It’s no question that the COVID-19 pandemic has affected all aspects of life and business, and the construction industry is no exception. It has caused varying challenges for companies and projects throughout the country, with states responding differently in regards to essential vs. non-essential construction. 

This has been coupled, in many cases, with a limited workforce and increased supply chain challenges. Many construction leaders have questioned whether their insurance policies, specifically business interruption coverage, will cover their potential financial losses and delays. The answer is: It’s complicated and each situation is different. Here are the latest updates as of this writing, but it’s also worth noting that this is a constantly evolving situation with discussions around potential solutions on state and national levels. 

Business Interruption Insurance and What it Covers

Business interruption insurance is a component of a property policy that covers the loss of income a business incurs due to necessary suspension or slowdown of operations resulting from direct property damage. This policy was written to provide relief for businesses from instances that directly impact them, subject to the terms and conditions of the policy. Theoretically, insurance is designed to be sustainable due to risk pooling—there are a number of businesses across the country with separate loss exposures, so companies are not affected simultaneously. In general, insurance carriers would say the property policy, specifically business interruption, is not intended to cover pandemics, as the financial loss is catastrophic in nature for an infinite amount of time and, as a result, the costs could be astronomical. 

Should a contractor look to trigger business interruption coverage under their property policy amid COVID-19, there are four general hurdles they must address.

•  Business Interruption Loss. There is inconsistency in case law regarding whether delayed revenue is “lost” revenue. Although many contractors may have projects that have been delayed or in some cases terminated, it is not consistent across the country whether this would trigger a business interruption loss. 
• Described Premises. The property policy, and as a result the business interruption component, trigger coverage for the location on the policy declarations. Contractors are different from other industries because the location where the construction project is performed is likely separate from the company’s offices or headquarters. As a result, it would be uncommon to see contractors’ jobsites listed on their property policy, which could present a challenge in triggering coverage.
• Direct Physical Damage. To trigger coverage under the property policy, direct physical damage is a requirement. Again, case law is inconsistent on whether non-physical damage to a location, such as a virus contaminating a location, could trigger coverage.
• Virus-Related Exclusions. Many property policies include virus and other related exclusions as a result of previous contagious diseases.

State Proposed Legislation

Since the coronavirus began to spread in the United States, seven states have introduced legislation that would extend business interruption insurance to retroactively cover losses associated with coronavirus shutdowns for policyholders. The proposed legislation attempts to mandate insurance carriers to pay claims for business interruption losses, regardless of whether coverage is provided in the policies. Despite being introduced, as of June, 1, 2020, none of the proposed legislation has proceeded forward. Additionally, each state’s proposal differs, but the majority of the legislation would only apply to businesses with 150 employees or less. 

There are, however, concerns about the legality of the legislation, cost implications and resulting ripple effect on the future property insurance and business interruption market. It is too soon to say definitively, but it would likely take years in the court system to resolve state-proposed retroactive legislation. 

Federal Proposed Legislation

At the federal level, a Pandemic Risk Insurance Act (PRIA) has been discussed, which in theory would operate like the Terrorism Risk Insurance Act signed into law following the Sept. 11 attacks. While discussions are in infancy, it appears the goal of this initiative is a federal loss-sharing program that would enable insurers to partner with the federal government to cover significant losses resulting from a pandemic to the extent such coverage was elected by the policyholder. PRIA would cap the amount of losses paid by insurance companies and create a federal backstop to fund aggregate losses beyond a threshold (for example, $250 billion), up to a pre-determined maximum. 

While there is an early draft in the works, there are many details yet to be worked out, including whether carriers would be required to offer such coverage, premium funding and a litany of other issues.

Legislation Concerns

Whether it’s on the state or federal level, the insurance industry has concerns over retroactively changing business interruption insurance contracts to cover pandemics and viruses, arguing that forcing carriers to cover these perils would cause significant economic strain and/or insolvencies, considering the magnitude of the losses. Given the obvious need for more relief to businesses in many industries, including construction, substantially impacted by the coronavirus, there will need to be some resolution of this issue. business interruption coverage will surely be an area of coverage disputes and litigation in the coming weeks, months and even years.  

Although the times are truly challenging and much remains unknown about the financial implications and insurance logistics, construction companies should work closely with their insurance brokers to evaluate their policies and, in some cases, submit claims if appropriate and recommended, out of an abundance of caution. 

These are truly uncharted waters—and there is not a one-size-fits-all approach to combating these novel challenges. Contractors with questions about their unique situation should contact their insurance broker.