Is a Captive Insurance Company the Solution to Business Interruption?

A restaurant in Washington, D.C. has joined the ranks of businesses suing their insurance company for coverage under a business interruption insurance policy as a result of the COVID-19 pandemic.  The suit claims that the restaurant was forced to close after Washington, D.C.’s mayor issued an order barring sit-down service, thereby limiting its business to take-out and delivery and eliminating 95% of its business.

After closing its business, the restaurant filed a claim with its insurance company.  The carrier denied the claim on the grounds that the restaurant was not forced to close as a result of physical damage to its premises, which is a precondition for coverage under most business interruption policies.  In addition, the carrier claimed that the COVID-19 pandemic falls under a virus exclusion in the policy.

In the suit, the restaurant claims that it was not forced to close as a result of the virus.  Instead, it claims that it was forced to close by reason of the mayor’s order.  In addition, it cites a provision in the policy, which provides coverage if the business is denied access to its premises by government action.

Similar lawsuits have been filed in Illinois, Indiana, Florida and Texas.  In some of those suits, the plaintiff has alleged that its policy did not contain a pandemic exclusion.  However, in others, the issue is the same as the lawsuit filed by the Washington, D.C. restaurant – that the reason for the closure was government action, not the virus.  It could be months, if not years, before these lawsuits are resolved.

So, what do these lawsuits tell the average business owner about insurance?

The lesson to be learned is that commercial insurance may provide less protection than you think.  There is a huge misconception about the business of insurance.  Most people buy an insurance policy expecting the carrier to bail them out when a crisis strikes.  However, insurance companies are not just in the business of paying claims.  Like any business venture, they are also in the business of making a profit.  And, the best way for an insurance company to make a profit is for premiums to exceed claims.  That is why an insurance policy, which may appear to provide broad coverage, may contain a boatload of exclusions.  It is also why a policy will generally require the insured to mitigate its damages and may also impose conditions on the insured’s ability to recover.  And, it is why the plaintiffs in these lawsuits were forced to sue their insurers.

What is a business owner to do?

One option is a captive insurance company.  A captive is an insurance company owned by the business that it insures.  A captive is formed primarily to cover the risks of that business, although it may also be required to insure unrelated risks.  Because the purpose of the captive is to provide real coverage to its related business, its policies can be tailored to the needs of the business in order to maximize the likelihood of coverage.  A captive can provide coverage that is either unavailable on the commercial market or prohibitively expensive.

In addition, it can cover gaps in a business’s existing commercial insurance.  For example, a captive may be more likely than a commercial insurance company to write a business interruption insurance policy that does not require physical damage to property or does not exclude business interruption caused by a pandemic.  A captive can provide greater protection to the business and greater comfort to the business owner.


If you do not already have a captive, it may be too late for you to obtain coverage for the COVID-19 pandemic under your existing insurance.  However, if this crisis has taught us anything, it is that another crisis is around the corner.  It may not be a health-related crisis.  But we can say with certainty that something is likely to interrupt your normal business operations in the future.  Now, is the time to prepare for the next crisis.  A captive can be a vital part of your risk management plan and help ease the pain caused by the next crisis.

If you are interested in learning more about captives and other risk management solutions, contact RMC Group.