As the coronavirus (COVID-19) pandemic continues to leave its indelible image on the world, businesses in all sectors are struggling to maintain operations and keep revenues flowing. The construction industry faces significant COVID-19 challenges, given its reliance on supply chains, materials, and steady labor, as well as its contractual obligations to perform work within specified time frames. Contractors also are concerned about the ability to secure new projects if lending and insurance restrictions tighten.
As some construction deadlines come and go due to the practical realities of COVID-19 and new work is potentially more difficult to secure, contractors are making tough decisions to stay afloat and remain viable over time. They must also carefully consider how the crisis could impact their contractual rights and obligations. Many are reexamining their business interruption insurance clauses to understand what is covered and what is not.
If you own or operate a construction company, could business insurance help you navigate the current pandemic? Unfortunately, the answer is…maybe.
Understanding Business Interruption Insurance
Business interruption insurance is add-on coverage to an existing commercial property insurance policy that covers a policyholder’s lost profits and other expenses when a shutdown occurs as a consequence of its inability to continue normal operations and functions. Its scope of coverages includes lost revenues, lease or rent payments, employee wages, taxes, relocation costs, and loan payments. Under most business interruption policies, losses are covered throughout the duration of the time needed to restore normal business operations.
Traditionally, business interruption insurance has primarily offered coverage due to direct physical damage or destruction of any insured property. That by itself makes a strong case for including this type of insurance in your overall business insurance portfolio. However, COVID-19 is not technically a trigger event that causes actual physical damage to a property—yet the pandemic has caused, and may continue to cause, interruption of operations, normal or otherwise. It’s from this point that things start getting tricky.
Force Majeure – the Big Unknown
“Force majeure” refers to an unanticipated and uncontrollable event. In commercial contracts, a force majeure clause may excuse or delay the insured’s contractual obligations due to a defined set of events and/or circumstances beyond their control. Defined is the operative term here, for courts have traditionally been disinclined to excuse non-performance if the reason isn’t one of the defined events in said contract. On top of that, state law governs contract interpretations, and they can vary from state to state. Many contractors are finding some relief through their force majeure, though many experts continue to view COVID-19 as a grey area with regard to its insurability.
What to Do – Evaluating the Merits of Business Interruption Insurance
Given these uncertainties, business interruption insurance may – or may not – provide adequate coverage against losses sustained during the COVID-19 pandemic. Therefore, whether you currently have business interruption insurance or you’re evaluating it as a potential add-on in the form of a rider to your construction company insurance coverage, consider the following before taking action:
- Work with your business advisors to understand force majeure agreements and identify any relevant notice/response requirements.
- Review all of your business insurance policies to gain a full understanding of the coverage scope, as well as triggering events.
- Keep timely and detailed records of any interruption causes and associated costs.
- Stay abreast of all legislative and public health developments, and evaluate restrictions and/or advisories against their current coverage and company information.
If you have questions about business interruption insurance or other real estate and construction issues, please contact the real estate and construction professionals at Goldin Peiser & Peiser.
GPP will continue to keep you posted through our COVID-19 Business Assistance and Resource Center. If your construction business needs assistance during this challenging time, our COVID-19 Business Advisory and Planning Services Group is ready to assist.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.