Does Your Insurance Policy Cover Lost Income Due to COVID?

by Megan Lamb

As COVID loosens its grip on society and the nation moves on to a new normal, courts have begun to grapple with lingering questions surrounding pandemic-related losses and liability. During the height of the pandemic, Governor Pritzker’s Executive Orders mandating mass closure of non-essential businesses meant a loss of income and stability for countless business owners. While businesses have now opened and for the most part have returned to some sense of normalcy, who is responsible (if anyone) for liability for losses incurred due to the pandemic has not been settled.

Recently, the question of whether a business’ lost income due to COVID is recoverable under an insurance policy was considered by the United States District Court for the Northern District of Illinois.

Style Lounge Salon, a Chicago-based hair salon, was closed for an extended period and later reopened in a limited capacity in compliance with the Governor’s orders. The Salon attempted to file a claim with their insurance company in late March of 2020 for a variety of losses associated with the pandemic-related closure, including loss of business income. The insurance company denied the Salon’s claim, finding that none of the losses alleged by the Salon were covered by its policy.

The policy covered lost business income in certain situations, requiring the policy holder incur a physical loss to file a successful claim under the business losses portion of the policy. The Salon’s policy on coverage for lost business income stated: “We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration’. The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.” The Policy further defined a “Covered Cause of Loss” as “[d]irect physical loss unless the loss is excluded or limited.”

The Northern District of Illinois sided with the insurance company, finding that the COVID-related losses incurred by the Salon were not covered losses and as a result the company was not liable to pay the Salon’s claim.

The court reasoned that, when a policy requires “direct physical loss,” loss of income due to a general governmental order does not fall within the parameters of the policy. The loss due to COVID-19 was not a direct physical loss because no tangible damage had been done to the Salon’s property. The Salon’s premises suffered no physical damage, and had not been looted, broken into, or set ablaze. In fact, it presumably remained in the same condition it had been in the day before the governor ordered all non-essential businesses be shut down. Without some sort of physical damage or missing property, the Salon’s policy promising reimbursement of business income did not apply.

The court ruled that the Salon could not find coverage under the policy’s provision concerning business income due to a communicable disease. The court found that the loss of business income must have come about “due to an outbreak of a ‘communicable disease’” at the Salon’s premises that resulted in a government-ordered closure of the business. For there to be coverage under this part of the policy, there would have to be a communicable disease outbreak at the Salon that would then require the government to specifically shut down the Salon, and any lost business income during that shutdown would be covered under the Salon’s policy. Losses solely as a result of the communicable disease, like COVID, would fall outside the policy.

The pandemic’s unprecedented nature put any attendant losses incurred outside the parameters of the insurance policy. Additionally, the pandemic and resulting governor’s orders that were alleged to cause the Salon’s injury would have occurred regardless the Salon’s existence and location—they were not caused by anything on the Salon’s premises.

Although the Salon’s legal battle is not over, this initial setback illustrates an important lesson: business owners should be sure to read any insurance coverage policies carefully for conditions and terms that could impact whether or not they’re covered for pandemic-related losses. Such policies may, or may not, cover COVID-related losses.