Broker Check

"Reasonable Expectations" Versus Business Interruption Exclusions

March 24, 2020

There has been pressure on insurers to cover business interruption losses due to COVID-19. Many policyholders may believe they have coverage in their Property policies. This may be true for a few broadly written policies, but in most cases this is incorrect.

Business interruption (now usually called "business income") insurance does not automatically cover every business shutdown. The shutdown must be due to a covered peril. if there is no physical loss or damage there is no coverage. If there is a specific virus or communicable disease exclusion there is no coverage.

50 years ago Harvard Law professor Robert Keeton wrote about the "reasonable expectations doctrine". Briefly, he stated courts would favor policyholders who reasonably expected coverage even if the policy's wording did not provide it. The key word is reasonable. If wording is ambiguous a court will rule in the policyholder's favor. On the other hand, a plainly written exclusion will not be over-ruled.

Insurers in the past have fueled policyholders' expectations by using terms like "all risk" and "comprehensive" in their coverage forms. This is much less common today. When a court finds a gray area they may adopt a policyholder's (or policyholder's lawyer's) interpretation, but they will not void a clear exclusion.

If you're unsure about what business interruption coverages are included in your business' policy, our Property & Casualty experts would be happy to review your policy and let you know. Feel free to schedule a quick 10 minute introduction call below: