business interruption insurance is designed to provide revenue reimbursement if a business cannot operate as usual due to damage from a covered peril incident," says Ty Stewart, CEO and president of Simple Life Insure. For example, Stewart says business interruption insurance kicking in if a store is damaged by a hurricane and can't reopen for several weeks until needed repairs are made.

"Unfortunately, it's been the prevailing precedent these past few months that, in most cases, businesses cannot use business contingent or interruption insurance to cover COVID-shutdown revenue loss," Stewart says. "This is because COVID hasn't in itself caused physical damage to properties or places of business, which is often cited as a core clause that must be met before business interruption coverage kicks in."

K.C. Williams III, managing partner with Williams Law, PA, explains that, under standard business interruption policies, five conditions are required for a recoverable business interruption loss. The loss must include:

1. Physical damage
2. To an insured property
3. Caused by a covered peril
4. Resulting in quantifiable business interruption loss
5. During the period of time it takes to restore the damaged property

And in most cases, claims made based on coronavirus are being denied.

"Whether these claims stem from the presence of the virus on the [small business owner's] own property or the property of supply chain, or result from government orders impairing access to insured locations or other properties, the majority of policyholders have received denials of coverage or requests for very specific information," he says.

According to Williams, "These demands come even though, in all likelihood, the insurance company intends to deny coverage based on the simple argument that COVID-19 is not property damage, or that viruses are excluded under the policy in question."

Workers compensation insurance

"Workers compensation is typically a statutory coverage and is governed on a state-by-state basis," says Steven Mikuzis, a principal in Power Risk Management Services, LLC. Employees who can prove that they likely developed COVID-19 on-the-job "can be entitled to workers compensation benefits," he says.

As long as a small business has maintained workers compensation insurance, most employee claims should be covered.

General liability insurance

"Most carriers include an exclusion for liability loss due to virus or bacteria," says Mikuzis.

But even if there isn't an express exclusion, "COVID-19-related liability claims, negligence claims/lawsuits are an uphill battle for third-party claimants," he says, mainly because the virus is "so prevalent and difficult to trace."

What you can do

"The best chance business owners have to access their business interruption or calamity reimbursement is to file a claim under a civil authority coverage," Stewart says. "This type of coverage states insurance must cover losses when a business is forced to shut down due to a civil authority mandate, a.k.a. a government order."

Unfortunately, he cautions, this strategy is still "a long shot," mainly due to the lack of physical property damage.

Recognizing the problems that have arisen, "Legislators in eight states and Washington, DC are currently writing bills aimed at widening this civil-authority claim type, making insurance carriers cover pandemic-caused government shutdowns." If such bills are passed, future claims are likely to have a better chance of being approved.