All information in this COVID-19 Response Resource issue is effective as of April 13, 2020.
Across the country, business owners have been asking their insurance agents if their insurance covers revenue losses caused by stay at home orders or advisories. The response has often been an emphatic, “No coverage. Your business has not suffered actual physical damage.”
Not so fast. Insurance coverage issues are often complex and hinge upon the language in the policy and the way courts interpret that language, but it is not a given that there is simply no coverage for businesses who have suffered losses during these hard times.
BUSINESS INTERRUPTION POLICIES
The first potential angle for coverage comes with business interruption policies. The insuring language typically provides reimbursement for loss of certain business income “due to direct physical loss or direct physical damage to property.” The policy may have a coverage extension for business interruption by a civil authority, to cover losses sustained when the “order of a civil authority” affects access to property. And, it may well have what, in the insurers’ view, would erase everything just stated above in the present circumstances—a virus exclusion purporting to exclude coverage for loss or damage caused by a virus.
With so many businesses having to shut down during this COVID-19 crisis, insurers have frequently been telling their insureds that their business interruption policies cannot help them because even though the businesses are most certainly suffering a loss, they supposedly have not suffered physical loss or physical damage to their property. There have been courts, however, that view “physical loss” or “physical damage” differently. For instance, the court in Wakefern Food Corp. v. Liberty Mutual Ins. Co., 928 A.2d 724, 406 N.J. Super. 524 (2009), reversed summary judgment for an insurer who denied a supermarket’s claim for spoiled food damages under its business interruption policy after an electrical blackout. The court noted that the insuring language was ambiguous as to what “physical damage” is and must therefore be construed in favor of coverage. In Houston Cas. Co. v. Lexington Ins. Co., 2006 WL7348102, S.D. Tex., the court denied the insurer’s motion for summary judgment where the insurer argued that there was no “physical damage” to a Florida amusement park that closed due to a mandatory evacuation order because the hurricane never ended up touching Florida. The court noted that “loss” is not the same as “damage,” and the two words must have distinct meanings. “Loss,” the court concluded, can include loss of possession or loss of use, which happened because the park closed for a day.
As for the virus exclusion in business interruption policies, the presence of civil authority coverage extensions in an insurance policy may be helpful. The following argument can be made: COVID-19 is not what proximately caused the loss—the business had to close because the government ordered it. Moreover, the “interruption by civil authority” coverage extension could be argued to supersede the virus exclusion.
There is another potential avenue for coverage besides business interruption policies. Due to the many exclusions in traditional insurance policies, businesses (especially those who by their trade deal in potentially hazardous substances) often purchase additional bespoke coverage to recover losses due to pollution or environmental contamination of the work site. This pollution insurance could pay for the decontamination of a business after the derailment of a train car of hazardous cargo nearby to the business or perhaps a leaking container of dangerous chemicals stored in a business’ warehouse (a “release” event). That coverage can backstop the exclusions of coverage in the wider property insurance and compensate businesses for the costs of remediation as well as the limited business interruption during the decontamination period.
Many pollution policies have specific exceptions against “communicable diseases,” wherein, say, a staff member comes to work with a virulent case of flu and sickens much of the workforce, forcing the business to cease operations for two weeks while several staff are hospitalized. Coverage here would often be denied.
Contrast this with often-covered pathogenic scenarios – a hotel forced to shut down briefly to address an outbreak of legionella or a college forced to close a dormitory when it is discovered to be rife with black mold. In both cases, while they have not yet sickened any staff or students, the pathogens still represent dangerous environmental contaminants requiring remediation. Now consider a scenario where a staff member comes to work in a policyholder’s work site, becomes symptomatic, and tests positive for COVID-19 (another release event). Prudence (and maybe local health policy) dictates shutting down, sending staff home and thoroughly cleaning the office environment to prevent further spread of the disease. In this circumstance, it could be argued that COVID-19 was not acting as a “communicable disease,” as the interruption wasn’t actually caused by widespread illness in the business; instead, COVID-19 acted as a contaminant that needed to be mitigated before business could resume.
Pollution insurance is not traditionally thought to cover a circumstance where the government orders business interruptions due to a viral pandemic. However, consider the train car mentioned above. If a derailment of radioactive cargo were to occur in a local business district, the local government might close and evacuate the surrounding businesses pending mitigation of the hazard, simply due to the risk of contamination, before any actual contamination being detected. Such a scenario is often contemplated in a pollution insurance policy, either directly or as “contingent business interruption.” While policies would need to be specifically analyzed for exceptions or other pitfalls, it might be argued that COVID-19 is just such a radioactive train car – its very existence in a place subjects all nearby to potential contamination and business interruption while awaiting its mitigation. This would be a novel question before courts, with outcomes potentially varying jurisdiction to jurisdiction, and, because of the great potential for losses to the insurers, one against which insurers will certainly stand strong. Should a virus be classified as a contaminant?
There is a caveat – if the virus is classified as a communicable disease or another type of interruption on one claim, it cannot in the same breath be classified as a pollutant as well to attempt to increase the insured’s recovery. A claimant will need to be advised as to whether attempting to employ their pollution insurance (a potentially large source of coverage) might estop other crucial coverage under their more general insurance.
MAKING A CLAIM WITH YOUR INSURER
Should you wish to claim losses under your current business interruption or pollution policy, making that claim now is crucial. Because insurers will doubtless wish to create far more specific exceptions to coverage addressing the impacts of pandemics in future policies, policyholders of “claims made” policies should not wait for their policy to be renewed, amended, etc., before making a claim. Parsons Behle & Latimer lawyers can review your policy for a fixed fee to determine if a case can be made for potential coverage with your insurer. We are also experienced in handling coverage claims for insureds on an hourly fee basis, including writing the claims letters and filing or defending declaratory judgment actions.
For more information about this or other related questions, please contact Juli Blanch at (801)322-9141 or send an email to firstname.lastname@example.org or call Zachary Shea at (775) 789-6556 or send an email to email@example.com.