Your Restaurant’s COVID-19 Insurance Claim Got Denied…Now What?

Since the COVID-19 pandemic started, the restaurant industry has experienced a widespread financial loss because of mass closures, fewer customers and increased safety regulations. As such, many of them hoped for loans and subsidies to help bail them out of this crisis, but the state and federal governments never followed through on deep, radical aid that would do long-term good for the industry. No help ever came. The little financial assistance they were afforded didn’t stretch very far, even for those who qualified and received PPP loans. As a result, many restaurants filed insurance claims instead.

Predominantly, restaurants filed for a “business interruption insurance” claim, which seems to make complete sense with the given situation on the surface. Essentially, plans with this coverage will compensate a portion of what the business loses after a disaster forces them to cease operations. Reasonably, restaurants around the U.S. filed this claim soon after the pandemic hit.

But they never saw a dime.

Defining Interrupted Business

How can so many businesses, paying thousands upon thousands of dollars in annual premiums, not receive even a little bit of payout during one of the most massive business interruptions we’ve seen in our lifetimes?

It all comes down to wording. Typically, policies that include this coverage specifies “direct physical damage” has to be incurred in order to qualify, i.e. a fire or a tornado. Viruses aren’t included or outright excluded by policies that overtly state they won’t cover cases where bacterial, viral or other disease forces businesses to a halt.

Seem accidental? It’s not. In 2002, SARS devastated the global economy and caused significant financial repercussions for insurance companies too. Since then, policies have changed to exclude coverage for damages incurred by disease specifically. Though it seems malicious, insurance companies insist that they simply can’t afford to cover all of the claims being made over the past several months, and they would be in major crisis if they tried to payout to all of the aggrieved clientele. Fundamentally, privatized insurance works because a myriad of people pay premiums and only a few cash in on them at a time.

None of that helps restaurants, though, who are going through a massive crisis all their own. As a result, a lot of them have taken their providers to court. By the beginning of August, more than 400 lawsuits had been filed by small businesses against their insurance providers.

Restaurants Go to Court

Food service establishments are suing insurance companies to change the meaning of what constitutes “interrupted business.” One restaurant, notably located in New Orleans, argued that COVID-19 contaminates surfaces that are difficult to clean to the extent and regularity necessary to keep customers safe—especially in a hot, muggy climate. That’s real, physical damage caused by the virus.

Other restaurants took a different tack. Rather than change the general understanding of what direct physical damage means, they want to void the entire argument by showing what will happen if mass closures continue to occur. By showing how the ripple effect caused by similar situations has impacted local economies, they can extrapolate that data to the macro level and demonstrate how half of the restaurant industry closing due to COVID-19 will incur serious effects the national economy. They’re hoping that the threat of such a dark future will encourage insurers and governments to make positive impacts now, before things get worse.

In addition to lawsuits, aggrieved restaurants are trying to draw attention to their plight in the hope of garnering national attention, drawing sympathy and subsequently gaining more supporters to back their side; they’re taking drastic measures, even going as far as billboards in Times Square. Raising awareness is the first step to effective community organizing.

Others are bypassing the lawsuits and ads and going straight to Capitol Hill.

Everyone Wants Legislation

Both restaurateurs to insurers are brainstorming meaningful laws that, if passed, would greatly assist with the currently tumultuous situation.

One proposition would solve the most immediate troubles: Let the federal government reimburse insurers who pay the claims, regardless of if the policy language accounts for viruses or not. This would certainly be good news considering that the court systems have already shot down several of those 400+ filed lawsuits; at least two restaurants in Michigan had their policy disputes denied because one judge, Judge Joyce Draganchuk, determined that the damage had to “alter the physical integrity of the property” to qualify for business interruption insurance.
Others advocate for a federal pandemic reinsurance program. For those unaware, insurance agencies pay outside “reinsurance” companies so that, in the case of unexpectedly large claims, the reinsurers can assist with payouts to the person or business who filed the claim. However, pandemics of this magnitude are too massive for even insurance agencies plus reinsurers to handle alone. Thus they’ve proposed the inception of a federal program which would not only assist with our current predicament but also establish how we handle similar situations in the future. The government and the insurance company would both pay a portion of the claims upfront, bypassing traditional reinsurers entirely, and the insurance agencies would reimburse the government for their portion over the course of several years. It’s a more manageable and viable plan.

Insurance companies seek a different solution. One alternative suggests splitting the market, so there are different precedents for small businesses versus medium to large ones. It would be mandatory to buy coverage unless the business specifically opts out in writing. Smaller companies, like restaurants, would get insurance money to assist with payroll in the event of a disaster. Medium to big businesses would buy market-based premiums like normal except the insurance companies would transfer most of the risk to the government reinsurance program, aptly named Pandemic Re.

These are just a few of the alternatives being presented to the courts and the government to repair some of the damage that COVID-19 has caused restaurants and avoid something like this happening again in the future. As lawsuits continue, the virus spreads, and different legislations undergo debate, restaurants will just have to wait and see whether the face of business insurance will change in an appropriate, tangible way…or if they just have to keep helping each other weather the storm instead.

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