- In the aftermath of the COVID-19 pandemic, the survival of many businesses will turn on whether they have private insurance coverage to cover all or a portion of their losses.
- Business interruption policies and other types of coverage are typically drafted to cover losses arising from “direct physical loss” or “damage to” covered property.
- How will states answer the question as to whether coronavirus constitutes a physical loss or damage to property?
As a result of the COVID-19 pandemic, businesses across the United States are suffering from unprecedented losses.* In cities and suburbs around the country, commerce has ground to a halt as businesses close their doors because of potential exposure to the deadly virus and in response to state and local government orders. Which of these businesses will be able to reopen will depend largely on how they are able to manage those losses.
Although the news in recent weeks has focused largely on funds available to small businesses through the recently passed CARES Act, that relief is, for the most part, unrelated to losses incurred and is entirely unavailable for companies with more than 500 employees. Therefore, the survival of many businesses both large and small will turn on whether they have private insurance coverage available to cover all or a portion of their losses. Unfortunately, even for those that maintain robust coverage, whether it will be available is far from certain.
Even though insurance policies differ, business interruption and certain other types of coverage are typically drafted to cover losses arising from “direct physical loss” or “damage to” covered property. Insureds are already receiving denial letters from carriers taking the position that coverage is not provided because they do not consider COVID-19 or any governmental order closing the business to constitute physical loss or damage to the property. Is this correct? The answer apparently will not only depend on the specific language of the insured’s policy, but also on a company’s ability to prove the physical presence of the virus and what will be considered valid proof.
Guidance from the Gopher State
Although states’ interpretations of insurance provisions often differ, a line of cases out of Minnesota provides an instructive illustration of how courts may approach the issue of whether coronavirus constitutes a physical loss or damage to property and what question may ultimately be presented to a jury.
The Loss Need Not Be Physical. In the mid-1990s, upon a routine inspection, the FDA discovered traces of an unapproved but safe pesticide in oat stocks at one of General Mills’ facilities. Under the FDA’s rules, even though the pesticide was safe and used on other approved products, its presence would be considered an improper adulteration. Upon notification of the discovery, General Mills immediately halted distribution and production of oat products, but by that time the equivalent of 55 million boxes of Cheerios and other cereals had been affected.
General Mills voluntarily held the adulterated cereals, even though they were completely safe and there was no discernible difference in the product. Although General Mills considered petitioning the FDA for a waiver that would have permitted distribution, it concluded the waiver could not be obtained in the time necessary to bring the affected cereal to market.
The food company sought coverage for its losses under various policies, including an all-risks policy issued through Gold Medal Ins. Co. for which coverage was denied. Gold Medal argued that FDA regulations, rather than the presence of the pesticide, caused the loss; therefore, there was not a “physical loss or damage.” When presented with the question of whether there was physical loss or damage, the Minnesota Court of Appeals determined that there was. The court found that direct physical loss can exist without actual destruction of property or structural damage to property, and that it is sufficient to show that the insured property is injured in some way and that an impairment in value satisfies that burden. Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 152 (Minn. App. 2001).
Well, Maybe a Little Physical. On the other side of things, Source Food Tech., Inc. v. United States Fidelity & Guaranty Co., 465 F.3d 834, 836–38 (8th Cir.2006) (applying Minnesota law) is likely a case that will be cited by insurance carriers in the months ahead. In that decision, the 8th Circuit refused to extend the General Mills decision to solely an economic injury stemming from a governmental regulation. In Source Food, a manufacturer could not transport its beef product from its supplier in Canada to the United States after the USDA prohibited the importation of all beef from Canada due to fears surrounding mad cow disease. Citing General Mills, the manufacturer argued that the loss of function of the beef product constituted direct physical loss to its property. The 8th Circuit concluded that as it was undisputed that the beef was not contaminated or adulterated, there was not “direct physical loss to the property” to trigger coverage. Of particular relevance for insureds is that the 8th Circuit noted that if the policy used “of” instead of “to,” there may have been a different result.
Demonstrating Physical Damage Through Means Other Than Proving Contamination. In both General Mills and Source Food, the factual records were undisputed—there was no question that the oats and beef had been contaminated. What if the question of contamination is unclear?
A year after Source Food, the Minnesota Court of Appeals was asked to address that question. In United Sugars Corp. v. St. Paul Fire and Marine Ins. Co., A06-1933, 2007 WL 1816412 (Minn. App. June 26, 2007), there was an open question as to whether the removal of certain foreign substances from sugar cured the at-issue contamination or whether, despite the removal, it remained “physically damaged.” The Court of Appeals was asked to determine if a jury instruction provided by the lower court requiring that the jury find “contamination” to trigger coverage for losses, rather than “adulteration” as requested by the insured, was reversible error. The Court of Appeals held that it was reversible error to limit the question to one of contamination because the lower court did not allow a jury to find “physically damaged by any means other than proof that it actually contained ‘foreign matter.’” Accordingly, the court seemed to recognize that although there needed to be some physical link, proof of its presence was not necessary to establish “physical damage.”
The Unique Problem with Coronavirus
As courts begin to address coverage for losses arising from coronavirus, they undoubtedly will face the same questions. Must a business demonstrate that it was physically contaminated by the virus? Is an employee who tested positive sufficient to demonstrate physical damage? Will high exposure rates in a given area be sufficient to demonstrate physical damage? Although these questions are difficult enough when courts are addressing nonemergency situations of isolated food contamination, the current dynamic presents stark, practical public-policy concerns.
Testing of both individuals and locations remains limited. Furthermore, asymptomatic carriers, unknowns regarding how long the virus can live on surfaces, and limitations on available PPE, testing labs, and appropriately trained individuals makes identifying the presence of coronavirus a practical impossibility for many under the current circumstances. Due to these issues, most people across all fields are simply advised to act like everyone has the virus. In fact, the CDC’s guidelines throughout the crisis have instructed employers to treat any potential case, or even potential exposure, the same as a positive case and mandating14-days quarantines in almost all circumstances.
The Solution of a Presumed Positive Presence
Considering the current limitations, it appears unfair and unadvisable to require insureds to be focusing on attempting to prove direct contamination of their business when such testing would potentially increase the public risk through additional social contact, require business expenditures at a time businesses are focusing on maintaining employment, and place yet additional players in a market for needed resources.
In light of these concerns, legislative intervention that balances the rights of both the insureds and insurers should be seriously considered by affected states. Although certain legislation under consideration such as New Jersey Bill A-3844, which would render coronavirus a covered peril under all business-interruption insurance policies in the state, may be a step too far, there appears to be a less radical solution. Legislation that established an evidentiary presumption that the coronavirus was present at all locations impacted by applicable civil orders would fairly preserve all contractual exclusions and other relevant policy language while taking an undue burden off insureds.
No doubt insurers will still have numerous arguments at their disposal to support denying coverage based on policy language; however, allowing insurers to avoid coverage because a business focused on keeping its employees healthy and employed, rather than procuring testing of its property, would not only be unjust, it would further hamper future economic recovery efforts. In this time of national emergency, state legislators should address the reality that we have all been physically damaged by the coronavirus whether we have a positive test to prove it or not.