The global impacts of the COVID-19 (Coronavirus) pandemic continue to result in economic losses to businesses and individuals throughout the world. Governments are ordering shut downs to quarantine and contain the spread of the outbreak. The actions of government and resulting changes in consumer behavior have resulted in negative impacts to many businesses. Businesses are impacted across several sectors and some are being forced to close their doors, shut down operations, and send employees home.
Business owners may have options to help them weather the storm during these unprecedented times. It is important that business owners review their insurance policies and familiarize themselves with any business interruption insurance coverage (see general definition for business interruption insurance below) that their insurance policies may provide.
Business interruption insurance is a type of insurance coverage that compensates your business for lost income and extra expenses that occur as a result of a covered peril or covered cause of loss. This type of insurance is designed to help businesses recover after a loss and to help make the business whole by reimbursing for loss of income and extra expenses incurred as a direct result of the loss event.
Further, a covered peril or covered cause of loss is often defined in the declarations of your insurance policy, and sometimes policies exclude from coverage “viruses.” In other words, insurance companies may deny (not cover) business interruption claims that allege damage from the Coronavirus.
Moreover, some business interruption policies include Civil Authority provisions that may provide coverage for covered causes of loss in connection with a government order prohibiting access to the insured business. This type of coverage often requires that the covered cause of loss result in physical damage that occurs within a certain radius of the insured business. How the term “damage” is defined in your insurance policy and what constitutes a covered cause of loss therefore require careful consideration.
However, even though insurance policies may have exclusions around claims related to viruses as a covered peril or covered cause of loss, at least two things need to be considered. First, each policy needs to be evaluated under the specific facts and circumstances as that will ultimately govern whether there is coverage or possibility for a payment. Second, the government may step in to help provide relief for your business. For example, in New Jersey there was pending legislation that would outlaw exclusions to the Coronavirus1. Under the proposed legislation, an insurer that indemnifies an insured business that has filed a business interruption claim as a result of the Coronavirus may apply to the Commissioner of Banking and Insurance for relief and reimbursement by the Commissioner from funds collected and made available as provided by the legislation. At this time, the legislation in New Jersey has been tabled after industry trade groups came up with an alternative voluntary approach to help small-business policyholders cover their losses.
Another example, the Denver Economic Development & Opportunity (“DEDO”) is working to connect the Denver business community to any resources that may be available to help provide support to businesses impacted by the Coronavirus. Businesses are being asked to fill out questionnaires that will help the DEDO staff determine the most appropriate support that may be available2.
Whatever the case may be, if your business has suffered economic losses as a result of the Coronavirus pandemic, it is important that you are prepared should your business qualify for some measure of economic relief. We have included below some high-level, general background related to business interruption claims, how they are calculated, and what records and information might be helpful to quantify the impact.
1. Period of Loss – First, it is important to understand the time period that the business was impacted (“period of loss” or “loss period”) as a result of the alleged loss event.
2. Lost Revenue – Determine what revenue would have been if the loss did not occur. Revenue is projected during the loss period but, for the alleged loss event (a scenario that assumes the loss event did not occur). Then, projected revenue is compared to actual revenue during the loss period; the shortfall in revenue equals lost revenue as a result of the alleged event.
3. Variable Costs and Expenses – Determine what costs and expenses of the business are variable in nature and what costs are fixed. Calculate the variable costs and expenses that were saved as a result of not generating the revenue (i.e. saved direct product costs, variable payroll and associated taxes and benefits, bad debt expense, variable utilities, etc.). Saved variable costs and expenses are deducted from lost revenue to calculate the loss of business income as a result of the alleged loss event.
4. Other Information That May be Helpful
Cancelled Sales Orders – Were sales orders cancelled as a result of the loss event? Lost sales order documentation and related correspondence from customers should be maintained, as it may be helpful documentation to quantify the revenue that was lost as a result of the event.
Projected/Actual Revenue – Monthly revenue information should be maintained for at least two years prior to the loss and during the loss period. Monthly revenue information will help determine any growth (decline) trends in the business prior to the loss, and also may help demonstrate any seasonality that exists in the business. Also, budgets and forecasts prepared prior to the loss event (if available) should be considered. These records are helpful in calculating projected revenue (what revenue would have been had the loss event not occurred) during the loss period.
Payroll – Did the business pay its salaried and hourly employees during the impacted period? Detailed payroll registers for at least two weeks prior to the event and during the impacted period will help determine what payroll continued during the loss period (e.g. fixed payroll) and what payroll was saved (e.g. variable payroll).
Costs/Expenses – Detailed monthly income statements for at least one year prior to the loss event and during the loss period may be helpful documentation to determine whether costs and expenses are variable or fixed in nature. These records will allow for monthly common-size income statement analysis and ratio analysis to understand costs and expenses that may vary with revenue, as compared to costs that are fixed in nature (do not vary with revenue). Another cost consideration is the impact on your business of an inability to obtain product from a supplier and added costs if you obtain substitute product from an alternative supplier.
Extra Expenses – Has the business suffered extra expense and/or out of pocket expenses as a result of the loss event? Careful consideration should be given and documentation maintained for extra expenses.
Readers should not act upon information presented without individual professional consultation.
Any federal tax advice contained in this communication (including any attachments): (i) is intended for your use only; (ii) is based on the accuracy and completeness of the facts you have provided us; and (iii) may not be relied upon to avoid penalties.