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Business Interruption Insurance Coverage for COVID-19

by Nicholas R. Caputo and Michael A. Eisenberg

An all-too-realistic hypothetical has occurred:  The governor or state legislature issues an executive order or passes a law that, in light of the novel coronavirus crisis, all “non-essential” businesses must close for either a set number of weeks, or indefinitely.  This interruption causes businesses to suffer significant losses to income and profits, forces employee layoffs, disrupts supply chains, and causes other unforeseen damage.  Numerous businesses will ultimately be forced to close permanently because of a lack of capital.  Many businesses maintain a commercial insurance policy with “business interruption coverage” (“BIC”), and will look to their carriers to help weather the storm.  Does maintaining BIC protect businesses from the foregoing potential losses?  The answer is, most likely, “it depends.” 

The scope of BIC policies can vary greatly from insurer to insurer and even policy to policy.  Such coverage depends upon the “standardized” terms in the policy, but also any riders or endorsements that may have modified the policy.   A policy may include a provision expressly providing for coverage in the event of a viral outbreak, especially if the business industry is travel, hospitality or healthcare.  Notably, the Wimbledon tennis tournament appears to have been prescient, having maintained pandemic insurance since 2002.  As a result, their claim for cancellation of this year’s tournament due to the novel coronavirus paid dividends of $141 million.[i]  As most businesses do not maintain a similar pandemic insurance policy, the race to litigate the question of coverage has already started.  Early litigants include but are not limited to restaurants[ii], casinos[iii], and even scuba dive shops.[iv]  Subsequently, in a coordinated effort, six class actions were commenced in federal courts in five states, seeking declarations of coverage on behalf of thousands of small businesses for claims denied by the defendant insurers, resulting from state and local government shutdown orders.[v]  Nor are insurers sitting idle. Travelers commenced an action in California federal court seeking to enforce a virus exclusion in their policies, as well as a declaration that a virus does not constitute physical loss or damage sufficient to trigger BIC coverage.[vi]

Needless to say, the novel coronavirus has brought BIC into sharp focus, as businesses, insurers, legislatures, and others seek to determine the boundaries of BIC provisions in existing and future policies. Whether BIC will provide relief to an insured suffering a loss due to the coronavirus is hardly a settled question. In general, BIC protects against business loss caused by “physical damage” to a commercial property.  The textbook example of coverage under BIC involve damage to property (such as to a structure) caused by fire, or natural disasters like earthquakes or floods.  While insurance carriers will undoubtedly contend that a loss caused by a viral outbreak does not involve “physical damage,” that position is far from certain.  Indeed, courts have previously been called upon to examine circumstances in which an insured sought coverage for premises rendered unusable, although not physically damaged.  In doing so, some courts held that lack of structural damage is not a bar to recovery, finding that “physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces.”[vii]  Such “physical forces” may include the presence of noxious odors[viii] or gasoline fumes[ix], the bacterial contamination of well water[x], or the danger presented by a nearby landslide.[xi] 

After the 2003 SARS epidemic, many insurers added an express exclusion to their commercial property policies to head off virus-related business income claims.[xii]  If, however, carriers were correct that a virus outbreak does not result in “physical loss or damage” under the coverage provision, then why did many of them rush to add virus exclusions to these policies?  Whether a business loss is recoverable under BIC when caused by the presence of a pandemic virus, either standing alone or as a result of a government shutdown order, is presently an open question that the aforementioned litigation may resolve, but potentially not for years.  Several states have introduced legislation obligating insurers to cover BIC virus-related claims, apparently without regard to policy exclusions to the contrary, although none have yet been enacted into law. For example, New York Assembly Bill A10226A takes direct aim at policies with virus exclusions, and provides in part, “every policy of insurance insuring against loss or damage to property…shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.”[xiii]  Such measures are sure to face steep opposition from insurers who fear that such legislation may result in depletion of all reserve funds, and potentially force them into bankruptcy.[xiv]

Absent a BIC claim predicated on damage caused by the virus, an insured may explore alternative routes to address a loss.  Many policies contain a “civil authorities clause”, which provides coverage when a covered premises is rendered unusable or inaccessible due to a government order, irrespective of any physical damage to the premises.  For example, a movie theater chain in Michigan was entitled to recover for business loss after the governor imposed a curfew following a riot.[xv]

The novel coronavirus has sparked widespread litigation already and legislation to attempt to resolve the question of who should bear the brunt of the economic devastation wrought.  Given the variance among policies, state laws, and the individual circumstances of the insureds, a uniform answer is not likely to be forthcoming anytime soon.

These are important and nuanced issues that require experienced handling. Robinson Brog has considerable experience with addressing insurance coverage issues on behalf of insureds. 

Contact Nicholas Caputo at nrc@robinsonbrog.com to arrange a call to address your policy coverage and to see if Robinson Brog can help you navigate these complicated issues.

NICHOLAS CAPUTO is a partner of Robinson Brog and a member of its executive committee.   MICHAEL EISENBERG is of Counsel to the firm.

[i] https://www.newsweek.com/pandemic-insurance-wimbledons-2-million-gamble-paid-off-canceling-tournament-during-coronavirus-1496961

[ii] https://www.businessinsurance.com/article/20200317/NEWS06/912333570/New-Orleans-restaurant-sues-for-coronavirus-business-interruption-cover-Oceana-G; claimsjournal.com/news/national/2020/03/27/296235.htm

[iii] https://www.insurancejournal.com/news/national/2020/03/24/562277.htm

[iv] https://www.jdsupra.com/legalnews/coronavirus-related-coverage-claims-84994/

[v] https://www.law.com/2020/04/17/class-actions-filed-against-lloyds-of-london-5-other-insurers-over-covid-19-coverage/?slreturn=20200329172403

[vi] https://assets.documentcloud.org/documents/6844986/Travelers.pdf

[vii] TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 708 (E.D. Va. 2010)

[viii] In re Chinese Manufactured Drywall Prods. Liab. Litig., 680 F. Supp. 2d 780 (E.D. La. 2010)

[ix] W. Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (1968)

[x] Motorists Mut. Ins. Co. v. Hardinger, 131 F. App'x 823 (3d Cir. 2005)

[xi] Hughes v. Potomac Ins. Co., 199 Cal. App. 2d 239 (1962)

[xii] See ISO form CP 01 40 07 06: "Exclusion for Loss Due To Virus Or Bacteria.” This form 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.”

[xiii] https://www.nysenate.gov/legislation/bills/2019/a10226

[xiv] https://www.reuters.com/article/us-otc-covid19/covid-19-response-could-bankrupt-the-insurance-industry-insurance-defense-lawyer-idUSKCN21W2YE

[xv] Sloan v. Phx. of Hartford Ins. Co., 46 Mich. App. 46, 207 N.W.2d 434 (1973)