As of this writing, 30,000 restaurants have permanently closed their doors due to the immense disruption brought on by the COVID-19 pandemic. By the end of April, another 110,000 are expected to join this sad and disturbing number.
Businesses have been promised support during this unprecedented crisis from both federal and state regulators. The recently passed coronavirus rescue package included the Paycheck Protection Program–$350 billion that is set aside for loans and loan guarantees for small businesses.
The floodgates opened on Friday, April 3, when banks were buried by an avalanche of loan applications. As most had received the operator’s manual the night before, they were simply not prepared and unable to process loan requests. While Bank of America was one that did start the process, many small business owners reported being denied because the bank was only accepting applications from current BofA borrowers.
Because of the backlash, BofA has currently opened up applications for those that had small business checking accounts as of mid-February, as long as they have not borrowed from another bank.
In addition to the apparent glitches, there appears to be several expected government loan restrictions.
Small Business Loan Restrictions
Loans for businesses with 500 or fewer employees are designed to cover two-plus months of payroll and some operating expenses. The government will pay off the balance if companies do not lay off employees. If a business has laid off employees prior to the loan coming through, a smaller amount will be subject to forgiveness. The New York Times also shared some additional restrictions: Businesses will have to use the money within two months to avoid repaying and, in those two months, no employee can receive more than $10,000 in order for that amount to be forgiven.
The only qualification, supposedly, is that the restaurant was in business and operational on February 15. The amount a business can qualify for is equal to 2.5 times their average monthly payroll cost up to a maximum of $10 million.
As restaurant owners and operators wait for relief, many have turned to their insurance companies in search of help under a business interruption claim. And what is the insurance company’s response? Forget it.
Business Interruption Insurance Claims Denied
First, let’s take a look at the definition of business interruption insurance. Otherwise known as business income insurance, it is designed to cover the loss of income occurred through a disaster. Fires and natural disasters often fall under this type of claim which usually covers operating expenses, payroll, taxes, and loan payments. It would seem that the COVID-19 pandemic would definitely fall under a disaster, but insurance companies disagree.
Most policies contain a clause that loss must “be caused by direct physical loss of or damage to property at premises.” Restaurants and others are challenging the denial of claims under the theory that the contamination of a property would qualify as physical loss or damage, and that preventative action, such as closing the business, was designed to prevent contamination. Others claim that, because the closures are due to the government stopping operations, their civil authority clause, which covers losses in this instance, should come into effect. Some insurance policies appear more airtight—such as those with express virus exclusions.
According to the Insurance Journal, the insurance industry is fighting back as courts and congress attempt to force them to cover these losses that, according to the industry, most policies were never intended to cover. According to Sean Kevelighan, CEO of the Insurance Information institute, “Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”
In the current crisis, an estimated 30 million claims from small businesses, which would amount to $220-$383 billion per month in claims, could besiege the insurance industry.
Wolfgang Puck, the famed chef and restaurateur, told Stuart Varney on Fox Business News that, if this amount exceeds insurer’s funds, which could be about half of what is available to pay for Property/Casualty claims, the government should step in to provide additional financial support. Other restaurateurs agree.
Restaurants Fight Back
Chef Thomas Keller, the only American-born chef to hold multiple three-star ratings from the Michelin Guide, has filed a suit against his insurer, Harford Fire Insurance Company. Keller’s business interruption claim was denied because there were no “dangerous conditions” at his restaurants. Other restaurants that have taken their insurance companies to court include Oceana Grill in New Orleans, a French Quarter restaurant that was the first to file a lawsuit, claiming that their policy provides coverage for business interruption caused by “business closure by order of Civil Authority.”
States are following suit, with lawmakers in New Jersey, Ohio, and Massachusetts considering passing laws that would bind insurance companies to compensate for business loss occurred during the pandemic.
While lawsuits and murky policies have left a wake of uncertainty and frustration, what is clear is that, if help is not eminent, restaurants across the nation will be unable to reopen their doors once the viral pandemic has receded.