Business Losses from the Virus: Can My Insurance Help Pay COVID-19 Losses to My Business?

As the world struggles to navigate the turbulent seas of the coronavirus (COVID-19) pandemic, businesses are understandably asking themselves whether they have insurance coverage for COVID-19 related losses. In particular, government-mandated “shelter in place” restrictions and similar measures will unquestionably impact most businesses and may cause significant economic losses.

While government-backed loans and related financial products may provide businesses with short-term relief to withstand such losses, insurance policies can potentially provide businesses with long-term relief in the form of coverage for COVID-19 related losses that will allow businesses to possibly recover some or all of their losses. Depending on the type of insurance that a business carries, there may be multiple avenues of coverage available from which to obtain relief.

Business Interruption Coverage

Most standard property insurance policies provide business interruption coverage, which is intended to protect businesses against loss of income or revenue as a result of disruptions to their operations. Generally, in order for business interruption coverage to be triggered, the business must sustain “direct physical loss of or damage” to its property arising out of a cause that is not excluded under the policy.

The question of whether business interruption coverage is triggered often revolves around the “physical” loss or damage element of the loss. While most insurers may argue that the word “physical” means the property must sustain a physical alteration in order for coverage to be triggered, some courts have interpreted “physical” loss or damage to include property that has been deemed unusable or incapacitated by a non-excluded cause which, depending on the policy language, may include a virus. Some courts have also recognized that the presence of a virus on surfaces or in the business’ airspace is a physical alteration of the property that satisfies the “physical” loss or damage requirement. This argument is gaining renewed traction, as evidenced by lawsuits recently filed in California and Louisiana by restaurants arguing that the contamination of surfaces by the COVID-19 virus is “physical” property damage. However, as discussed in greater detail below, some policies contain virus exclusions that may preclude coverage.

In addition, some policies may say that coverage is triggered by a “direct physical loss” only, and not contain the “direct physical damage” requirement. Some courts have interpreted this language to mean that a business’ inability to use its property due to a non-excluded cause is “direct physical loss” of the property that triggers coverage. Such language may also support an argument that a total loss of use of property due to a “shelter in place” restriction or government-ordered shutdown that forces the business to cease operations is a “direct physical loss” that triggers coverage, even if the property is not physically injured.

Contingent Business Interruption Coverage

Some businesses may also sustain economic losses because they incur additional costs or are unable to conduct business with companies that have been impacted by COVID-19. In response to such risks, some property policies provide contingent business interruption coverage.

Contingent business interruption coverage insures against losses caused by damage to property belonging to suppliers, customers, and other third parties upon which the business relies on to conduct its operations. If the third party sustained damage due to COVID-19, and the policy does not exclude losses caused by a virus, a business may be able to recover its losses under contingent business interruption coverage if its ability to perform is contingent on the third party’s provision of goods and materials. Depending on the policy language, the third party can potentially be anyone that is in the supply chain, and not just parties with whom the business has privity.

Civil Authority Coverage

Some property policies provide civil authority coverage, which covers losses resulting from government actions that impair or prohibit access to the business’ premises. As with business interruption coverage, civil authority coverage may hinge on whether the business has sustained “direct physical loss of or damage” to its property to trigger coverage, even if there is a government action that restricts access to the business. As illustrated above, a business’ inability to use its property due to the presence of a virus on its premises, or the presence of a virus by itself on the business’ surfaces or its airspace, may satisfy the “direct physical loss of or damage” requirement. Some policies may also contain endorsements that dispose of the “direct physical loss of or damage” requirement so that losses resulting from a government-ordered shelter in place or shutdown would potentially be covered.

Whether the business’ suspension of operations was necessary as opposed to voluntary may impact the potential for civil authority coverage. For example, a business that is not an “essential” business as defined by California’s shelter in place restriction will have a stronger argument that it sustained a covered loss under civil authority coverage because its suspension of operations was necessary, as opposed to a business that is “essential” and could continue operating, but voluntarily elected to cease operations entirely.

Some policies also provide coverage if ingress and egress to the insured’s premises is impacted, even if there is no action by a civil authority that impairs or prohibits access. Some policies may also provide coverage for losses arising out of a non-excluded cause that hampers the general public’s access to the business’ premises, even if the property has not been physically damaged and there is no civil authority directive preventing or limiting access to the property.

Virus and Communicable Disease Exclusions

Following the 2003 SARS pandemic, many insurers began to include exclusions in their policies that preclude coverage for losses arising out of related to viruses or communicable diseases. While most of these exclusions are broad in scope, some are worded in such a way that they may not apply to a COVID-19 related loss.

Most virus exclusions preclude coverage for any loss or damage caused by or resulting from “any virus, bacterium, or other microorganism.” However, some exclusions do not explicitly refer to a “virus”, but instead, refer to “mold, mildew or other microorganism.” Some scientific journals and periodicals have described a “virus” as a “non-living creature”, which could support an argument that a virus is not a “microorganism” and thus, an exclusion limited to “mold, mildew or other microorganism” does not exclude coverage for a COVID-19 related loss.

Some policies contain communicable disease exclusions, which preclude coverage for any loss or damage caused by or resulting from a “communicable disease.” If “communicable disease” is not defined in the policy, a business could argue that the exclusion is ambiguous and should not apply. The stronger argument, however, may be to distinguish between a “sickness” versus a “disease” and argue that the exclusion does not apply because COVID-19 is a “sickness” and not a “disease.”

Ultimately, whether the policy has a virus and/or communicable disease exclusion, the language of the exclusion is crucial as to whether it applies, and should be carefully scrutinized in order to determine if it applies to a loss.

Legislative Action

Some states, including Massachusetts, New Jersey, and Ohio, are currently contemplating passing legislation that would mandate insurers cover COVID-19 related business interruption losses even if the policies exclude coverage for virus-related claims. While there is no indication that California is considering such legislation, this could change if the number of states weighing the possibility of passing laws in support of coverage. Insurers will unquestionably fight against such efforts on various grounds, including that the extension of coverage despite the inclusion of virus-related exclusions in the policies amounts to a re-write of coverage that the insurers did not bargain for when they issued the policies.

Conclusion

The question of whether a COVID-19 related loss is covered depends on multiple factors, especially the policy language and the facts surrounding the loss. Businesses should carefully review their policies to evaluate whether they have coverage for COVID-19 related losses. In order to maximize the potential for coverage, businesses should tender claims to their insurers as soon as possible. document all facts and circumstances giving rise to the claim, and notify their insurers of the specific damages they have sustained. Businesses would also be well-served by retaining insurance coverage counsel for advice on insurance policy interpretation, steps that the business should take to maximize the potential for coverage, and challenging improper denials of coverage.