When it comes to insurance, one mistake that many people make is failing to read their policy. Most insureds believe that they understand what their policy covers simply by the name of the policy. For example, an auto policy covers everything car-related, and a homeowner’s policy covers everything that can happen to your home. However, this is a big mistake.
An insurance policy is a contract between the insured and the insurance company, and, like any contract, its effect depends upon the language of the contract. In addition, since contract interpretation is a matter of state law, the state where your policy is issued is a huge factor. The same language in one state can have a completely different meaning in a different state.
The need to read your policy has never been more clearly illustrated than during the Covid-19 pandemic, which has affected businesses from the hospitality sector to the travel industry to medical practices. Whether as a result of government orders or the fear of customers to leave their homes, businesses of all types have either had to shut down completely or reduce their capacity. As a result, businesses have lost significant revenue during this time. Fortunately, many of these businesses have business interruption insurance policies and have asserted claims under their policies. Unfortunately, without exception, the insurance companies issuing those policies have denied coverage. Why?
The quick and cynical answer is that the insurance companies do not want to pay these claims. The full extent of business loss in the American economy is not yet clear. However, one estimate is that businesses have been losing close to $40 billion a month. Yet, the entire property and casualty insurance industry has collected approximately $6 billion in premiums. Clearly, the premiums will not cover the losses. However, another reason may be that the insurance companies are simply reading the language of the policies and enforcing the policies as written.
The typical business interruption policy contains language that protects a business against the inability to operate due to loss or damage to property. In most states, the courts have interpreted this language to require actual physical damage to a business’ building. Without demonstrated physical damage to property, there is no coverage.
The result has been that, since the pandemic began, over 5,000 lawsuits have been filed against insurance companies. While none has been fully adjudicated yet, we are beginning to see some results. In most cases, an insurance company will respond to a lawsuit by filing a motion to dismiss. A motion to dismiss challenges the sufficiency of a complaint, and, by a large margin, insurance companies are prevailing on their motions to dismiss.
In order to overcome a motion to dismiss, a business must allege that its business property was damaged in the same way that it would have been damaged by fire or flood. This is a difficult bar to eclipse. Most business closures have been caused by government shut-down orders, rather than actual physical damage to busines property, which prevents its use. Some plaintiffs have tried to get around this problem by claiming that their property has been damaged by the presence of the Covid-19 virus on the premises. This has worked but only in a small number of cases.
The reason that this claim has not been more successful is that many business interruption insurance policies contain a virus exclusion. This virus exclusion was generally added to business interruption policies in 2006. However, there are some business interruption insurance policies that do not contain a virus exclusion. In those cases, the plaintiffs have been able to defeat the insurance company’s motion to dismiss.
Another way in which businesses are trying to get around the “physical loss or damage” requirement is by claiming that their business interruption was caused by governmental action. Therefore, whether their physical location was damaged is irrelevant. The government order caused the loss of their ability to use their premises.
Again, this approach has been only marginally successful. In a very small number of states, the courts have said that the policy’s use of the phrase “loss or damage to property” must be read to mean that “loss” and “damage” are not synonymous. Otherwise, if they meant the same, one would be what courts call “surplusage”. In other words, either loss or damage would be excess language without adding any real meaning to the phrase. Courts tend to avoid surplusage. However, this argument has worked in only a few states. In most states, the courts have said that the typical business interruption insurance policy does not cover governmental orders, as would a regulatory change policy.
The obvious answer is – READ YOUR POLICY! However, this is not a very satisfactory answer for a couple of reasons. The first is that insurance policies are not pictures of clarity. They are often ambiguous and contain confusing endorsements and exclusions. Even a highly educated businessperson may have difficulty understanding a policy if he or she is not experienced at reading policies. The second is that, by the time you’ve read your policy, it is often too late.
The best answer is that you should work with an experienced and knowledgeable insurance professional, like RMC, before you buy your policy. After all, you wouldn’t sign a contract without first consulting an attorney, and an insurance policy is a contract. Not only can your insurance advisor explain your policy’s provisions before you have a claim, a professional advisor will have access to the policies of multiple companies and can find the policy that best suits your needs. In addition, an insurance professional can negotiate with an insurance company to obtain coverage that is not part of the standard form policy.
A second reason to work with a professional is that the professional can introduce you to innovative concepts, like a captive insurance company that may better suit your needs. A captive insurance company is an insurance company formed by a business to insure the risks of the business. It can work in concert with your commercial insurance, replace some or all of your commercial insurance or insure risks that are not insurable or are prohibitively expensive on the commercial market. Because you own your captive insurance company, you control the risks that it can assume. As a result, you can tailor its policies to cover your specific needs. While it is too late to form a captive to insure against the Coved-19 pandemic, now is the time to plan for the next unexpected risk.