By Jeffrey T. Willoughby, CPA, CFF, CFE
Businesses that were required to close or operate at less than full capacity due to the COVID-19 protective stay-at-home orders are still trying to get a handle on what this massive disruption means and what the options are. For one, they want to know how, what, for how long, and by how much will business interruption claims be affected. This blog addresses some of the ways business interruption claims may be affected.
Some states have pending legislation that will require insurance companies to cover certain business interruption losses as a result of COVID-19. Any claims for losses would have to be as a direct result from the effects of COVID-19. As of May 6, eight states have pending legislation that may provide insurance coverage for certain business interruption claims.1 Some states have proposals to cover losses even if certain exclusions apply, or even if no coverage existed for those claims prior to the COVID-19 pandemic.2 There are also proposals with provisions for coverage provided to businesses in specific industries like hospitality and health care. The passage of any proposed legislation into law will affect any business interruption claims that arise from COVID-19.
Business interruption claims will also be impacted by the public’s willingness to return to normal. Even if all restrictions are removed for businesses to open and customers to return, it will be the customers who ultimately decide when and how they will return. Just because local, state, and national authorities remove restrictions, that doesn’t mean everyone will rush out and behave just as they had before COVID-19.
The courts may get involved too. Some law firms that are pushing their new business interruption services are gaining momentum daily. Lawsuits and claims may be imminent. Between proposed legislation to extend coverage and potential lawsuits forcing the same, many businesses will be forced to act in one way or another regarding business interruption claims.
The things specifically affected by COVID-19 have been revenue, continuing expenses, and extra expenses – the normal components of business interruption loss calculations.
Business interruption claims for loss of income generally use the before and after method of estimate. Simply put, what was the business doing before the interruption and what did it do after that period ended. The primary way many businesses will be affected will be from being closed for a period of time, reopening, and eventually returning to full operations. Other businesses will be affected by being closed and, upon reopening, operating at a different level or in a different manner than they had previously.
Those who are able to reopen may never return to operating as they had previously, and some may never reopen. Some businesses may have new regulations to comply with while others may have new customers and sources of revenue. Preparing or assessing claims will require a thorough review of each component, how each has changed as a result of COVID-19, and the magnitude of those changes. The true impact of COVID-19 will not really be known until restrictions are lifted and businesses are able to determine what has changed and the extent of each.
Interruption claims are likely to be presented for the periods when businesses were actually closed as a result of COVID-19, but there will also likely be claims from businesses that were operating in a reduced capacity. One of the challenges will be to determine how long a particular business was interrupted and when it returned to normal. The language in some policies incudes phrases like “when returned, or should have returned, to normal.”
Some of this determination may become moot because many policies also include provisions for time periods “up to one year.” However, at least one state’s proposed legislation indicates possible coverage for the “duration of the declaration of disaster emergency.”3 That is not to suggest the COVID-19 closings will last more than a year, but it shows something besides policy language may determine the length of some interruption claims.
For businesses that do not return to their former levels, this determination may become a two-step process: What is your post-pandemic normal and when/how long should it have taken for you to get there?
The final piece of the puzzle is determining how much the claim is worth. Policyholders primarily want to know how much their policy will pay, while policy issuers (coverage issues aside) will be concerned with how much they will have to pay out on a particular policy. To confidently estimate the amount of a claim, each of the questions above will have to be answered as directly related to the COVID-19 pandemic.
If a business answers the question as to how it has changed, for the true impact on a business interruption claim the how has to be directly related to COVID-19. If not directly related, then the “how” cannot be included in a claim for lost income.
Once businesses are given permission to reopen and conduct business without restriction, expectations are there will be many business interruption claims for loss of income. Whether you are preparing the claim, responding to the claim, or providing assistance to either, you will need to answer the questions how, what, and how long to make a claim determination.
CPAs will be integral to the business interruption process by performing the necessary analyses on lost revenue, related expenses, and extra expense due to COVID-19. One of the biggest challenges in any business interruption claim is to establish proximate cause; that is, directly link the economic loss to the specific issue. That might be easy during the period in which businesses were mandated to be closed, but once state restrictions on commerce are loosened or removed, it will be a bigger challenge to measure any loss solely related to COVID-19 compared to other economic or societal factors.
1 “COVID-19: Congress, Pennsylvania, Michigan, and South Carolina Join Other Jurisdictions Proposing Legislation Addressing Insurers’ Obligations to Pay for Pandemic-Related Losses,” National Law Review (May 6, 2020).
2 “States Begin to Introduce Legislation: Business Interruption Policies Would Be Required to Cover COVID-19-Related Claims,” Venable LLP (April 28, 2020).
Jeffrey T. Willoughby, CPA, CFF, CFE, is a director with Forensic Resolutions Inc. located in Philadelphia and Westmont, N.J. He can be reached at firstname.lastname@example.org.
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