Your Business Interruption Claim Was Denied or Underpaid: What a California Business Can Do

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A denial or a low payment on a business interruption claim is the insurer's position, and it can be challenged. In California the insurer must put a denial in writing and state every reason known to it. A dispute over the amount can go to appraisal, and a dispute over coverage can go to court. Watch the deadline to sue: the standard fire policy form allows 12 months after inception of the loss. (Ins. Code, § 2071.) Kolmogorov Law, P.C. represents businesses in these disputes.

Call (909) 235-6116 or contact us online to discuss a business income claim that was denied or underpaid.

What a denial letter must say

California's claims regulations set the form. An insurer that denies a first party claim, in whole or in part, must do so in writing. The letter must list every basis for the denial and the factual and legal grounds for each, as then known to the insurer. If it relies on a policy provision or exclusion, it must cite the provision and explain how it applies. (Cal. Code Regs., tit. 10, § 2695.7, subd. (b)(1).)

The same regulation sets the clock. The insurer ordinarily has 40 calendar days after receiving proof of claim to accept or deny it. If it needs longer, it must say why in writing and update the claimant every 30 calendar days. Once a claim is accepted, payment is generally due within 30 calendar days. (Cal. Code Regs., tit. 10, § 2695.7, subds. (b), (c)(1), (h).)

What business income coverage requires

Business interruption coverage, also called business income coverage, may be written as part of a commercial property policy. The wording varies. The policy the California Supreme Court examined in 2024 is an example. It paid the income lost while operations were impaired during the period of restoration. The impairment had to be caused by direct physical loss or damage to property from a covered peril.

The court held that direct physical loss or damage requires a distinct, demonstrable, physical alteration to property. The alteration need not be visible or structural. Loss of use alone does not qualify, and the court concluded that the presence of the COVID-19 virus generally did not meet the test. (Another Planet Entertainment, LLC v. Vigilant Ins. Co. (2024) 15 Cal.5th 1106.)

A fire, a flood from a burst pipe, or a collapsed roof would ordinarily clear that hurdle.

Reasons insurers give

• No physical damage to covered property. A closure caused by a government order or a supplier's problem is tested under separate provisions, such as civil authority coverage.
• A shorter restoration period. In the policy the Supreme Court reviewed, the period ran until operations were restored with reasonable speed, including the time required to repair or replace the property. An insurer may say repairs should have gone faster.
• The calculation. Projected sales, seasonal patterns, expenses that stopped during the closure, and payroll are each a place where the numbers diverge.
• Policy conditions. Late notice, a missing proof of loss, a waiting period, or an exclusion.

If the policy never contained the coverage the business asked for, see our page on broker errors.

Deadlines to calendar now

California's standard form fire policy supplies default terms for fire coverage. A policy may differ only if its fire coverage, taken as a whole, is substantially equivalent or more favorable to the insured. (Ins. Code, § 2070.) Two terms of the form matter after a denial.

• Proof of loss. A signed, sworn proof of loss is due within 60 days after the loss, unless the insurer extends the time in writing.
• Suit. No action on the policy may be maintained unless it is commenced within 12 months after inception of the loss. The period is 24 months when the loss is related to a declared state of emergency.

(Ins. Code, § 2071.)

The California Supreme Court has held, in a homeowners case, that the 12 months are tolled from timely notice of the claim until the insurer denies it in writing. (Prudential-LMI Com. Insurance v. Superior Court (1990) 51 Cal.3d 674.) The court limited its holding to homeowners policies, but Courts of Appeal have since applied the same tolling to commercial property and business interruption policies. Tolling covers only the time from notice of the claim to the written denial, so the months before notice and after denial still count. Read the suit clause in your own policy and count from the date of the loss.

When the dispute is about the amount: appraisal

Under the standard form, if the insured and the insurer fail to agree on the amount of loss, either may make a written request for appraisal. Each side selects a competent and disinterested appraiser and notifies the other within 20 days. The appraisers choose an umpire. If they cannot agree on one within 15 days, a judge selects the umpire. After a government-declared disaster, appraisal may be requested but not compelled. (Ins. Code, § 2071.)

Appraisal is aimed at the amount of loss. Coverage questions generally go to court, and whether a business income dispute fits the appraisal clause depends on the wording of the policy.

Proving the income loss

Assemble monthly profit and loss statements and sales reports for at least two years before the loss, tax returns, payroll records, and proof of the expenses that continued during the closure. Our page on lost profits explains how courts test income projections in contract cases.

What not to do

• Do not accept a payment described as final, or sign a release, before the calculation has been checked.
• Do not let the suit deadline pass while waiting for an adjuster to call back.
• Do not discard damaged property or records before the insurer has inspected them.

If the insurer's handling of the claim was unreasonable, a separate claim may exist. Our page on insurance bad faith covers that subject.

What to bring to the first meeting

• The full policy, with the declarations page and every endorsement.
• The denial or payment letter and all correspondence with the adjuster.
• The proof of loss and any income worksheet submitted.
• Financial statements, tax returns, and sales reports from before and after the loss.
• A timeline of the loss, the repairs, and the reopening.

Frequently asked questions

A fire closed our shop for four months and the insurer paid a fraction of our lost income. What can we do?

Start by asking the insurer, in writing, for its calculation and the policy terms it applied. In California a dispute limited to the amount of loss can ordinarily be sent to appraisal under the standard fire policy form, where each side names an appraiser and the appraisers select an umpire. (Ins. Code, § 2071.) Calendar the policy's suit deadline, which may be as short as 12 months.

How long does an insurer have to accept or deny a claim in California?

Ordinarily no more than 40 calendar days after receiving proof of claim, under California's claims regulations. If the insurer needs more time, it must say so in writing within that period, explain what it still needs, and send an update every 30 calendar days. A denial of a first party claim must be in writing and state every basis then known to the insurer. (Cal. Code Regs., tit. 10, § 2695.7, subds. (b), (c).)

What does direct physical loss mean in a business interruption policy?

It means the insured property itself was physically changed. The California Supreme Court held in 2024 that direct physical loss or damage requires a distinct, demonstrable, physical alteration to property, which need not be visible or structural. Being unable to use a property as intended is not enough. (Another Planet Entertainment, LLC v. Vigilant Ins. Co. (2024) 15 Cal.5th 1106.)

Our business interruption claim was denied eight months ago. Is it too late to sue the insurance company in California?

Not necessarily, but act now. The standard fire policy form in California requires suit within 12 months after inception of the loss, or 24 months for a loss related to a declared state of emergency. (Ins. Code, § 2071.) The California Supreme Court has held, in a homeowners case, that the period is tolled from timely notice of the claim until the written denial, and Courts of Appeal have applied that rule to business policies. Count the time before notice and after denial. Your policy may also allow more time.

What is the period of restoration?

It is the window during which a business income policy pays lost income. In the commercial policy the California Supreme Court examined in 2024, the period began immediately after the direct physical loss or damage. It ran until operations were restored, with reasonable speed, to the level that would generate the income the business would have had without the loss, including the time required to repair or replace the property.

Talk to a California insurance coverage attorney

If your business income claim was denied or paid short, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is a business litigation firm in Irvine that represents companies and their owners in business, commercial, and intellectual property disputes, in court and in arbitration. The office is in Irvine, California.

Related reading: our insurance litigation and business litigation pages.

This page provides general information about California law and is not legal advice. Outcomes depend on the policy, the facts of the loss, and the court.