There is much being made about coverage for business income losses related to COVID-19. It seems that new lawsuits are filed daily, while the tally of lawsuits that are being dismissed continues to rise. It appears that in many jurisdictions, the courts are agreeing with the industry that the policy tends to be clear that there simply is no coverage for this sort of loss. At least, that is what has happened so far in many places.
On many policies, the trigger to initiate coverage is “direct physical loss of, or damage to, Covered Property.” This is important when we consider more than just the claim that the governmental order shut down the business. When we consider that some of these claims are going to be centered on a business closing down because someone at the business contracted COVID-19 – or at least it’s suspected that someone contracted the virus there – our question is now, is there coverage because of the presence (or suspected presence) of the virus? Is it possible for a virus to cause direct physical loss?
Physical Loss Defined
It depends on how you define direct physical loss.
In the insurance world, we really have a hard time with a direct yes or no answer. In fact, I would say that maybe is the best phrase in insurance. If we weren’t in insurance, we would have no problem defining direct physical loss or damage. Since we are in the insurance industry, we need to know what a direct physical loss, or damage, is to a property.
We need to start with loss of or damage to property. Loss is being deprived of something, and damage is an injury or harm that reduces value or usefulness. Let’s ask ourselves: can a virus deprive us of property or reduced its value or usefulness? Consider that the virus appears to be able to survive for up to five days on certain surfaces, and we conclude that its existence can deprive us of the ability to use property or reduce its usefulness.
What is a direct loss? A direct loss is loss to a specific piece of property, and since we understand that the virus can survive on specific surfaces, it appears to be a direct loss. But what about the other word: physical? Doesn’t that indicate that there has to be some kind of change to the property in a real, tangible way?
That is where it gets sticky. In one Illinois case, the judge stated that for physical damage, there had to be some change in the characteristics of the property. That is to say, a color change or a change in its physical appearance that indicated something had happened.
My thought is that while there are obvious physical alterations to property that meet the requirement of physical damage, is property that is contaminated also physically damaged? If contamination is a type of physical damage then can the presence of a virus contaminate a surface, therefore causing direct physical loss of or damage to property? Maybe.
The existence of an exclusion indicates that it may be possible.
In 2006, ISO filed CP 01 40 07 06 – Exclusion of Loss Due to Virus or Bacteria. This endorsement was filed after the 2002 SARS and 2006 bird flu outbreaks. According to IRMI (International Risk Management Institute), “ISO explained that it was introducing the virus or bacteria exclusion endorsement out of concern that, in the event of a pandemic, there could be ‘efforts to expand coverage and create sources of recovery’ despite the requirement of actual property damage and the exclusion of loss from contamination within the pollution exclusion.”
In filing the exclusion, ISO already believed that the presence of a virus was not direct physical damage and that the pollution exclusion would apply if it was claimed that the virus contaminated a surface or an area. However, if there were no possibility that one could reasonably consider the presence of a virus on surfaces as property damage, this creates an ambiguity, at least to me, because we don’t exclude events that are impossible in most cases. Exclusions are written to limit the exposure from events that could happen, and in some cases, are likely to happen.
It is also problematic to say that a pollution exclusion would also apply because of the definition of pollutant in the policy.
“Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.
A virus is not solid, liquid, gas or thermal in nature. It is true that viruses are carried by gasses and liquids, but that doesn’t make the virus either of those. Additionally, we should interpret this policy language according to certain principles, including the idea that this list, while not all inclusive, is exemplary of the types of materials that should be considered pollutants. There’s nothing here that indicates that a virus should be considered a pollutant.
Therefore, I conclude that at least in some way, the existence of the exclusion makes it possible to have direct physical loss of or damage to property.
More Than Physical Loss
The exclusion anticipates more than direct physical loss.
First, do not forget that the first requirement to finding coverage on a commercial property policy is to find out whether there was direct physical loss of or damage to property. Without direct physical loss of or damage to property, there isn’t a loss covered by the policy. That is the first key, but that doesn’t mean that this endorsement doesn’t anticipate other losses.
Here’s how the endorsement reads related to itself:
The exclusion set forth in Paragraph B. applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.
This paragraph lets us know that this endorsement applies across commercial property policies that include business income and extra expense. While those policies also require that there be direct physical loss of or damage to property, they don’t cover those losses. This endorsement applies to those policies and endorsements as well.
It’s the next paragraph that excludes coverage:
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 diseases.
This paragraph doesn’t limit the exclusion to only direct physical loss or damage. Without adding those two words, direct and physical, it expands its reach to any loss or damage related to viruses. That tells us that this broad exclusion is meant not to provide any coverage for any property damage related to a virus.
If we go back to the original question, can a virus cause direct physical damage to property? It appears to be possible. It also appears that the intent of this exclusion, and others like it, is to exclude any property damage related to a virus. In the end, even if an insured could show that their property was damaged by a virus, there’s still no coverage available.
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