Business Interruption Insurance Coverage: Report Your Claims

Henry Pfutzenreuter June 30th, 2020

Franchises are struggling from losses caused by the COVID-19 pandemic, government orders, and civil unrest. Franchisees face these risks directly, but the entire system is impacted by lost revenue streams caused by widespread business interruptions. Franchisors and franchisees should review their insurance policies to determine whether they have coverage for such losses. Even when exclusions might appear to apply, it is better to err on the side of notifying insurers of losses and to consult with counsel about reporting the facts that support coverage, in order to maximize the likelihood of recovery.

Most franchise agreements require franchisees to purchase insurance that protects themselves as well as the franchisor. The requirements vary but often include coverage for both third-party liability and property losses. Ideally, the franchisees must include their franchisor as an additional insured and loss payee on their policies.

Types of Business Interruption Policies

Businesses that purchase commercial package policies insuring a variety of risks often receive coverage for business interruptions, which provides coverage for loss of income during suspended operations due to a covered cause of loss. Some policies also include civil authority coverage for loss of income when government action in response to a covered cause of loss prohibits access to the insured’s property. Typically, business interruption and civil authority insurance are included as separate sections or endorsements to the policy’s property coverage part.

Most business interruption and civil authority insurance require a “direct physical loss” or “damage to property” caused by a “covered cause of loss,” which is usually any cause not specifically excluded by the policy. Counsel for policyholders argue persuasively the presence of coronavirus causes direct physical loss of use or damage to the value of property. Many insurers, however, began adding specific exclusions for losses caused by viruses after the SARS outbreak in the early 2000s. While courts must construe these exclusions narrowly, they can present greater obstacles to recovery depending on their specificity.

Every policy is unique and franchisors and franchisees alike should review them individually to determine the scope of their coverage. While most insurers are denying business interruptions claims arising from the COVID-19 pandemic based on virus exclusions, lawsuits and legislation are already underway that may ultimately affect the availability of coverage. Losses caused by riots and vandalism face fewer challenges.

Notify Insurers of Losses

Regardless of the cause, the best approach is for insureds to notify their insurers of all potential claims to preserve their rights under their policies. Most policies require insureds to promptly notify insurers of losses and their failure to do so can result in denial of coverage. Before making a claim, it is important for insureds to review their policies and consult with counsel to identify and report the supporting facts that will maximize the likelihood of recovery, including a direct physical loss, damage to property, and covered cause of loss.