As the COVID-19 pandemic continues to spread across the United States, so too has business interruption. Businesses across the country have reduced hours of operation or have shut down completely. The economic impact likely will be felt for a long while.
As a result of these and anticipated future disruptions, businesses should evaluate how their operations and financial well-being will be affected, and then closely analyze whether any existing insurance policies potentially provide coverage for such losses.
Business Interruption and Contingent Business Interruption Coverage
Business income coverage or business interruption coverage is usually purchased as part of commercial property insurance. Business interruption coverage is defined as “commercial property insurance covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations.” This coverage typically applies to “loss suffered during the time required to repair or replace the damaged property.”
Commercial property insurance policies often contain two types of coverage that may be applicable to disruptions like those caused by COVID 19 and the responses thereto: business interruption coverage and contingent or supply-chain business interruption coverage.
Typically, business interruption coverage is triggered when the covered property suffers “direct physical loss of or damage to” covered property. For example, a building that is rendered temporarily or permanently unusable due to some event. Contingent or supply-chain business interruption coverage insures against losses due to a supplier suspending operations where the supplier suffered a physical loss to its operations that would be covered had it occurred to the insured’s property. Thus, it is not merely that a supply chain is disrupted but that the supply chain is disrupted because a supplier’s property was damaged. In addition, many policies contain civil authority coverage, which is implicated losses that occur when governmental authorities restrict access to areas where a business operates or the business itself.
As this is a rapidly developing and evolving situation, there is no case law yet addressing whether COVID-19 triggers business interruption coverage. Thus, businesses will need to analyze their own insurance program right now without awaiting the guidance that might come from others.
As with all insurance coverage issues, the first place to start is the policy(s) and a careful review of the coverages provided as well as matters excluded. In this regard, a first significant issue is whether the policy is a named peril type policy or an “all risks” type policy. In the former, the policy only covers losses caused by the specifically listed perils and because disease outbreaks are not one of the typically named perils, it is unlikely that disruptions caused by COVID-19 will be covered by a traditional named peril policy. By contrast, an “all risks” policy covers property damage and business interruption loss from any fortuitous cause unless specifically excluded in the policy. An “all risks” policy may provide coverage for losses caused by COVID-19 if there is no applicable exclusion in the policy (e.g. one against loss due to virus or bacteria and it is determined that a “physical loss” has occurred at the covered property).
Some courts have adopted a narrow interpretation of “physical loss,” focusing on the word “physical” and requiring damage to the premises or property. These decisions are fact and jurisdiction specific. For example, courts have found the following situations do not satisfy the requirement of “physical loss:” (a) inability to import beef product from Canada due to border closures due to “mad cow” disease, (b) mold and bacterial contamination and (c) discovery of asbestos.
While the paradigm case for business interruption losses is structural damage to covered property, coverage may exist in certain circumstances where there is no structural loss. For example, other courts have held even intangible changes, like odors, may satisfy the physical loss requirement. The requirement is some identifiable change to the property.
Even where a business suffers physical loss caused by COVID-19, there may be limitations on whether there is coverage depending upon the exclusions within the policy. For example, in recent years, some policies added exclusions for bacterial or viral infections. The applicability of such an exclusion will depend upon the specific language of the exclusion since viruses are not bacteria and thus an exclusion of bacteria alone might not preclude coverage while a combined Bacteria/Virus exclusion likely does. Insurers also may argue that the pollution exclusion in the policy bars coverage. The issue of whether a virus fits within the policy definition of pollutant is one that likely will be hotly contested as there is no settled rule yet.
The key takeaway is that whether business interruption insurance is applicable to shutdowns of businesses likely will depend upon the specific language of the policy(s) as well as the individualized facts. For example, whether the workplace was shut down because of actual or threatened contamination as opposed to a closure to provide social distancing and whether the policy contains a specific exclusion for viral infections or just a general pollution exclusion.
Other Policies Potentially Implicated
Other policies might be implicated as a result of COVID-19. A company’s general liability policies may be implicated if there are third-party bodily injury or property damage claims asserted against a company. Likewise, workers compensation policies might be implicated by employee claims of workplace injury from the virus. In addition, Directors and Officers coverage and Errors and Omissions coverage may be implicated by claims asserted against a company arising out of the situation and the company’s planning, internal controls and crisis management policies in response to the situation. Where exclusions for virus-caused business interruption claims are clear and unambiguous, they will likely be enforced. History, however, has proven during times of crisis that creative arguments to work around a clear exclusion may be given more weight than during ordinary times—and these are not ordinary times.
Thus, each affected company should contact its broker or internal risk management professionals to review carefully all potentially applicable insurance policies in order to evaluate whether there may be insurance coverage for any of the losses suffered or claims asserted. This should be done promptly so that where appropriate, the company can provide timely notice of a claim to its insurer in accordance with the policy language.