Small Business Insurance and Coronavirus

The coronavirus pandemic has affected businesses of all sizes across the board, but it’s small businesses that have been the hardest hit. State orders to remain indoors and the shutting down of non-essential companies have had a massive economic impact on small business owners and employees.

According to FEMA, almost 40% of small businesses never reopen their doors following a disaster. Some of the 30.2 million small businesses in the U.S. will continue to undergo extensive financial losses as a result of quarantines and restrictions in trade as long as the pandemic persists.

Some small businesses are turning to their insurance policies to see if they can claim income lost due to the pandemic. But whether these claims will be covered depends on several factors. Just how much can small business owners expect to be covered by their insurance in the case of a global crisis like the coronavirus?

Small business owners are required by the federal government to have certain kinds of insurance, such as workers’ compensation, unemployment and disability insurance. Some states also require additional coverage, and these laws vary from state to state.

From the moment a business begins operating, it is exposed to potential risks. These are the most common types of insurance to cover business risks and losses:

• General Liability Insurance
  General liability insurance provides broad protection against financial loss due to a wide range of reasons, including bodily injury, property damage, medical expenses, libel, slander and faulty products.

• Product Liability Insurance
  This insurance is for businesses that manufacture products for sale. Product liability insurance protects against lawsuits due to injury or bodily harm damages caused by a defective product.

• Professional Liability Insurance
  Also known as errors and omissions (E&O) insurance, this insurance is for businesses that provide services to customers. E&O insurance protects business owners against financial loss due to malpractice, errors and negligence.

• Home-Based Business Insurance
  If you’re operating a home-based business, this insurance offers additional coverage to your homeowners insurance. It covers business equipment and inventory in the event of a loss.

• Worker’s Compensation Insurance
  Added to a business’s insurance policy, this will usually cover medical treatment, disability and death benefits in the event an employee is injured or dies as a result of his or her work with the business.

• Commercial Property Insurance
  This insurance is for businesses that own or lease space. It protects business owners against loss and damage of company property (equipment, signage, inventory, furniture and related items) caused by fire, smoke, wind and hail storms, civil disobedience and vandalism.

• Business Interruption Insurance
  This insurance is intended to protect businesses against income losses sustained as a result of disruptions to their operations after a disaster. It provides relief for damages caused by the closing of a business facility and the cost of rebuilding a business after a disaster.

Business interruption insurance can also be included in a business owner’s policy, which is a special kind of insurance that comes as packaged for small and medium-sized businesses and generally combines all of the typical coverage options into one bundle.

Generally, business interruption insurance will cover:

• Revenue lost due to the closure.
• Fixed expenses, such as rent and utility costs.
• Expenses of operating from a temporary location.

Your policy may cover additional extra expenses associated with the disruption — for example, advertising to announce your new temporary location.

Each policy should be checked for specific limitations.

Business interruption insurance (also known as business income insurance) is designed to help a business survive a disaster. Coverage is limited to certain types of disruptions and exclusions, and COVID-19 may not be covered under this. This is especially true if you obtained business interruption coverage as part of a commercial property policy, where the coverage only applies to events stated in the core policy. Due to the SARS outbreak of 2003, a number of these policies don’t include compensation for infectious disease outbreaks.

Business interruption policies also generally require the losses to be caused by physical damage to the property, which, for many businesses affected by the coronavirus pandemic, has not been the case. This insurance typically covers loss as a result of a windstorm, fire or other natural disasters.

Sean Kevelighan, CEO of the Insurance Information Institute, said in a press release, “Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk. Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”

Even in the case of civil authority (federal, state, or local government) forcing your business to close temporarily, you will likely not be covered. The critical policy point that would trigger coverage is tied directly to any physical damage occurring on your property or adjacent properties.

No. While there may be some companies currently advertising insurance that covers business interruption losses related to a pandemic, this coverage will not apply to the current coronavirus crisis. It works the same way as needing to buy collision insurance in the event of a car accident and not after it has happened.

To get full coverage for losses sustained due to the current coronavirus crisis, a small-business owner would need contingent business interruption coverage, which specifically includes the loss of revenue caused by a communicable disease outbreak. This loss could include disruptions to the supply chain, loss of revenue, the cost of repairing facilities and equipment and the cost to clean and sanitize.

According to partner-in-charge at Aprio, Howard Zandman, one of the only ways for a business to recover its losses due to COVID-19’s impact may be under infectious disease coverage. He wrote in a recent article, “We are currently in an unprecedented situation with COVID-19, and it is difficult to predict whether the presence of the virus or the threat of contamination will be sufficient to trigger business income coverage.”

Because of the large number of businesses being affected by this and making claims, it is possible, as Zandman and other attorneys foresee, that this gap in coverage and economic loss will have to be addressed at the state level.

If a small business owner cannot claim losses from their insurance, the next best thing is to look to the government relief efforts created in the wake of the pandemic. The SBA is making more loans available to small businesses. Through new legislation, namely the Families First Coronavirus Act and the CARES Act, business owners can apply for funds in the form of loans and grants, as well as apply for other types of relief. Different ways small businesses can adjust include shifting to an online business model and helping employees work from home.

The coronavirus pandemic illustrates the need to plan for the next risk and disaster, as unexpected as it may be.

The SBA advises a four-step approach to getting business insurance for your small business.

The National Federation of Independent Businesses provides information for choosing insurance based on your risks and what kind of accidents, natural disasters or lawsuits could potentially threaten your company.

Look for a commercial insurance agent that is as interested in what you need just as much as they are interested in making the commission from the policy they sell to you. Make sure the policy matches your business needs.

Compare rates, terms and benefits from different agents to find the price and policy details that suit your business best.

Liabilities grow along with the business itself, so it’s advised to contact your insurance agent if you make any changes to the business (personnel or equipment) and keep abreast of any changes in your coverage.

As an added step, FEMA also advises businesses to build up a disaster savings account and to review policies annually.

As the coronavirus pandemic continues to run its course and businesses remain closed, small business owners need to make use of the resources available to them through the SBA, the IRS and other government organizations to try to mitigate the impact on their business as much as possible.

Business owners should check up on their business insurance policy to see what is covered now, determine where the gaps in their business insurance can be found and plug those gaps. Being insured and protected from the unexpected can help businesses move forward.