The fragility of many small to medium sized businesses is one of the many economic realities that has been brought to the forefront of the national discussion by the Coronavirus Pandemic.
Restaurants, for example, are in most cases relatively low margin businesses. The revenue they generate one week will pay for supplies the next week. If a disaster, such as a hurricane or a government-mandated shutdown, forces a restaurant to close, they have to throw away their current inventory of perishable food. They also won’t have money to resupply when it comes time to reopen, pay their staff or pay their other obligations, such as utilities, loan payments or rent.
Any business operating on a thin margin that is forced to close, even for a relatively short amount of time, could be in jeopardy. There are many small businesses that don’t survive hurricanes, and those disasters cause comparatively short-term disruptions when compared with the months long shutdown some businesses are enduring during the COVID-19 pandemic.
To understand the importance of business interruption insurance as it pertains to hurricanes, it can help to understand just how far reaching the consequences of a massive storm can be for industries in Florida. During Hurricane Irma:
Around 70 million tourists visit Orlando each year. A hurricane like Irma doesn’t just cause short-term damage in terms of refunds and lost revenue, it also hurts future tourism forecasts and risks pushing those projections far lower in the near term. Tourism Economics estimated Florida had 1.8 million fewer visitors in the last four months of 2017 due to the storm. That may not seem like much when more than 8 million people are still visiting each month, but from a business standpoint that slump can be the difference between profitability and operating at a deficit, especially in areas that were directly affected.
Business interruption insurance is what protects businesses from both the long-term and short-term economic impacts of disasters such as hurricanes. This coverage can compensate businesses for:
Say, for example, a mortgage company had a building in the path of Hurricane Irma, and the building is heavily damaged by wind and rain. The company’s employees can’t return to work right away during cleanup, and all their computer equipment is destroyed.
Business interruption insurance wouldn’t just compensate the company for the projected lost revenue from being shut down for however long is required. The coverage would also pay for some short-term relocation costs.
Property insurance and business insurance may pay for replacement of damaged computers, but business interruption coverage would pay for any training on those new computers that may be required. Business interruption insurance may also compensate the business for rental costs if they had to temporarily rent out offices in a shared working space. The same would apply for a baker. Business interruption would cover the baker’s ovens that were destroyed by Hurricane Irma and all their flour, sugar and other foodstuffs that were trashed by the wind and rain. Business interruption insurance should compensate them for lost profits, pay employees, meet rent and debt obligations, and pay for new inventory when the business is ready to reopen.
Many business interruption policies don’t just require business disruption to go into effect. These polices only activate when the property suffers physical damage. There were lots of Florida businesses that were forced to close due to evacuation orders during Hurricane Irma, but their premises and property weren’t physically damaged by the storm. Their business interruption claims were denied even though their business was directly impacted by evacuations.
This physical damage clause is also one of the reasons COVID-19 business interruption claims are being denied. Insurance companies are arguing that no actual damage was done to business property. There are also several excluded perils in most business interruption policies – one of them explicitly being viruses. However, government-forced shutdowns are included among the list of covered perils on most policies.
Some business owners are also arguing that Coronavirus should be considered property damage since you could argue their businesses may have been infected, as with mold, and now require remediation before they can reopen.
Business interruption insurance is intended to protect business owners, but getting a claim approved isn’t always straightforward. In some cases, business owners are not treated fairly by their insurance company, or the insurer makes mistakes during the claims process.
Mistakes are all too common during times like hurricanes or a pandemic, when insurance companies are overwhelmed by claims and are too short staffed to handle them.
In those cases, it may be in a business owner’s best interest to speak with an attorney experienced in property damage and business interruption cases.