Hurricane Ida tore through southeast Louisiana on August 29 and 30, 2021—leaving chaos and destruction in its wake. Many businesses suffered flooding, holes in their roofs, and worse. But Ida’s damage to Louisiana’s economy isn’t limited to just the physical. The storm left almost 900,000 Entergy customers without power in the state. To make matters worse, many roads were impassable from fallen trees and flooding, and evacuations forced people to leave the state.
With some locales not being forecast to have power restored for as long as a month, and with physical damage widespread across the impact area, many Louisiana business owners are turning to their insurers for financial help—in the form of business interruption coverage. This article’s goal is to provide an overview of how business interruption coverage works, when it might apply, and how your business can navigate business interruption coverage to recover some of its losses from what may have been the strongest storm to hit Louisiana since the 1850s.
When Does business interruption Coverage Kick In?
Business interruption coverage is unique from other types of coverage in most business owners’ policies because it does not stand by itself. In other words, a business owner cannot simply make a claim to an insurance company that it lost business and would like to be reimbursed. Instead, on most policies, business interruption coverage is triggered only in conjunction with another insurance claim—usually for physical damage to the property. The business owner can collect business interruption payments only for the lost income that is directly attributable to the physical damage.
This distinction was hotly litigated during the early months of the COVID-19 pandemic, when mandatory government shutdowns sent many restaurants and other hard-hit businesses scrambling to find a way to reduce their lost income. Courts almost unanimously held that businesses did not suffer any “physical loss” during the stay-at-home orders, and thus were not eligible for business interruption coverage. More information about business interruption coverage during the stay-at-home orders can be found here (Michigan Court Delivers First US Decision on COVID Business Interruption Claims – MBLB).
So: a business that was forced to stop operations due to physical damage during Ida (e.g., flooding or roof damage) is clearly entitled to business interruption coverage. But what about a business that “merely” lost power, or that is cut off from its customer base due to fallen trees or evacuation orders?
All hope is not lost for those business owners who survived the storm physically unscathed. Some policies offer “civil authority” coverage, which comes into play during a government-mandated evacuation, curfew, or other order restricts access to the business. The caveat, of course, is that the order must be associated with the event that caused the insurance claim to be filed (remember the discussion of the COVID-19 stay-at-home orders?). The good news for Louisiana’s policyholders is that this is not likely to be an issue for any evacuation, curfew, or “stay-away” order associated with Hurricane Ida, because the order and the cause of the damage to the business are directly related.
Of course, not every parish in Louisiana was subject to mandatory evacuation during the storm. Orleans and Jefferson Parishes, for example, were only under voluntary evacuation orders. Some insurers are denying “civil authority” claims on the grounds that evacuation was not mandatory. Louisiana Insurance Commissioner Jim Donelon issued guidance instructing insurers to pay homeowners’ and renters’ claims for additional living expenses under “civil authority” coverage, even without a mandatory evacuation order. However, it is not clear whether the Commissioner will issue similar guidance for business interruption coverage.
Policies might also offer “contingent” business interruption coverage, which covers financial losses caused by disruptions to a business’s customers or suppliers. Contingent business interruption coverage usually only kicks in when the damage to the customer or supplier would have been a covered business interruption loss if it had happened to the insured business instead. This provision could come into play for a business that sources supplies or materiel from another Louisiana business that was damaged in the storm.
Ultimately, given the widespread swath of destruction and disruption that Hurricane Ida caused in southeast Louisiana, it is likely that many businesses will be able to access their business interruption coverage.
What Does Business Interruption Cover?
Business interruption coverage replaces a business’s lost income during a natural disaster or other damage to the property that reduces or eliminates the business’s source of revenue.
Business interruption coverage is not standardized and varies from policy to policy and from insurer to insurer. But most business interruption coverage forms state that the insurer will reimburse a business’s lost income, operating expenses, payroll, taxes, loan payments, and other expenses necessary to keep the business afloat in a crisis. Business interruption coverage usually lasts until the end of the “business interruption period.” This is usually defined as the date that the damaged property is physically repaired, though some policies may continue coverage past the date of physical repair. In any event, most policies cap business interruption coverage at thirty days.
Business interruption coverage can often cover unusual business expenses incurred in connection with a crisis. This can include the cost to move to a new temporary location, or additional training or payroll costs associated with training employees on new equipment. Business interruption coverage could also include ingress/egress expenses, which will cover costs incurred when it becomes physically difficult or impossible to access the business (such as due to flooding, fallen trees, or downed power lines).
Policyholders should also note the type of expenses that business interruption will not cover. This includes personal property loss or structure damage (such as broken windows, stolen inventory, or items damaged in transit). It also generally does not cover utility bills—though some large industrial policies may offer coverage for utility or “service” interruption.
The scope of any individual business’s coverage will be determined by the policy language and the insurer’s own internal policies. Never assume that any given expense will or will not be covered. If you have any questions, ask your insurance adjuster.
What to Do If You Suffered a Business Interruption
Importantly, recognize that you have an obligation to mitigate your losses. As a general rule, this means that you should behave as if you have no coverage. You do not know how much (if any) money you might recover from the insurance company under your business interruption claim. However, you will have an easier time in both the short run and the long run if you minimize your expenses as much as possible while repairing damage as quickly as you can. This is particularly true given that it may be some time before you collect a check from the insurance company. Business interruption losses can often take months to fully and accurately calculate.
One very important step is to gather and compare all of your business’s applicable insurance policies. Insurance policies often overlap and interplay with each other, such that one may cover an expense that is excluded by another. They also contain language governing which policy pays out first when the insured has multiple policies covering the same type of loss. This is particularly true when dealing with a catastrophic event such as Ida, which may bring liability insurance, business property insurance, business interruption insurance, utility coverage, and flood insurance all into play. Also remember to look at any other policy on which your business is named as an “additional insured”—such as policies of subcontractors, landlords, or tenants.
Ensure that you properly and thoroughly document all of your property and business income losses. Business interruption will not cover any business income or expenses that are not properly, thoroughly, and credibly documented.
You must keep reliable and complete records of (1) your pre-loss earnings and expenses, and (2) your storm-related expenses. The pre-loss earnings are crucial because the insurance company will use them to calculate how much revenue and profit you would have earned, had the storm not occurred. The post-loss expenses are crucial to make sure that you are reimbursed for every eligible expense you incurred as a result of the storm. Do not be afraid to submit every expense and every loss to the insurance company. You may be surprised what your policies will cover, and the worst that will happen is that the insurance company will simply refuse to cover it.
Make sure that you maintain an accurate and complete copy of all communications with the insurance company. Doing so will not only complete your records, but will facilitate the claims process and ensure that the insurance company is able to issue payment timely and for the full amount owed.
Make sure that you comply with all deadlines in the policy. Most policies require an insured to put the insurance company on notice of a claim as soon as practicable, and require the policyholder to provide an itemized list of all physical property losses (sometimes called a “sworn proof of loss”) by a certain date. Expect this deadline to be within sixty days of filing the claim, though policies and state rules vary widely on this issue. While it will likely be longer before your business interruption claim is fully calculated, you must be careful to not let this deadline run on your property claim. Because your business interruption claim is likely tied to your property claim, failing to meet property claim deadlines could result in the denial of your business interruption claim as well.
Finally, don’t rush to finalize your claim. As tempting as it may be to resolve your claim as soon as possible, realize that it may be months before you are able to quantify the true scope of your losses. Repair costs, delays in returning customers, and supply chain problems may take a long time to resolve. It will also take accountants and lawyers some time to calculate the full scope of your loss. Early resolution might mean that you end up accepting less money than if you let the claim matriculate through its full process. In the meantime, if you need cash now, ask your insurance adjuster for an advance based on the expenses that you are able to prove now.
Business interruption is a complicated, difficult, and time-consuming type of claim to make. But by properly documenting your losses, knowing your insurance coverage, and being patient, you should be able to properly and smoothly navigate the coverage for your business.