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Why Doesn’t Business Income Coverage Apply to COVID-19?

Published by Robert J Stillwell on April 15, 2020


Many business owners have found that the Loss of Business Income coverage on their policies does not apply to the COVID-19 Pandemic.  This has come as a surprise to many. 

Simply the name of the coverage would imply that you’re protected against the loss of business income regardless of the reason; however, insurance policies are complicated contracts and can’t protect you from everything.  We’ll explore this topic here and try to provide you with some insight why.

How Does Business Income Coverage Work?

The most common type of Business Income coverage is found as part of a Commercial Property coverage.  You can also obtain other types of Business Interruption coverage (such as that provided by some Cyber Liability policies), but for the purposes of this article, we’ll look at the Property coverage. 

Business Income coverage is triggered by Direct Physical Damage to a property which prevents you from generating income.  A typical example would be a fire at a restaurant that has significant fire & smoke damage, requiring repairs that might take weeks, months, or longer.  

When this event happens, the Loss of Business Income coverage triggers because the property is no longer usable to generate revenue, due to the direct physical damage to the property.  Other types of direct physical damage include water damage, vandalism, wind, hail, and falling trees.

Why Doesn’t Business Income Coverage Apply to COVID-19?

You might argue that the presence of a contagious virus on premises that prohibits a business from operating might constitute direct physical damage.

However, sanitizing a property can often be done without waiting weeks or months, it would be hard to prove a contagion’s existence, and most businesses are closed not because of the presence of the virus, but due to government order to prevent the spread of the disease.  In addition, most insurance policies contain a specific exclusion, prohibiting coverage due to loss from virus or bacteria. 

We’ve established the policy’s contractual reasons COVID-19 is not covered under Business Income policies; however, it’s also important to understand why it’s not covered. 

But Why?

Most businesses are negatively affected by COVID-19 in one way or another.  Most businesses that are still able to operate are already or will be generating less revenue than they were before.  Some are hit harder and more immediately, while some will feel the effects more on a long-term basis. 

Initial estimates are that if insurance covered this pandemic as a covered event, the cost for insurance companies would be between $220 – $383 Billion for just a single month, for just small businesses, with as many as 30 million claims.  To put this in perspective, 30 million insurance claims would be 10 times more than the most insurance claims ever handled by the insurance industry in one year. 

In comparison, Hurricane Katrina caused $125 Billion in property damage with about $80 Billion of it insured.  At the lower end of the estimate, the cost of a single month of economic shutdown for small business would cost three times the cost of Hurricane Katrina. 

In short, the cost of covering loss of business income due to a pandemic is simply unaffordable for the insurance industry – if they paid business income claims due to the pandemic, they might not be able to pay any other claims. And if the insurance companies did intend to cover this type of loss, insurance premiums would increase to the point of being unaffordable for many businesses. 

Insurance policies are designed to cover relatively isolated events.  A building catches fire.  A business suffers a data breach.  A tree falls on a house or a car.  A product causes injury or death.  A driver causes an auto accident.  While any of these things can be incredibly expensive, they are limited in scope.  Pandemics are not. 

What Happens Now?

Some states are talking about introducing legislation designed to force insurance companies to cover business income losses from COVID-19.  On the face of it, this solution would entail the government legislating away a legal contract, which opens up a whole host of other issues. 

Some are proposing for federal legislation to establish a Pandemic Risk Insurance Act, which would function in a similar way to how Terrorism Insurance works with insurers and the federal government working together for a solution. 

There are no answers yet but solutions are being explored. 

Many insurance companies are offering extended grace periods for payment of premium.  It is our advice to maintain your insurance coverage as long as you’re able to.  Replacing policies is not always guaranteed, and they may be more expensive or offered on different terms, especially if there is a gap.  If you’re short on cash but want to keep your policy active, please contact our office and we’ll do our best to help. 

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