What is Direct Physical Loss in Business Interruption Insurance?

If you have business interruption insurance, then it is possible you may have looked at the provisions of your insurance contract and seen the phrase “direct physical loss.” This seemingly simple phrase can have a significant impact on whether you are able to collect on your policy, especially if you were forced to shut down due to COVID-19. So what is direct physical loss, and how can that affect your business interruption insurance claim?

What is Business Interruption Insurance?

            Business interruption insurance is a kind of insurance that covers losses you suffer due to being forced to temporarily close your business. Rather than dealing with the direct physical costs, though, it addresses lost income due to being unable to operate your business as normal. For example, it might not cover water or mold damage you suffered in a flood, but it would cover your lost income for the time it took for the damage to be repaired.

How Do I Get Business Interruption Insurance?

There are two primary ways for a business owner to get business interruption insurance. The first is to specifically purchase a business interruption insurance policy from an insurer that offers it. The second is to have a business interruption clause as part of a general business insurance contract. With this second type of insurance, because many business owners may have business interruption insurance already and not know it. You should review your general business insurance policy. It’s always a good idea to know what you are and are not covered for.

Defining Direct Physical Loss

Many business interruption insurance contracts only cover business interruptions caused by “direct physical loss” to the business. Generally speaking, this has been interpreted by the courts to mean disasters that caused direct harm to the physical property of the business. For example, damage caused by a natural disaster like a fire, flood, or earthquake might qualify. So would damage caused by burglars, rioters, or vandals.

The Coronavirus Conundrum

            One of the primary issues going through the courts right now is the issue of whether business interruptions caused by the coronavirus qualify as “direct physical loss.” The coronavirus, also known as COVID-19, has devastated businesses across the country, and New York was particularly hard-hit early in the pandemic. Businesses that lost income due to the COVID-19 quarantine have been looking to business interruption insurance to cover their losses, with mixed results.

Some courts have adopted a more general definition of the term and have been willing to expand the definition from its traditional boundaries to include coronavirus-related closures. Other courts, however, have kept to a strict definition of direct physical loss, resulting in COVID-19 claims being denied outright. As it stands, the issue remains unsettled law, both in New York and across the country.

Finding a Way Past Direct Physical Loss

Even if you cannot get a court to agree that coronavirus-related losses count as a direct physical loss, you may have other avenues open to you to recover under business interruption insurance. For example, if your contract has “civil authority” coverage, you may be able to get payment due to being forced to close by the government. Alternately, you may have a clause in your contract that covers closures due to illness or infectious disease. However, you cannot be certain until you have consulted with an attorney.

If you are a business owner with a business interruption insurance plan, and you want to recover for losses suffered due to the coronavirus pandemic, you should seek out a business law attorney with experience in the field. The business law attorneys at Blodnick, Fazio & Clark are skilled and knowledgeable in the areas of business law and commercial transactions.  With offices conveniently located in Garden City, Nassau County, and Babylon, Suffolk County, the firm provides high-quality legal care at reasonable prices. If you require legal assistance concerning business startups, formation, corporate acquisitions and mergers, corporate restructuring, or another business matter, call (516) 280-7105 or fill out our contact form for a free consultation.

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