Business Interruption Insurance
The COVID-19 pandemic has clearly led to disruption of the economic landscape for businesses. This disruption has made many business owners question whether their insurance will cover resulting losses (income loss due to closures, supply chain interruptions, and decreased demand due to the social distancing). Below is a summary of some of the key factors in analyzing business-interruption coverage in the wake of COVID-19.
First, it’s important to remember that an insurance policy is simply a contract under which the policyholder (the insured), in exchange for a premium payment, receives benefits if the insured sustains damages caused by the “occurrence” of a risk covered under the policy. The key elements of any insurance policy are the risks covered, the risks excluded, and the method of determining compensable and reimbursable damages.
Most businesses carry commercial property coverage to insure against a variety of losses, including the loss of business income; i.e., business-interruption coverage. Business-interruption coverage is offered in several forms with the type of policy and coverage terminology of the policy varying greatly. Most business-interruption provisions cover business losses directly or indirectly caused by a covered peril (loss of profits, operating expenses which are incurred during the period of interruption, costs of remedying the interruption or mitigating the loss, and other reasonable expenses necessary for the business to continue operation).
Standard commercial property policies most likely do not include coverage for viruses or bacteria, such as COVID-19. However, if the policy is an “all-risk” policy (which means it covers all risks except those specifically excluded), damages related to COVID-19 may be covered. Obviously, this makes gaining coverage for these losses crucial for businesses, and this is evidenced by the lawsuits across the nation already filed on this issue.
Understanding the legal significance and interaction of certain policy terms is critical in evaluating whether coverage exists for the interruption of business due to COVID-19. The analysis of business interruption coverage involves a detailed review of the policy itself and any modifications to the policy created by endorsements. It also involves evaluation of the facts which have created the risk, such as the interruption of business due to governmental actions, etc. Finally, it requires interpretation of the policy using legal rules for construing and interpreting policy language which are established by case authority in each state. Legal analysis of policy coverage is thus a complex and intricate process of evaluating policy language and relevant facts to reach a legal determination as to whether coverage is owed.
Understandably, insurance companies and their insureds often reach different conclusions as to whether coverage is owed, and if so, the damages for which an insured is due to be reimbursed under the policy. This is why a pronouncement by an insurance agent, broker, or insurance company that coverage is not owed is not always an accurate assessment. An insured has the legal right to have the issue of coverage legally evaluated, which would include an evaluation of the factors below.
Insurance agents, brokers, or insurance companies are not always right when they state that a policy does not cover the insured’s claim. The insured has the right to a legal evaluation.
You may ask how a “novel” virus like COVID-19 can be excluded from coverage since it didn’t exist until this year. While COVID-19 itself may not have been anticipated by insurance carriers, the bad news is that after previous public-health crises (rotavirus, SARS, avian flu, anthrax, and legionella), carriers began placing exclusions specifically for viruses or bacteria into all-risk policies. One standard exclusion is ISO form CP 01 40 07 06 titled “Exclusion for Loss Due to Virus or Bacteria” which in relevant part states, “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
In its filing with state regulators at the time it proposed the above exclusion, ISO stated:
While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent. In light of these concerns, we are presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.
This being said, there are creative arguments being made by attorneys on behalf of businesses in an effort to sidestep the virus exclusion for COVID-19 claims. The ability to argue around a virus exclusion will depend heavily of the individual facts surrounding the business’ losses.
Requirement of physical damage or loss
Even if there is no virus exclusion, the determination of coverage will generally hinge on whether the premises sustained “actual physical damage or loss.” The definition of “physical damage,” whether defined in the policy or interpreted in the courts, is important in these cases. For instance, what if a business remains technically habitable, but was closed due to an effort to protect against a threat of contamination, but is never actually contaminated? In that case, it is possible the premises suffered no direct physical loss. Some case authority interprets “direct physical loss” as even non-structural damage, so long as the damage renders the premises unfit for its intended use.
Regarding COVID-19 specifically, lawsuits have already been filed arguing that the physical-damage requirement has been met because the virus contaminates surfaces and will remain there for days without proper cleaning, resulting in a direct physical loss that requires action to remedy the damage.
A civil-authority provision generally provides coverage for business interruption losses which arise when a civil authority (federal, state, local government) issues an order prohibiting or impacting access to the business premises. Of course, most civil-authority provisions require some type of physical damage or loss to property (either the insured’s property or other property) which then triggers the civil authority to impede access to the insured’s premises. A lot of the case authority on this issue involves civil-authority actions taken due to the threat of or damage from a natural disaster, as well as civil authority actions following the 9/11 terrorist attacks. Again, the definition of “physical damage or loss” can be key in gaining coverage under this provision. Some case authority supports that coverage will only apply when a covered loss caused actual physical damage to property, which then prompted the civil authority to restrict access to the insured’s property.
Using that interpretation, a pre-emptive civil-authority action meant only to prevent physical damage or loss (i.e., prevent the spread of COVID-19) may not be covered whereas a civil authority-action closing down access to a specific business due to actual contamination may be covered. The arguments in cases involving civil-authority provisions will depend, in part, on the reasons for the civil-authority action, stated or implied. There have already been lawsuits filed in Alabama and surrounding states arguing that state or local government orders restricting gathering in public places due to COVID-19 triggers the civil-authority provisions in all-risk policies. Some of those lawsuits argue that the impact of the civil-authority action (loss of use of business premises) constitutes the required physical loss under the policy, and that the reason the civil-authority action was issued is irrelevant. More lawsuits are expected and time will tell whether those arguments will prevail.
Insurers are reluctant to cover business interruption losses in the midst of the COVID-19 pandemic. The amount of loss will be staggering and the correlation to the pandemic is compelling. Nonetheless, legislators are considering actions which would shift the economic burden currently shouldered by smaller businesses to the insurance industry. In March, a bipartisan group of Congress members requested that four industry trade groups consider taking financial losses by retroactively covering COVID-19 related losses, especially for small businesses which are particularly vulnerable.
In response, the trade groups indicated that, while they were willing to work with Congress on solutions, “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” While it is uncertain what will ultimately happen with business interruption claims and COVID-19, the insurance industry is expected to strenuously oppose any attempts to require retroactive coverage for those claims. In addition, there will likely be constitutional challenges to any attempt by the legislature to retroactively alter the rights of insurers under existing insurance policies. Because of the expected opposition to coverage for COVID-19 related claims, it is important to review each insurance policy as a whole to determine the extent of coverage, if any, available. Necessity breeds innovation and with the potential scope of damages arising from COVID-19, creative arguments from experienced counsel will be key in any successful effort to gain coverage.
Lanier Ford has an experienced team of lawyers ready to assist you in reviewing your insurance policies to determine the potential for coverage and assisting you in gaining coverage.
For more information about business-interruption insurance coverage, please contact one of the following Lanier Ford attorneys:
Items on this web page are general in nature. They cannot—and should not—replace consultation with a competent legal professional. Nothing on this web page should be considered rendering legal advice.