Business Interruption Insurance Claims


As we are all managing through the COVID-19 pandemic that is significantly impacting individuals and businesses alike, lawmakers in various states are proposing legislation to require insurance companies to pay business interruption claims related to COVID-19 through their existing policies.   As of April 1, legislation has been proposed by New Jersey, New York, Massachusetts and Ohio.

Business interruption is the temporary close of business operations, either partially or completely, as the result of a specific event.  Related to insurance coverage, the loss event is the result of a covered peril such as hurricane, fire, etc.  The proposed legislation includes, among the covered perils under insurance policies, coverage for business interruption during the period of a declared state of emergency due to the COVID-19 pandemic.


What does this mean for your business?

If the legislation passes in your state, and you currently have business interruption insurance, you may be entitled to file a business interruption insurance claim if your business experienced a loss.  Business interruption insurance indemnifies the insured for income lost “but for” the event and possibly other expenses incurred to mitigate the loss.  Other expenses may include items such as additional rent due to a move to a temporary location.  The insurance coverage is designed to make the insured whole and is for the actual loss sustained.  As such, deductions must be taken for certain expenses that were not incurred during the loss period.  The insured’s ability to mitigate their loss either during the loss period or shortly thereafter must be considered.  The amount that will be recouped by the business will not exceed the limit stated in the policy.


Claim Calculations

As part of the claim, business owners will need to calculate the actual loss sustained.  In doing so, the insured’s profit and loss statement for a period of time ending prior to the date of the loss will need to be analyzed.  Therefore, we recommend business owners generate a balance sheet and profit and loss statement as of the date in which the loss period began to document the business’s financial position.    The most important element of the claim is calculating lost sales.  This calculation establishes the foundation for determining cost of sales and lost profits.

The lost sales calculation is estimated to be the difference between the sales that should have been achieved had the interruption not occurred and the actual sales that were achieved.   The insured’s expenses will need to be analyzed and segregated between variable (vary directly with sales) and fixed to determine discontinued expenses.  Some expenses are semi-variable and require additional analysis.

We strongly advise all business owners to review their current insurance policies and coverage as well as discuss their options with their insurance agent.   

At Sax, we have a team of professionals who can provide you with the assistance in evaluating and calculating the potential loss related to these claims.   Please reach out to us with any questions or assistance needed with business interruption insurance claims, and we will be sure to keep you posted as updates to the proposed legislation emerges.

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