In these unprecedented times, Ellis Insurance is fielding calls from business owners asking whether their insurance policies provide coverage to help offset or cover significant losses stemming from the coronavirus pandemic.
- What if my business has been closed due to the shuttering of non-critical businesses?
- If our business needs to close our doors due to exposure to the virus, would that qualify for “loss of income” coverage?
- How is a voluntary closure of our business handled by insurance? What if there is a jobsite lockout? Lost productivity?
These are monumental economic challenges for businesses big and small. We are here to help.
The root of these questions can be easily summarized: Do commercial property and, specifically, business interruption insurance policies, provide coverage for COVID-19-related losses? In this quickly evolving environment, the answer is “It depends.”
The short version: Working with lawmakers, regulators, and through coordination with a broad coalition of non-insurance companies, the U.S. insurance industry is currently promoting a plan, backed by the federal government, that would help businesses suffering from a loss due to a pandemic. A more detailed explanation of coverage and analysis follows.
An Overview of Business Interruption Insurance
Commercial property policies often include business interruption or business income coverage that is designed to protect prospective earnings of a business. That is, the coverage indemnifies a policyholder for losses arising from the business’s inability to operate normally, provide its services, and fully function.
Since this is a property coverage, coverage is generally triggered by a physical loss, such as the impairment, damage, destruction, or loss of the use of a building, machinery, equipment, or other business property. Picture the sprinklers going off and drenching files, flooding computers, and forcing a business to shut down or reduce profits while they make repairs.
This coverage generally lasts for the period of restoration, meaning the time it takes to repair or rebuild the damaged property. In other words, your policy would optimally pay repair costs and reimburse you for lost operating revenue while your business remains closed.
To establish a business interruption claim you must prove (a) a direct physical loss or damage to property at the insured’s premises; (b) that necessitates suspension of operations; and which (c) directly causes the business income loss.
Key Exclusions/Endorsements to Consider.
Shortly after the SARS epidemic of 2003, many insurance policies began to include an endorsement that specifically excludes damages caused by viruses or bacteria, formally called the Exclusion of Loss Due to Virus or Bacteria Endorsement. If your policy includes this Endorsement, your business may not be covered.
Where a policy includes the Exclusion of Loss Due to Virus or Bacteria Endorsement, courts must first consider whether the claim satisfies the insuring agreement; i.e., whether coronavirus contamination constitutes a “direct physical loss or damage to covered property.” And, in fact, arguments have been made that may support future COVID19 claims: “Nothing…rules out the possibility of damage caused by the presence of microscopic organisms or requires that loss or damage be visible to the naked eye, or even visible at all.” – source, Law360.com, 3/12/2020
Is a Coronavirus Infection a “Direct Physical Loss or Damage to Covered
Property” to Trigger Coverage?
How courts interpret “a direct physical loss or damage to the premises” in the context of COVID-19 will impact businesses throughout the world and have staggering societal, economic, and legal implications. What if, for example…
- An employee, visitor, or tenant tests positive for the coronavirus forcing owners to close?
- Testing reveals coronavirus on the surface of a countertop in a company’s kitchen or on a piece of equipment at a jobsite? Would that be evidence of “direct physical loss or damage?”
- COVID-19 is found on a piece of equipment at a jobsite but no one is infected, and the company voluntarily shuts down?
- A construction project is shut down by the government or work is voluntarily stopped before COVID-19 is detected at a job site?
What if the presence of a virus on the physical property causes a shut down? Would that trigger coverage? It may come down to the success of an insured party convincing the courts that the existence of the deadly virus at the premises constitutes physical loss or damage to property.
Already, insureds are racing to the courthouse. In addition to famous restaurants in CA and NY, a restaurant in New Orleans recently filed suit asking the court to determine whether state and local restrictions on public gatherings and restaurant operations trigger coverage. The complaint states that “the deadly virus physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees.” “Fomites” are inanimate objects that can become contaminated with infections agents and, in turn, cause the virus to transfer from object to human. Expect courts to hear that word often in the coming months and years.
At a fundamental level, companies seeking to claim loss of income would first need to show their policy does not include a virus exclusion, and then would need to show how a physical loss caused the business operations to suspend, resulting in loss of business income to the policyholder.
Third Party Claims and Commercial General Liability (CGL) Coverage
Companies may also be faced with third party liability claims arising out of the COVID-19 pandemic. A CGL policy covers damages for “bodily injury” and “property damage” resulting from an “occurrence.” CGL policies often contain a Fungi or Bacteria exclusion, sometimes referred to as the “Mold exclusion,” which may limit coverage. If there is such an exclusion, the policy language will need to be examined to determine whether it is defined to include a virus or communicable disease.
There are countless questions that will need to be answered by insurance carriers, lawyers, and, ultimately, courts over the coming months. Litigants will push these arguments, relying on creative application of state and federal caselaw, the language of the policies and endorsements, and the facts of each specific instance of business interruption and loss.
Sources include PropertyCasualty360, Cranfill Sumner & Hartzog LLP, and Massachusetts Association of Insurance Agents.