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“Direct Physical Loss” in Business Interruption

On Behalf of | Oct 3, 2023 | Firm News

Business is never a sure thing. Running a successful enterprise of any size depends on making smart decisions on multiple fronts. Among them is how to protect your business from unanticipated losses resulting from the shutdown of the business due to external forces.

Perhaps never before has it been more important for business owners to hedge their bets by purchasing business interruption insurance coverage. Of course, that coverage is not inexpensive, but you count on being able to use it if the unexpected happens, like a natural disaster or a government-ordered shutdown during a global pandemic.

At the Law Offices of Jerry J Goldstein, our attorney works with clients who own businesses throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.

What Is “Direct Physical Loss”?

Business interruption coverage is based on the premise of “direct physical loss.” What constitutes direct physical loss is probably much narrower than you imagine. Moreover, it is more related to what causes a loss than the loss itself.

Direct physical loss or those incurred as a result of being unable to operate your business due to fire, water, or other damage. It will pay you for certain losses for a certain duration, typically until you have restored the damage to the condition it was in before the loss. This should not be confused with damage that your property insurance would pay, such as clean up after a pipe leaks or earthquake damage if you have an earthquake insurance policy.

Direct physical loss may also occur if you were forced to shut down your business because the city council voted that businesses could not be open while streets were closed for an event or because it has issued a curfew that forces you to close earlier than you normally do.

Examples of Direct Physical Loss

Direct physical loss claims relate to losses you incur when you can’t operate your business due to damage caused by wildfires or floods. Your insurance policy will pay to repair the actual damage, but your business interruption insurance will pay for certain operational losses in the interim. These include:

  • loss of profits,
  • fixed costs of doing business,
  • the cost of temporarily relocating the business,
  • employee wages, and
  • other expenses.

How Does Direct Physical Loss Trigger Business Interruption Claims?

Your right to file a claim against your business interruption insurance coverage hinges on your ability to quantify the direct physical losses incurred by your business.

For example, if a retail store suffers fire damage and cannot reopen until the damage is repaired, it will incur certain losses, such as profits. It will also have to continue paying the mortgage or rent and taxes despite earning no profits. It may want to continue paying employees, so it doesn’t lose them to other jobs. The business owner would need to provide proof of profit losses and expenses to quantify a claim.

Proving direct physical loss in some cases is challenging, particularly due to the interpretation of insurance companies about the coverability of what caused the interruption, if the policy does not exclude the coverage outright. Claims related to government-mandated shutdowns during COVID have been predominately denied by insurance companies in California.

Insurers contend the pandemic did not cause any physical damage that interrupted the operation of the business, like water damage or a fire would. Therefore, a business interruption claim for direct physical loss could not be triggered.

What Should Businesses Do if Their Claim Has Been Denied?

If you have had a COVID-related business interruption insurance claim denied, consult with a business attorney like the Law Office of Jerry J Goldstein. The fact is that the California Department of Insurance and the state’s courts are gathering information and rendering judgments on lawsuits filed by businesses whose COVID-related business interruption claims have been denied. To put it another way, the jury may still be out on whether coverage should apply — even when a policy specifically excludes coverage for viruses and bacteria.

An appeals court decision ruled that one insurer should not have denied a business’s claim for direct physical loss. Moreover, the California Supreme Court has agreed to provide guidance on key issues related to pandemic-related business interruption claim denials. Our firm is following the case law here and in other states very closely.

Get Your Questions Answered

If you have questions about what constitutes direct physical loss under your specific business interruption insurance policy, we should talk. Insurance companies want to deny claims every time they can to protect their profits. At the Law Offices of Jerry J Goldstein, we are concerned about the harm done to your business’s profits.

If you own a business anywhere throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others, don’t wait to get your questions answered.

Please note that in providing services outside of our immediate area, we generally don’t bill for travel time from our offices to meet at the business location or home of our clients, so call us now.t