Insurance Provisions That May Cover COVID-19-Related Business Losses
The insurance provisions. The two principal types of insurance provisions generally at issue during this pandemic are
- business interruption and contingent business interruption coverage—coverage for lost profits and extra expenses that can include losses from when business operations are first disrupted to the end of the disruption period, as a result of “(direct) physical loss or damage” to insured property—and
- civil authority coverage—coverage for actual loss sustained during the time when access to the insured premises are prohibited by the order of a civil or military authority, and which may be limited to a defined time period, include a lower sub-limit, or both.
Depending on the coverage purchased, a policy may provide for a high “per occurrence” coverage limit or lower sub-limits.[3]
To secure business interruption insurance, coverage attaches if there has been a “direct physical loss or damage,” with variations on that wording in different policies. The critical insurance question in the COVID-19 crisis is when and whether there has been a “physical loss” to insured premises to trigger coverage. Multiple state governments and the federal government issued various proclamations concerning the emergency, sometimes determining that the risk of being infected with the virus is so concerning that residents should be staying at home and businesses must close, except in limited circumstances. Some of these orders include detailed information about the risks of COVID-19. Thus, insured businesses may allege that their insured premises are already unusable and too dangerous to remain open, thus satisfying the “physical loss or damage” requirement. At the same time, even if coverage is triggered, there may be an exclusion, such as a virus exclusion or communicable disease exclusion (or both), that precludes coverage. The wording of the coverage provision, any potential exclusion, the specific facts, and applicable law should determine whether there is coverage.
In addition, or in the alternative, civil authority coverage also may be available to cover losses and expenses resulting from civil or military authority orders. While this coverage also may be conditioned on the direct physical loss or damage, like business interruption insurance, the policyholder may only need to show that the physical damage occurred within the immediate area, even if not at the insured’s premises. Therefore, it may bolster a claim to show that COVID-19 cases (or exposures) have been reported in the same building or surrounding neighborhood. Moreover, specific state or local business closure and “stay at home” orders may specifically rely on medical facts about COVID-19 that reflect “property loss or damage,” such as the fact that it spreads easily between people, that the virus attaches easily to surfaces for sustained periods of time, or that the mere risk of spreading the virus has created a “public health emergency.”[4] If there is coverage, losses and expenses are usually subject to a time limit, typically 30 or 60 days of losses and expenses resulting from an order that restricts partial or total access to the insured’s premises.
Losses that might be covered. Assuming there is a viable claim, a policyholder can seek to recover the actual loss of business income it sustains during the necessary suspension of its operations in the period of restoration. These losses would include lost profits and costs during the periods of shutdown and restoration, up to policy limits, or endorsement sub-limits, fixed costs, and claim preparation costs, among others. Policies with “extra expense” coverage also cover costs incurred by the business during the period of restoration back to normal operation business—i.e., the time needed to rebuild, repair, or replace damaged goods or property—which is likely to be uncertain anyway with the type of partial openings and closings that have taken place during the COVID-19 pandemic. Civil or military authority interruption coverage might be easier to secure, as it can be tied directly to government-ordered closings. However, it typically provides more limited coverage, for actual losses during the period for short time periods (typically 30 to 60 days) and for lower sub-limits.
Critically, businesses should begin documenting losses and costs immediately to secure coverage. Businesses should gather relevant documents for those losses and costs, and they should consider securing the assistance of an accountant for accuracy.
Triggering Insurance Coverage
Property loss and damage that may trigger coverage. As insurance claims for business-related losses have skyrocketed, insurers have been denying many of these claims. While many factors may play into coverage determinations, denials generally have been based on the assertion that the policyholder has not met the physical loss requirement or that a virus exclusion applies to preclude coverage, or both. For example, some insurers have claimed that, under traditional approaches for determining whether this property loss requirement has been met, coverage is triggered only when there is “actual” or “structural” damage, which would mean evidence that the pathogen has been identified at the insured’s premises and thus physically damaged property in the form of viral contamination. Insurers also have been publicly proclaiming in press releases and media interviews that business interruption insurance does not cover COVID-19-related losses, because it “requires direct physical loss to property, and that this means that a business has to show it has suffered an actual or structural loss or damage.”[5] In response, some insureds have filed suit to challenge coverage denials, addressing these positions on property loss and applicability of exclusions, among other issues.[6] Different policy language, facts, state orders, and applicable law should mean that these cases may have different outcomes. However, practically speaking, different court decisions may affect other coverage disputes over business interruption coverage and the perception of whether coverage should be available.
In non-COVID coverage matters where the parties dispute whether there is property loss triggering coverage, some courts have determined that the policyholder did not need to show structural or actual damage to obtain coverage. Courts have found that the policyholder can meet the “direct physical loss” requirement once the property becomes unsafe or uninhabitable, or is no longer usable or functional.[7] Under this approach, an event—or “occurrence”—that renders the property unusable, satisfies physical loss and damage requirements to trigger coverage, even if there is no evidence yet of the virus in airspace or on surfaces. Likewise, in cases involving dangerous substances, some courts have found coverage in cases involving the potential for harm resulting from the nearby presence of a potentially dangerous substance. For example, in disputes over coverage arising from underlying claims concerning asbestos on premises, courts have determined that even if the asbestos fibers are not airborne, the mere presence of the asbestos nearby constitutes a “physical injury” to “property” and therefore is “property damages.” Similarly, where ammonia was released inside a facility—which the parties agreed rendered the facility unfit for normal human occupancy, and the fire department directed employees not to enter the building—the court found that it was sufficient to find that the facility was “rendered inoperable” to determine that the insured had sustained “direct physical loss of or damage to” its property.[8] What matters is that the very presence of the harmful substance in the premises themselves.[9] Other cases addressing similar property coverage disputes have had similar outcomes where the losses arose from the potential for harm from certain dangerous substances, such as leaking gasoline, the presence of Chinese drywall, nearby smoke from wildfires, carpet fumes, carbon monoxide, and bacteria in water.[10]
Recent COVID-19-related decisions that address property loss or damage triggering coverage. In the pending cases that involve coverage for COVID-19-related losses—each of which depends on the specific facts, policy language, and applicable law—the property loss and damage issue has already been addressed in different ways. Different complaints and facts result in alleged property loss or damage being framed differently. Some of the complaints have alleged that the presence of COVID-19 on the insured property has caused direct physical harm to property and was the cause of losses. Without considering the exclusions that may come into play, policyholders pleading property damage in this way may be able to rely on the body of case law discussed above that stands for the principle that there is a direct physical loss or damage when property has been rendered unsafe or not functional due to contamination. Some complaints allege the presence of COVID-19; some do not. Likewise, some complaints allege that financial losses stem from stay-at-home orders and seek coverage on the basis that the government orders result from the unsafe conditions arising from COVID-19 or result in revenue losses due to loss of being able to use the business premise.
Cases that address the urgency of preventing the spread of COVID-19, even if not directly insurance-related, may provide support for insureds to argue that there has been property loss or damage. For example, an April 2020 Pennsylvania Supreme Court decision has been cited by some insurance practitioners as providing support for the argument that COVID-19-related harms constitute physical damage that triggers insurance coverage.[11] In Friends of Danny DeVito v. Tom Wolf, certain business owners challenged the governor’s ability to issue an order shutting down all “non-life-sustaining” businesses.[12] The court found that the Pennsylvania governor could order businesses to close absent confirmed contamination because the COVID-19 pandemic is a “catastrophe” that has resulted in a “natural disaster,” where the “exigencies created by the spread of the coronavirus” made it necessary close businesses to mitigate and suppress the continued spread of COVID-19, which can otherwise spread “exponentially.”[13] Thus, practitioners might be able to argue that this case shows that the risk from COVID-19 that has interrupted business is indistinguishable from the risks created by other covered events, such as release of bacteria or ammonia, or that actual contamination at an insured premises is not required to find that there has been property loss or damage. From the other perspective, practitioners for insurers have taken the position that this case is unrelated to business interruption coverage, explaining that the governor’s proclamation and order was limited to the proposition that the governor had the authority to close businesses.[14]
Because these cases are still proceeding, there are only a few examples so far of arguments from both sides on COVID-19 business insurance disputes. In a recent ruling from the bench in a Michigan state trial court in Gavrilides Management Co. LLC v. Michigan Insurance Co., the court dismissed the plaintiff’s suit for losses it suffered after the governor issued executive orders in March limiting its two restaurants to take-out and delivery orders.[15] The court found that the restaurants did not sustain “direct physical loss or damage” even though the insurance policy at issue covered loss of business income due to a “suspension of operations” caused by direct physical loss or damage to its insured properties. The insured had alleged that the restaurants were “damaged during the pendency of the [executive orders] because people were physically restricted from dine-in services.” The court asserted its reliance on Michigan cases that it found to hold that “direct physical loss of or damage to the property” must take a tangible form and somehow alter “the physical integrity of the [insured] property.” Relying on the insured’s repeated allegations that no confirmed cases of COVID-19 had been traced to the restaurants and no employees had tested positive for COVID-19, the court found that the complaint did not allege “any physical loss of or damage to the property.” While the court also found that certain exclusions also would apply, it is possible that there might have been a different outcome if the case were decided under different law where, as in some of the cases listed above, courts have determined that an invisible hazardous substance in the air makes a facility uninhabitable or unusable, and is sufficient to trigger the direct physical loss or damage requirement.
Likewise, in May, a New York federal district court rejected a magazine’s suit for coverage under its business interruption coverage for losses suffered after statewide government-mandated closures of “nonessential” businesses during the COVID-19 pandemic shut down the magazine’s operations. In Social Life Magazine Inc. v. Sentinel Insurance Co. Ltd., the magazine alleged that because the coronavirus is able to attach to surfaces and is “everywhere,” it can cause physical damage to the magazine’s office building and equipment, and is not otherwise excluded because the policy did not contain a common exclusion for viral pandemics.[16] The insurer denied coverage on the ground that the spread of the novel coronavirus did not cause any “direct physical loss or damage” to the magazine’s Manhattan office. In an oral decision following a telephonic hearing, the court rejected the magazine’s motion for a preliminary injunction.[17] During the hearing, the court agreed with the insurer’s reliance on Roundabout Theatre Co. v. Continental Casualty Co., which found no business interruption coverage for a theater company’s losses resulting from a city order to close the street due to a construction accident that precluded access to the theatre, in the absence of any physical damage to the theatre premises.[18] Taking the same approach as in Roundabout, the Social Life Magazine court rejected the insured’s argument that it had “on-site property damage,” because “the virus exists everywhere,” and damaged lungs, not “printing presses.” The court declined to consider decisions from outside of New York finding that an insured’s loss of its ability to use premises or equipment due to “mold spores, bacteria, virus” constitutes covered property damage, instead adopting the insurer’s position that “property has to be entirely unusable or uninhabitable for physical loss or damage to constitute a loss of use,” as it would be with Legionnaire’s bacteria found in a building’s coolant system or water or ammonia or mold or E. coli, but not from coronavirus.[19]
In the coming weeks, we will continue to see more decisions from courts on these issues. For example, the briefing on a motion to dismiss already has been completed in Nue, LLC v. Oregon Mutual Insurance Co.,[20] involving a Seattle eatery that filed suit for business interruption coverage for its loss in revenue following the Washington governor’s stay-at-home order and shutdown of dine-in restaurants. The insured sought coverage for its losses resulting from the partial suspension of its operations. In seeking to dismiss the eatery’s claims, the insurers argued that there was no physical loss, because that requires alteration of property that needs to be “repaired, rebuilt, or replaced,” or at least loss of functionality, and that there was no such alteration of property or loss here because the eatery continued to prepare food for takeout and delivery. In opposing that motion to dismiss, plaintiff Nue argued that it suffered a loss of use of property that constitutes physical damage under the policy because it had experienced a loss of functionality arising from its loss of access to its dining room, tables, chairs, and glassware, all triggering its coverage because its property completely lost its physical utility. Notably, Nue pointed out that the policy specifically covered “partial shutdowns,” and therefore its loss of functionality argument should result in coverage being triggered.
Insurers have taken the position that the policyholder must show actual damage to the property and surrounding property. However, there are arguments and case law that support insureds refuting this position, potentially arguing that where policies don’t require “direct” physical loss, or are “all risk” policies that might allow for a broader interpretation of “resulting physical damage.”[21] Likewise, in arguing that a virus exclusion does not apply, which is not discussed in this article, insureds may try to skirt the issue of “loss or damage” and claim that coverage for business expenses is different than coverage for loss.[22] Importantly, coverage is determined on a case-by-case and policy-by-policy basis, and therefore it is critical for businesses to read their policies carefully. Each of these differences can alter the policyholder’s ability to secure coverage.
Other Factors That May Affect Coverage Claims
The possibility of legislative action. To address these arguments and widespread insurance coverage denials, certain state legislatures have proposed legislation to address business interruption insurance coverage relating to COVID-19 claims.[23] The insurance industry responded immediately to these proposals, initiating a concerted lobbying effort against these bills. Certain industry representatives have taken the position that, if insurers were obligated to cover pandemic-related losses under business interruption insurance, this obligation would create solvency risks for the insurance market.[24] In the public arena, certain policyholders have made statements in response, indicating that they paid enormous sums of money in premiums over decades for an emergency business interruption, to cover emergencies and losses just like these resulting from COVID-19.[25] The current status of this legislation is uncertain, and therefore policyholders should evaluate their coverage without relying on outside assistance.
Steps insureds can take. Assuming that insureds are able to proceed with business interruption claims, it will be important for insureds to tender the claims for coverage as soon as possible. Policies may contain notice provisions that set forth time periods, the process for tendering notice, and the designated recipient for notice. Timing of notice may be particularly important if one policy period is ending and a subsequent renewal policy period is beginning, because insurers may be adding new and restrictive exclusions to renewal policies; insurance that might have been available under the prior policy will now be excluded in the renewal policy. Notice to the insurer should include basic information about the policy and the business, and should generally inform the insurer that that the business has suffered losses arising from the COVID-19 pandemic and related shutdowns.
Assuming a claim moves forward, the policyholder should determine whether the policy contains strict deadlines for submitting a proof of loss or, ultimately, for filing a lawsuit in case coverage is denied. Importantly, the insured should prepare all supporting documentation to show, among other things, lost profits, wage information, COVID-19-related employee absences, interruptions in the supply chain, plus all other expenses. In addition, insureds should gather all orders and proclamations that may have affected these losses.
The bottom line is that each claim is unique, and an insurance denial does not necessarily mean that the policyholder is not entitled to coverage. While numerous businesses are filing suit, many may be waiting to see how these other suits, and the litigated issues, proceed.
Conclusion
Navigating the daily news involving business interruption coverage for COVID-19-related businesses losses can seem overwhelming, particularly in these challenging COVID times when so many businesses are suffering financially. As challenges to coverage denials proceed over the coming months, policyholders will get a better sense of when and where property loss or damage can be alleged to trigger coverage. Likewise, understanding the allegations brought in these cases and the arguments made in court proceedings is helpful for policyholders trying to negotiate with their carriers and strategize over securing coverage. Each business should find the best approach for its circumstances, insurance policy language, and jurisdiction.
Arden B. Levy is the founder of insurance coverage law firm Arden Levy Law PLLC in Alexandria, Virginia. Robert H. Cox is a partner with the law firm of Briglia Hundley, P.C., in Tysons Corner, Virginia. He focuses his practice on commercial litigation, including insurance-related litigation.
[1] See, e.g., Tom Hamburger & Tony Romm, “Hard-hit restaurants, gyms and other businesses are battling insurers over the coronavirus, sparking a new Washington lobbying war,” Wash. Post, Apr. 22, 2020.
[2] See, e.g., Jef Feeley & Katherine Chiglinsky, “Monthly Loss of $413 Billion Spurs Insurance Claims Across U.S.,” Bloomberg, Apr. 8, 2020; Suzanne Barlyn, “U.S. insurers want taxpayers to back pandemic coverage for businesses,” Reuters, Apr. 29, 2020, https://www.nytimes.com/reuters/2020/04/29/business/29reuters-health-coronavirus-insurance-pandemics.html?searchResultPosition=2; Jonathan Stempel, “Simon Wiesenthal Center sues Chubb to ensure coronavirus insurance coverage,” Reuters, Apr. 29, 2020.
[3] Policyholders also should evaluate whether other types of insurance may potentially cover certain COVID-19-related losses. For example, policyholders in the hospitality and theater industries already may have purchased certain emergency event management coverage that expressly provides for “virus” coverage, although such coverage typically has lower sub-limits. Likewise, if subject to a third-party lawsuit alleging some type of mishandling of the pandemic, a policyholder may be able to seek coverage under its commercial general liability or directors’ and officers’ coverage.
[4] See, e.g., Proclamation by Maryland Governor Lawrence J. Hogan Jr., Declaration of a State of Emergency and Existence of Catastrophic Health Emergency—COVID-19 (Mar. 5, 2020); Press Release, Office of the Governor of Virginia, Governor Northam Extends Business Closures for Two Weeks to May 8 (Apr. 15, 2020).
[5] See Zoe Sagalow, “In letter to lawmakers, insurers say pandemic cost is too great,” Roll Call, Apr. 8, 2020.
[6] Many suits have been filed by businesses in different states for a wide array of industries, challenging coverage denials and addressing whether there was direct physical damage or loss, whether government orders trigger coverage, and whether exclusions apply, among many other issues, including the following: claims on behalf of restaurants (e.g., French Laundry Partners, LP et al. v. Hartford Fire Ins. Co. et al. (Cal. Super. Ct.); Guajillo Mexican Rest. v. Hartford’s Twin City Fire Ins. Co. (Va. Cir. Ct.); Rush Hour Live Escape Games LLC v. Mesa Underwriters Specialty Ins. Co. d/b/a MUSIC (E.D. Va.); Big Onion Tavern Grp. LLC et al. v. Soc’y Ins., Inc. (N.D. Ill.)), claims on behalf of car dealerships (e.g., Geneva Foreign & Sports, Inc. v. Erie Ins. Co. of N.Y. et. al. (W.D. Pa.)), and claims on behalf of nonprofit organizations (Simon Wiesenthal Ctr. v. Chubb Grp. of Ins. Cos. et al. (C.D. Cal.)).
[7] See, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 543–44, 968 A.2d 724, 737 (N.J. Super. Ct. App. Div. 2009) (finding loss of use or value, or functionality, can satisfy requirement in damage to power source); Total Intermodal Servs., Inc. v. Travelers Prop. Cas. Co. of Am., No. CV 17-04908 AB (KSx), 2018 U.S. Dist. LEXIS 216917, at *11–12 (C.D. Cal. July 11, 2018) (finding that loss of use begins as soon as property cannot be used in claim for cargo that was lost once mistakenly loaded on ship bound for China, and ultimately destroyed, rather than delivered to customer).
[8] Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-cv-04418 (WHW) (CLW), 2014 U.S. Dist. LEXIS 165232, at *19 (D.N.J. Nov. 25, 2014) (ammonia discharge caused “physical loss of or damage to” insured facility).
[9] See Armstrong World Indus., Inc. v. Aetna Cas. & Sur. Co., 45 Cal. App. 4th 1, 93–94, 52 Cal. Rptr. 2d 690, 734–35 (1996) (finding that the presence of asbestos in the vicinity is injurious due to the potential future releases of asbestos fibers).
[10] See, e.g., TRAVCO v. Ward, 715 F. Supp. 2d 699, 708–9 (E.D. Va. 2010) (finding that a physical condition, such as Chinese drywall, that renders property uninhabitable is sufficient to meet the “physical loss or damage” test) (relying on cases involving unpleasant odors, bacteria, gasoline, and risk of rockslide); W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968) (accumulation, buildup, and infiltration of gasoline rendered church building uninhabitable).
[11] See, e.g., Jordan Rand, “Pa. Ruling Strengthens Arguments for COVID Loss Coverage,” Law360, Apr. 16, 2020.
[12] Friends of DannyDevito v. Wolf, No. 68 MM 2020, 2020 Pa. LEXIS 1987 (Pa. Apr. 13, 2020)..
[13] See Friends of DannyDevito, 2020 Pa. LEXIS 1987, at *22–30.
[14] See Anthony Miscioscia & Timothy Carroll, “Pa. Ruling Doesn’t Support COVID-19 Biz Interruption Claims,” Law360, Apr. 23, 2020.
[15] See Hearing on Motion for Summary Judgment, Gavrilides Mgmt. Co. LLC v. Mich. Ins. Co., No. 20-258-CB-C30 (Mich. Cir. Ct. Ingham Cty. July 1, 2020).
[16] See Soc. Life Magazine Inc. v. Sentinel Ins. Co. Ltd., No. 1:20-cv-03311 (S.D.N.Y.). A notice of appeal from the denial of the plaintiff’s motion for a preliminary injunction was filed with the U.S. Court of Appeals for the Second Circuit on May 17, 2020.
[17] Transcript of Hearing at 4–9, Soc. Life Magazine Inc. v. Sentinel Ins. Co. Ltd., No. 1:20-cv-03311 (S.D.N.Y. May 14, 2020).
[18] See Roundabout Theatre Co. v. Cont’l Cas. Co., 302 A.D.2d 1, 2, 751 N.Y.S.2d 4, 4 (App. Div. 1st Dep’t 2002).
[19] Transcript of Hearing at 9–13, Social Life Magazine, No. 1:20-cv-03311 (S.D.N.Y. May 14, 2020).
[20] Nue, LLC v. Or. Mut. Ins. Co., No. 2:20-cv-00676 (W.D. Wash. July 1, 2020) (granting stay of proceedings and referencing Plaintiff’s Response to Oregon Mutual Insurance Company’s Motion to Dismiss, filed June 15, 2020).
[21] See MDS, Inc. et al. v. Factory Mut. Ins. Co. (FM Global), 2020 ONSC 1924 (covering lost profits for nuclear power plant’s resulting losses after government shutdown order following leak of radioactive water, due to subsequent difficulties with repairs and inability to procure replacement isotopes).
[22] See also Windber Hosp. et al. v. Travelers Prop. Cas. Co. of Am., No. 3:20-cv-00080 (W.D. Pa. July 14, 2020) (memorandum order declining to grant summary judgment before consideration of class, finding it premature to declare whether a hospital can recover its “continuing normal operating expenses” due to the loss of use of buildings and facilities, resulting from state-mandated COVID-19 closures, is a “covered physical loss”).
[23] New Jersey Assembly—A.3844 (Mar. 16, 2020); Louisiana—H.B. 858 (Mar. 31, 2020) and S.B. 477 (May 19, 2020); Massachusetts—S.D. 2888 (Apr. 6, 2020); New York Assembly—A10226 (Mar. 27, 2020); Ohio General Assembly—H.B. 589 (Mar. 24, 2020); Pennsylvania—H.B. 2372 (Apr. 3, 2020).
[24]See https://content.naic.org/article/statement_naic_statement_congressional_action_relating_covid_19.htm.
[25]See, e.g., https://www.washingtonpost.com/politics/simon-wiesenthal-center-sues-insurance-giant-in-latest-fallout-over-coronavirus-claims/2020/04/29/2928cab8-89c4-11ea-ac8a-fe9b8088e101_story.html (calling insurance coverage denial after paying premiums “for decades” as “categorically immoral and unjust”).