Why Insurance Doesn’t Protect Small Businesses From Looting

Between Covid, protests, curfews, and looting, some businesses have racked up big losses. And their insurance may not cover them.

By Zara Stone, Tech + Culture Freelance Reporter for Medium

On the evening of May 30, amid protests over the death of George Floyd, 15 people, armed with hammers and bricks, broke into California Street Cannabis, a pot dispensary in San Francisco’s Nob Hill. They smashed the windows and countertops and cleaned out the store, carting away around $10,000 of product. For founder Drakari Donaldson, a 24-year-old Black Mexican American, it was devastating. His business was only five months old, and the Covid-19 lockdown had put a dampener on a jam-packed calendar of education and community initiatives he had planned for the shop’s debut, in the hope of reducing the lingering stigmas surrounding cannabis use.

The day after the looting, Donaldson and his team barricaded the dispensary windows with scrap metal and boards and opened back up since medical marijuana is considered an essential business. The boards are still up due to a citywide shortage of window repair. “I’m waiting to hear back about what the insurance will cover,” he says. He’s hopeful they’ll be covered, but he doesn’t know for sure.

After months of pandemic-induced upheaval, small retailers, in particular, have been decimated. First came the drop in revenue caused by lockdowns and supply chain shortages and then for some, the losses due to curfews, protests, and looting. There’s no firm number of just how costly these break-ins were. However, Property Claim Services, an insurance-industry data monitor that specializes in catastrophes, estimates the total cost for Minnesota insurers is a minimum of $25 million. When it comes to Covid, the American Property Casualty Insurance Association estimates the income loss for small U.S. businesses to be around $255 billion to $431 billion per month. Many small businesses don’t have any insurance since only workers’ compensation, unemployment, and disability insurance are required by federal guidelines, though states and landlords have their own rules. Even for those that do, it turns out coverage for looting isn’t guaranteed.

Kirk Pasich, a partner at Pasich LLP Insurance Recovery Group, calls this gray space of insurance a “quagmire.” Most insurers will pay out for physical damage without argument, but many say they won’t pay for income losses related to protests, including looting or curfews. “They say, you’re already losing money because of Covid. So we don’t have to pay you because you can’t lose the same money twice.”

Another factor that hurts small businesses is the virus exclusion, which was introduced to many small business policies in 2006, in the wake of the 2003 SARS outbreak. If the business income loss is deemed virus-related, there’s no payout.

And many of them won’t cover those losses either because of the virus exclusion, which was introduced to many small business policies in 2006 in the wake of the 2003 SARS outbreak. If the business income loss is deemed virus-related, there’s no payout. Of course, you can appeal a rejection, Pasich says. He argues that business income loss due to the closures aren’t virus-related (unless employees are sick, for example). The losses are due to the government stay-at-home orders, he says. But business owners will have to make their case. “For small businesses, without the resources to investigate, this is challenging,” he says. “The insurance industry has taken this very broad position that the virus exclusion applies, and that the virus being present in your own space is property damage.”

A quick primer on insurance: There are two types of insurance that businesses typically have: property and liability. Liability covers claims against the business, and property covers physical damage and loss of business income. Damage covers things like broken glass and product theft. Loss of business income covers rent, licensing, and associated costs while the store is shut. This also applies to loss of income due to civil authority, meaning that income lost due to government shutdown orders or curfews would be covered up to the limit of the policy. “If you were making $100,000 a year, and you were shut down, you might get $100,000 from your insurance for your loss of business, and you might get the insurance to pay for the actual physical loss of your profit,” Pasich says.

Many small businesses opt for high deductibles to keep their premiums to a couple of thousand a year, Pasich says. Paying these high deductibles when cash flow is tight can be a real problem. Not to mention the legalese of the policy: The deductible may be stated in dollars or in hours or days. (For example, in lieu of a deductible, some businesses cede income-loss coverage for the first 72 hours.) Whether losses are from damage that makes it impossible to do business or due to an order of civil authority may also affect the outcome. “That’s just one area — it’s very complex,” Pasich says. “It’s not as simple as looking at your policy and saying, I’ve got one deductible.” Businesses without legal counsel often lose out.

For instance, insurers won’t fully cover the losses of Rif LA, a Filipino-owned sneaker resale store. On May 30, owners Jeff Malabanan and Ed Mateo reported multiple rounds of looting at their San Francisco and Los Angeles locations. “They are breaking into our store again, but it’s already empty from the first looting,” they tweeted.

They spent the next few days calculating their losses and speaking to their insurers. “Insurance gave us 20% of what we really lost,” they tweeted. “If y’all keep doing this thinking insurance will cover everything. You’re wrong.” They ended up boarding up their San Francisco store again, with a handwritten sign: “RIF SF. We are permanently closed. There’s nothing left. Please leave this property alone.”

The insurers’ pushback is felt among many small businesses. A San Francisco wine merchant (who asked not to be named) says he’s been burgled three times in the past few weeks, and has filed claims for $60,000. He says he’ll be lucky to get half of that.

Moving forward, Pasich warns that coverage is likely to be more expensive, and that some insurers may become insolvent.

Businesses should carefully examine any checks they receive, he says — some include language like “full satisfaction” which waives any rights for appeal. If businesses really need to deposit the check to stay afloat, he advises emailing their insurers first, stating that they’ve received the check and plan to cash it with the understanding that they’re not waiving any of their rights for additional money. “Small businesses have to understand what their rights are,” They may walk away from the coverage not realizing the insurance company might be wrong and should be paying out more, he says.

Moving forward, Pasich warns that coverage is likely to be more expensive, and that some insurers may become insolvent; recent losses include the $25.3 billion wildfire payout in 2017 and 2018, and an $11 billion settlement from PG&E. “It’s going to be a hard market — higher premiums, lower limits, and narrower coverage,” he says. New policies will probably have Covid-specific specific exclusions. The cost of policy renewals will also rise, he says.

In San Francisco, California Street Cannabis’ Donaldson is still waiting on insurance. The community rallied around him, creating a GoFundMe page for the store that’s raised $7,000 so far. If his insurers pay out, Donaldson says he’ll donate that to the Communities United Against Police Brutality Fund. “We’re now back on track,” he says. “We took a dip in our sales, but we’re now doing better than before Covid-19 hit.”

This article originally appeared in Medium on June 23, 2020 and can be found here.