If you think that the American insurance industry may get hit with a massive bill from business owners seeking to recoup their losses from the COVID-19 shutdown – you are likely correct. While many out-of-work business owners have yet to calculate their total business losses, the predictions are staggering. Small businesses are estimated to be losing between $255 – $431 billion every month Americans are unable to go back to work. As our country rallies behind the working class and advocates for full compensation of their financial losses, there are glaring questions that have yet to be asked about the logistics of such a mass payout – in other words, the how, who, what, and when of business interruption coverage.
These early predictions already have the U.S. insurance industry scrambling to keep recovery expectations in the realm of reality. David A. Sampson, president and CEO of the American Property Casualty Insurance Association, explained that even if business owner calculations of losses are taken at face value, “the total surplus for all of the U.S. home, auto, and business insurers combined to pay all future losses is only $800 billion.” Simply put, there is just not enough money to make the American workforce whole again after the pandemic. That being said, insurers must be prepared to ask: How will business losses be calculated? Who is a COVID-19 Plaintiff? What types of losses are covered? When do the business interruption losses begin and end?
This reality has led to an inevitable dispute between business owners and insurance adjusters over how to calculate business interruption losses and lawsuits are already flooding the legal system. From our extensive experience defending insurance companies against these types of claims, Holden Litigation has identified the two possible approaches Courts will use to calculate COVID-19 business interruption losses.
Calculating COVID-19 Business Interruption Losses
The Post-Catastrophe Economy Considered Approach and Post-Catastrophe Economy Ignored Approach are two ways to calculate business losses in natural disaster scenarios. An insurer’s defense and trial strategy may differ greatly depending on which approach the Court selects for its calculation.
In the Post-Catastrophe Ignored Approach, business losses are calculated in a scenario as if the catastrophe never occurred. In other words, the value of the business interruption is determined solely on historical sales data. In the Post-Catastrophe Economy Considered Approach business interruption losses consider the business’s profitability during a hypothetical scenario that the catastrophe occurred, but the business was not damaged and remained open. In this approach, the actual profits after the business re-opens are critical to the calculation.
For example, let’s say Clint is the owner of a local business called NoGermz. The business sells homemade hand soaps and cleaning supplies. Before COVID-19, NoGermz was making little profit and struggled to pay its employees. Clint was considering filing for bankruptcy. During the COVID-19 pandemic, NoGermz had to shut down due to government orders for the temporary closure of non-essential businesses. After the shutdown orders were lifted, NoGermz business sales skyrocketed as a result of the growing interest and demand for antibacterial hygiene and sterilization products.
Under the Post-Catastrophe Ignored Approach, NoGermz business interruption losses would be calculated as if the pandemic never occurred; in other words, Clint’s business losses would be determined solely on NoGermz profits history prior the COVID-19 shutdown. This approach is litigated by insurance companies as a fair approach for calculation, as factors such as the business’s impending bankruptcy and diminishing sales are relevant factors of consideration for an accurate financial loss assessment.
In the Post-Catastrophe Economy Considered Approach, NoGermz losses during the shutdown would be calculated from the perspective where the COVID-19 outbreak happened, but NoGermz remained open for business. This approach would consider the increase in NoGermz’s business profits after the shutdown order was lifted in its final calculation.
Ultimately, insurance defense attorneys must be prepared to efficiently and quickly litigate these cases in high volume and understand the specific formula the Courts will use for calculating business interruption related financial losses.
If you enjoyed this blog, please check back for Part 2 of our Business Interruption discussion: Who is a COVID-19 Plaintiff?