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Paycheck Protection Program and Business Interruption Legislation Expected to Have Large-Scale Consequences on the Insurance Industry

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COVID-19 has put countless people and businesses across the country and across the world in a state of uncertainty. Unexpected and unprecedented losses abound, and many business owners have made claims under their insurance policies for business interruption coverage.

A business income coverage form typically covers losses sustained in the event of a necessary suspension of operations. Under normal circumstances, the triggering event for such coverage might be a burst pipe, a fire, or a fallen tree that requires the business to close for a period of restoration. Generally, these types of events are considered a “covered cause of loss” that results in “direct physical loss of or damage to the covered property.” Many such form policies include a “virus exclusion”, and insurance companies have been denying these claims on that basis.

However, COVID-19 presents circumstances that are abnormal and there are now bills before state legislatures nationwide, which could preempt the language in standard business interruption coverage and force insurers to cover COVID-19 losses. This puts insurance companies in unchartered waters when adjusting claims.

In response to COVID-19, the United States government introduced the now-infamous Paycheck Protection Program (PPP). PPP payments are loans- forgivable under certain circumstances- which incentivize small businesses to keep their employees on payroll during the COVID-19 crisis.  The nature of these loans has left adjusters wondering whether, if state legislatures opt to compel coverage for COVID-19-related businesses losses, those funds would be deducted from the carrier’s payment for business interruption coverage.  

The terms of the PPP state that the loan will be forgiven if the business owner keeps his or her employees on the payroll for eight weeks and the funds are used for payroll, rent, mortgage, interest, or utilities. So, in some cases, a PPP payment is a loan, which requires repayment, i.e., a liability. In other cases, the PPP payment will essentially be a grant from the government to diminish the business owner’s losses.  Thus, the PPP payments exist in a legal grey area, somewhere between a liability and a grant.  Insurers are traditionally liable only for actual loss. If a PPP payment turns out to be a grant, the insurer, arguably, would be entitled to offset its payment under the business interruption form by the amount of the PPP grant received by the insured. The problem, however, is that at the time the insured files a claim for business interruption coverage, neither the insured nor the adjuster will necessarily know whether the PPP payment will ultimately be a grant or a loan. And the potential problems do not end there.

The purpose of PPP payments is to provide businesses the necessary capital to keep people working and continuing operations. This poses another problem regarding business interruption coverage. Often, business interruption coverage does not cover a partial shutdown of the business. See Broad Street, LLC v. Gulf Ins. Co., 37 A.D. 3d 126 (N.Y. App. Div. 2006). Thus, a business owner who accepts a PPP payment and maintains some form of operation of his or her business, however, limited, may be precluded from pursuing business interruption coverage.

These are all things that insurers and business owners need to consider and prepare for when making decisions regarding their financial well-being.  The terms of each policy will need to be scrutinized, as well as the factual background of each claim. A thorough investigation of individual claims will be paramount for insurers. Specifically, some key points will be the type of business, whether it was closed pursuant to an order by a civil authority, the extent to which it was able to conduct business during the shutdown, and the date on which normal operations resumed.  As states start to lift stay-at-home orders and businesses begin to scramble towards normalcy, expect business interruption legislation to have large-scale consequences on the insurance industry.