August 27, 2020 Articles

A Primer on Enforcing the Virus Exclusion

Regardless of whether a policyholder’s business interruption coverage requires damage to physical property, the virus exclusion will likely preclude recovery for economic losses associated with COVID-19 shutdowns.

By Stephen F. Butterfield

In early March 2020, the global pandemic arising from COVID-19 [1] led state and local governments across the country to issue unprecedented stay-at-home orders, leading to the closure of businesses deemed “non-essential,” including restaurants, bars, and retail establishments. [2] The purpose of those orders was to slow the spread of COVID-19 to prevent hospitals from being overwhelmed, rather than allowing the virus to plow through the population while a so-called herd immunity developed.  [3]

Sadly, the impact of those orders has been financially devastating for affected businesses, particularly small businesses. It is estimated that nearly 110,000 small businesses across the country have closed, never to reopen, as a consequence of those orders. [4] As a result, businesses nationwide have filed, or will soon file, first-party claims against their insurers seeking business interruption coverage under their commercial property policies for COVID-19-related losses. [5] But many of those small business owners will likely face the difficult burden of overcoming a heretofore sparsely litigated coverage exclusion included by endorsement in many commercial property policies: the Exclusion Of Loss Due To Virus Or Bacteria (referred to in this article as the virus exclusion). [6]

This article provides an overview of business interruption coverage with a particular emphasis on the virus exclusion, including the general interpretive principles by which courts will examine the exclusion, the history and purpose of the exclusion, and an analysis of arguments in favor of enforcing the exclusion.

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