Everyone is facing an unknown future with COVID-19. One question for clients is whether the impact of business interruption from the virus can be covered by their insurance policies. Having some of the loss covered by insurance could actually be the difference in a business making it through this uncertain time or facing bankruptcy. But whether coverage exists is not an easy question and requires a close examination of the coverages a business has. And, even if there is coverage, some requirements for invoking that coverage may require rapid action. Notice requirements may be be within thirty days (or less) of the interrupting event—a fairly short window when balancing other considerations that come with managing a response to a pandemic.
What is business interruption coverage and when does it generally apply?
Business interruption coverage will generally cover lost revenue and unavoidable continued business costs and is usually under the commercial property coverage part of a policy. It provides for coverage when there is “direct physical loss of or damage to” insured property. Government efforts to contain COVID-19 may also invoke a “civil authority” provision in a business interruption policy, which may apply when a government restricts or prohibits access to the insured property based on physical loss or damage.
The policy language is typically along the lines of:
This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.
Thus, the requirements are: (1) physical loss or damage, (2) to insured property, (3) caused by a covered peril, (4) resulting in quantifiable business interruption loss, (5) during the period of time it takes to restore the damaged property.
Can COVID-19 be physical loss or damage?
Whether exposure or potential exposure to COVID-19 at a property falls within the requirement of physical loss or damage is likely to be a hotly contested issue. Already, one business out of New Orleans has sued its insurance provider to have a court rule on whether closures from the pandemic could qualify. Some courts have already determined that physical loss can occur without structural or tangible changes to a property, such as through contamination. See, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418 WHW, 2014 WL 6675934, at *4 (D.N.J. Nov. 25, 2014) (ammonia contamination that rendered the premises unsafe constituted direct physical loss under business interruption coverage); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997) (asbestos contamination was direct physical loss under “all-risk policy”). And other courts have indicated that the threat of harm which renders property unsafe could be enough to trigger coverage. See, e.g., Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477, 493, 509 S.E.2d 1, 17 (1998) (the threat of rocks and boulders “crashing down at any time” on a property after a landslide would qualify as direct physical loss); Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 39, 437 P.2d 52, 55 (1968) (the saturation of the ground around a property rendered the premises unsafe and would qualify as direct physical loss).
When could “civil authority” coverage apply?
Generally, “civil authority” coverage applies when there is a forced closure by a civil authority. This typically happens through a government order barring access to the insured property based on physical loss or damage. In addition to the considerations regarding physical loss, there are questions of whether the government guidance in a particular area rises to a forced closure.
If the government has not ordered the closure of a particular business, and merely discourages the population from visiting that business, it may not be enough to invoke civil authority coverage, though that still depends on the policy language. This has already led to substantial commentary from, for example, the United Kingdom’s hospitality trade organization, UKHosptiliaty, given the British government’s decision to only strongly advise its citizens to avoid restaurants, rather than order that they be shut down.
What about other bars to business interruption coverage?
There are several potentially applicable standard exclusions that could separately bar coverage for a COVID-19 business interruption, some specifically adopted by the industry to address pandemic concerns after the last SARS outbreak. For example, the Insurance Services Offices, Inc., or “ISO,” is a company that creates template forms that insurance companies often use for their policies. In 2006, the ISO forms for business interruption coverage added an exclusion to specifically bar coverage for virus pandemics. But some states seem to be looking at legislation that would negate the exclusion. New Jersey, for example, has proposed legislation that would require business interruption coverage for COVID-19 even if there is a specific exclusion in the policy for influenza pandemics.
Are there other potential policies or coverages that could apply?
Depending on the type of business, there could be several other types of insurance that could apply in the wake of this pandemic. Under a commercial property policy, there could also be dependent property/contingent liability coverage. This coverage may apply if a supplier or another business has a business interruption from physical loss that impacts the insured business.
Other potential policies that may apply are:
- Event Cancellation policies (which are available to companies in the event business)
- Loss of Attraction coverage (which can apply for destruction of an “attraction” nearby the insured property)
- Supply Chain policies (which are similar to dependent property/contingent liability coverage but may not require physical loss from the supplier business)
- Commercial General Liability policies (which may apply to loss suffered from bodily harm)
- Director & Officers policies (which may apply in the event of a lawsuit based on company actions in response to COVID-19.
Insurance policies exist to mitigate the effects of unanticipated economic harms. COVID-19 certainly qualifies. But clients should carefully review existing policies to take advantage of any existing coverage and, equally as important, to give proper notice to their insurers of potential claims.