The arrival and spread of COVID-19 has had significant and far-reaching social and economic impacts upon individuals and businesses throughout the United States. In an effort to curtail the spread of the virus, local and state authorities across the country have issued orders effectively closing all “non-essential” businesses from further operation.
Due to such mandatory suspensions of business and the enforcement of quarantines, business owners have begun to look to their commercial insurance policies to help lessen the economic blow of the pandemic.
One common type of insurance that business owners have sought to utilize is “business interruption” coverage, which generally insures against the temporary suspension of business operations as a result of a covered loss. However, there are many important considerations business owners should take into account when making a claim for recovery of business interruption insurance benefits as a result of COVID-19.
Although one might assume that “business interruption” insurance is triggered any time the business is faced with an unexpected or involuntary shutdown or suspension, many business owners have been surprised to learn that such coverage applies in a more narrow set of circumstances. Specifically, a typical business interruption provision makes clear that the business suspension must be caused by “direct physical loss of or damage to property” at the insured location. Moreover, such policies typically require that “[t]he loss or damage must be caused by or result from a Covered Cause of Loss” — which itself is often defined as “direct physical loss unless the loss is excluded or limited in this policy.”
Notwithstanding broad assumptions regarding the scope of such coverage, business interruption insurance typically is only triggered by some quantifiable physical loss to property requiring repair or replacement contemporaneously with such business suspension — such as is the case with vandalism, fires, floods, hurricanes or earthquakes.
Faced with limited options to keep their businesses afloat, insureds are arguing that the presence of COVID-19 itself is sufficient to trigger business interruption insurance, even in the absence of direct physical damage. This has resulted in many insureds throughout the country initiating lawsuits against their insurers, seeking judicial declarations that the resultant surface contamination from the presence of COVID-19 is itself “physical loss or damage.”
Even assuming that such surface contamination can qualify as physical damage, business owners may still face an uphill battle to obtain insurance benefits, as it may be difficult to demonstrate that the virus was actually present so as to cause such direct physical loss in the particular business seeking coverage.
Regardless of whether COVID-19 itself can be said to cause direct physical damage to property, coverage may still be excluded under the policy. Since the Severe Acute Respiratory Syndrome (SARS) outbreak in the early 2000s, the insurance industry as a whole began to exclude coverage for similar spreads of viruses, as such losses are considered too widespread to be economically feasible to insure against. In many instances, coverage is excluded where the loss or damage is the result of a “virus or bacteria.”
For example, a virus exclusion endorsement from the Insurance Services Office (ISO) which is widely used in many business insurance policies provides that coverage is excluded for loss “caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” COVID-19 will likely be considered a virus capable of inducing distress, illness, or disease.
If the business owner’s policy contains such a virus exclusion, business losses resulting from the closure of non-essential businesses to slow the spread of the virus could be excluded from coverage under the typical business interruption policy. On the other hand, it is important to note that some businesses may have paid an extra premium for inclusion of an endorsement which specifically extends coverage for virus-related losses.
For example, some policies may include endorsements — such as a “Pandemic Event Endorsement” — which may provide coverage for losses resulting from the spread of COVID-19. Business owners will need to look closely at their policies to determine whether they have paid an additional premium for this added protection.
Despite the presence of virus exclusions in many business insurance policies, many insured businesses have sought to recover under their policies’ “civil authority” coverage.
In general, civil authority coverage allows a business to obtain insurance benefits where a governmental authority issues an order which restricts access to the business, thereby preventing the business from conducting its normal operations. Businesses have claimed entitlement to civil authority coverage because local and state authorities’ stay-at-home orders have restricted access to their business premises.
And to circumvent the policy’s virus exclusion, insureds have asserted that their businesses are not closed because of the virus itself, but are instead closed only because a governmental authority has directed them to close. Although such an assertion may receive varying levels of success depending upon the jurisdiction in which the claim is litigated, many such claims are likely to be unsuccessful when considering the breadth of language used in the policy’s virus exclusion, which excludes coverage for any loss “caused by or resulting from” a virus.
Insurers have pointed out that such orders mandating closure of businesses are themselves “caused by or resulting from” COVID-19 and, therefore, losses resulting therefrom are likewise excluded.
In any event, regardless of whether an exclusion applies to bar coverage, it is important to understand that most provisions of civil authority coverage — like business interruption coverage — require that the loss be the result of some type of direct physical damage to property.
Specifically, for civil authority coverage to apply under most business insurance policies, the civil authority’s shutdown order must first be the result of some physical damage to a location other than the insured’s premises. Such a situation commonly arises where a property damage event occurs nearby — such as a fire to a neighboring property or a gas main break — which requires authorities to prevent access to the insured’s business in an effort to respond to the event, such as preventing the spread of such fire or requiring evacuation of the area.
Consequently, the typical civil authority coverage likely would not apply to business interruptions caused by closures ordered merely to prevent the spread of viral contamination in the absence of property damage. With the spread of COVID-19, it will be difficult for insureds to point to some identifiable property damage to a specific nearby location directly resulting from the virus so at to implicate coverage.
With the mounting number of insurance denials for claims related to COVID-19, some lawmakers have begun to propose bills that would require insurers to retroactively cover such claims. For example, proposed legislation in places such as Louisiana, Massachusetts, New Jersey, New York, Ohio, and Pennsylvania would create mandatory coverage for losses resulting from the pandemic and require insurers to cover business interruptions due to global virus transmission. Bill S.D. 2888 introduced in the Massachusetts legislature mandates that no insurer may deny a business interruption claim on account of COVID-19 “even if the relevant insurance policy excludes losses resulting from viruses.”
Some lawmakers are facing pressure from groups such as the Business Interruption Group (BIG), an advocacy group of prominent chefs and restaurant owners which calls for federal subsidies for insurers that opt to waive policy exclusions applicable to COVID-19 in favor of coverage for such business interruption losses. Likewise, the Independent Restaurant Coalition — a group representing thousands of chefs and restaurant owners — has asked Congress to compel the mandatory payment of business interruption claims resulting from COVID-19.
Any such state law requiring mandatory COVID-19 coverage for business interruption claims will most certainly be subject to constitutional challenges.
In addition to emphasizing that any such law will create significant solvency risks for the insurance sector, insurers will challenge the law as an unconstitutional impairment of private contractual obligations in violation of the Article I, Section 10, Clause 1 of the U.S. Constitution. Often referred to as the Contracts Clause, this provision generally prohibits states from passing laws which impairs certain contractual obligations. Thus, such laws will have to withstand challenges by insurers that that they attempt improperly rewrite existing insurance policies.
In any event, it is important to remain aware of such proposed legislation, which may nevertheless incentivize or otherwise put pressure on insurers to pay claims related to COVID-19.
As a result of the flurry of coverage denials, a massive wave of litigation is expected to take place throughout the country, as individual businesses begin to initiate lawsuits against their insurers with many class action suits likewise contemplated. As the number of lawsuits grow, courts of various jurisdictions will undoubtedly struggle to come to consistent rulings on these issues. Part of this inconsistency will undoubtedly be rooted in the differing language of each particular policy, as each case of coverage will be required to be determined on the specific contractual language and unique circumstances of each case.
Differing results may arise by virtue of the state in which the particular policy was issued, as some jurisdictions may interpret exclusionary provisions — such as the virus exclusion — more narrowly than other jurisdictions.
It is of critical importance that all insured businesses carefully review their policy language in detail, as the ultimate determination of whether coverage might be available for a suspension in business operations as a result of COVID-19 will depend on the particular language in the policy.
If coverage is potentially available for COVID-19-related shutdowns, it is important that such insured businesses promptly make a claim with their insurance carriers or otherwise risk a further basis for denial of coverage — as most policies require claims to be made promptly or as soon as practicable. In connection with such claims, insured businesses must also ensure that they are making every effort to adequately document the business impacts resulting from the pandemic in order to properly support any claim for insurance coverage.
Moothart is a member at the Kansas City-based law firm, Seyferth Blumenthal & Harris. He focuses his practice on the representation of businesses and professionals in complex litigation with an emphasis on insurance-related issues. Daugherty is an associate at the law firm Seyferth Blumenthal & Harris. His practice focuses on commercial litigation and counseling in all stages of litigation, with an emphasis on insurance-related issues, representing insurers in various coverage-related cases.
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