Does Business Insurance Cover Losses From a Forced Closure?

As business owners discovered during the 2020 pandemic, a business shutdown can be a logistical nightmare. You may need to close your doors, but you still have operating expenses, mortgage or lease payments, and employee wages. If a forced closure drags on, lost income becomes an issue.

Many small businesses closed their doors permanently because of the pandemic. Others managed to survive thanks to government bailouts and loans.

All businesses, large and small, reevaluated the need for business interruption insurance coverage. This type of insurance covers all forced closures and emergency shutdowns. The requirements and exclusions are strict. Business owners must consult an attorney before signing any forced closure coverage, or they may be worse off than before.

This article reviews business interruption insurance and forced closure coverage. For information about other types of commercial insurance, visit FindLaw's Business Liability and Insurance page.

What Is Business Interruption Insurance?

Most companies have a standard business owner's policy (BOP). This common policy includes general liability insurance, property insurance, and business interruption coverage. This package covers most issues businesses will likely experience during a typical closure.

In addition to property damage and any other liabilities, business interruption insurance covers:

• Income that you would otherwise have if you were open
• Mortgage, rent, or lease payments
• Taxes and payroll
• Relocation to a temporary location
• Extra expenses due to physical damage or other business needs

As business owners found during the COVID-19 emergency, there are things that their BOP does not cover during a forced shutdown.

• Broken items, such as glass (there are separate policies for glass and fixtures)
• Flood, earthquake, and, in some areas, hurricane or sinkhole damage
• Utilities (power, gas, telephone) may have their own policy for outages
• Income that is not included in your financial records
• Pandemics, viruses, or infectious diseases

As businesses discovered during the pandemic, there is an exclusion for viral and bacterial contamination. Many insurers have separate policies for such events.

There is also an exclusion for epidemic/pandemic shutdowns, implemented after the SARS epidemic of 2002. Many policies only pay when there has been a physical loss and will not pay if there is a risk of loss, as in the COVID-19 shutdown.

Other Types of Business Shutdowns

When the Caldor fire ravaged the western Sierra Nevada mountains in August 2021, the entire Lake Tahoe basin was evacuated. The evacuation order and business closures lasted more than a month.

Business Interruption Insurance applies when the government declares an emergency and orders businesses to close. A city's order of an evacuation or a public safety emergency may qualify.

Most types of coverage include a waiting period before the insurance policy begins. The length of time depends on the nature of the shutdown. For instance, hurricane coverage usually has a 72-hour waiting period. This means businesses cannot claim financial losses for those three days.

Business shutdowns are not always due to events in this country. A new problem, contingent business interruption, is rattling the business insurance industry. This occurs when unexpected events in other locations — even other countries — affect businesses here. These events can affect transportation, supply chains, and even access to the business itself. Many things can cause shutdowns, including:

• Natural disasters, such as winter storms, floods, and volcanic eruptions.
• Political events. Conflict in other regions can upset shipping schedules here. The results of an election on the East Coast may trigger shortages on the West Coast.
• Infrastructure failure. A recent spate of bridge collapses in 2024 revealed America's dependence on vulnerable roads, bridges, and ports.

Small-business owners should review their specific needs with an insurance agent in their area.

Things To Watch for in a Business Interruption Policy

A business interruption insurance policy should include a civil authority clause that allows coverage during citywide or statewide disruptions, such as hurricanes or pandemics. However, as business owners learned during both these events, insurance companies can be clever about finding ways around the clause.

An insurance policy is only good for:

• The covered event, such as a hurricane or fire. Your policy will not cover losses if your business closes because a storm washes out a causeway but your business remains intact.
• The covered loss, which may be income, damage, or employee wages. Ensure you have comprehensive coverage for all losses.
• Losses up to your coverage limits. You will pay the rest out of pocket if your losses exceed your limits.

For example, if a city orders businesses to close ahead of a hurricane, the business must wait 72 hours before it can make a business interruption claim. The business cannot file a claim if the city lifts the curfew before that time.

Suppose the hurricane destroys the road to the business, but the business itself is not damaged. Unless the business has contingent business coverage, the owner cannot file a claim, even if the business cannot reopen.

Small-business owners should have a plan for reopening their business after a natural disaster or other emergency. Know what your policy covers and what expenses you'll have to cover yourself. If you set aside an emergency business operating fund, you'll be prepared if a disaster strikes.

Get Legal Advice

Whatever the grounds for your claim, insurance providers want it submitted on time. If you don't have business interruption insurance, you should talk to your insurer immediately. In all cases, an attorney should review your policy before you sign any documents. Consult an insurance attorney in your area for advice.