A number of lawsuits have been filed across the Country by businesses seeking to obtain insurance coverage for lost business through a “business interruption “policy. This article attempts to explain what is covered by these policies; and, the positions being taken by the insurer and the insured.
Business Interruption Insurance. Most commercial property insurance policies contain clauses that protect an insured against reduced earnings and increased expenses because of damage to the property they use to conduct business or damage to the property of others on whom they may depend.
The severity of the loss typically depends on the length of the interruption in normal business operations. The coverages include:
Business Income. This insurance covers actual loss sustained by the insured as a result of “direct physical loss or damage” from a covered cause of loss (i.e. by a cause not otherwise excluded from the policy). Business income includes net income (before taxes) that would have been earned by the insured and the continuing normal operating expenses incurred.
Extra Expense. This coverage is typically an additional coverage for many policies. Extra expense is defined as the expense needed for arranging for temporary quarters due to property damage at the insured’s location. This coverage also typically requires “physical damage” to the covered property.
Contingent Business Income. Coverage may be obtained for interruption of an insured’s business due to property damage suffered by a supplier or customer. This coverage typically requires direct property damage to the supplier/customer resulting from a covered cause of loss.
Civil Authority. Losses resulting from interruption of business caused by actions taken by governmental/civil authorities can be covered when access to the insured’s property is prohibited because of damage to other property.
State Legislatures Try to Respond. Pennsylvania, Louisiana, New York, Ohio, Massachusetts, and New Jersey lawmakers – and perhaps others — have introduced bills that would force insurers to retroactively cover business interruption claims due to COVID-19.
The bills generally attempt to require coverage for “loss or damage to property, which includes the loss of use and occupancy and business interruption [to include] coverage for business interruption due to global virus transmission or pandemic.” In many cases, insurers that pay out business interruption claims under these proposals would apply to their State’s insurance commissioner for reimbursement; the proposal would allow the insurance commissioner to collect a special assessment against all insurers doing business in the state.
Lawsuits Across the Country. Individual and class actions suits have been filed by businesses across the country seeking coverage for financial losses resulting from the pandemic. A New Orleans-based restaurant filed a petition in Louisiana state court seeking a declaratory judgment that their business interruption coverage would cover contamination by the coronavirus as a “direct physical loss” requiring remediation to clean the surfaces of the establishment; and, that a Civil Authority Order by the Louisiana Governor banning large gatherings in a single space and by the New Orleans Mayor restricting restaurants trigger the civil authority provision of the policy. Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, Mar. 16, 2020).
Two Miami-based restaurants filed a putative national class action complaint, seeking a declaratory judgment and alleging an anticipatory breach of contract claim. The plaintiffs seek a declaration that “the COVID-19 pandemic and the corresponding response by civil authorities to stop the spread of the outbreak triggers coverage, has caused physical property loss and damage to the insured property, provides coverage for future civil authority orders that result in future suspensions or curtailments of business operations.” El Novillo Restaurant, et al. v. Certain Underwriters at Lloyd’s, London et al., No. 1:20-cv-21525-UU (S.D. Fla. Apr. 9, 2020).
Insurance Companies Worrying about Financial Resources. On May 8, 2020, the United States Treasury Department issued a letter to members of Congress which argued that the insurance industry’s ability to serve policyholders would be threatened if Congress were to pass any of the various proposals that seek to force insurers to retroactively change business interruption policies to pay losses arising from the COVID-19 pandemic. The letter is shown below:
In the letter, the Treasury Department official writes that the proposals “fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry.” The letter tells federal lawmakers that Treasury will collaborate with insurer groups on “addressing losses attributable to the current and potential future pandemics.”
North Carolina Department of Insurance. In North Carolina, the Insurance Commissioner sent a letter to “Business Owner[s]” that said in pertinent part:
Standard business interruption policies are not designed to provide coverage for viruses, diseases, or pandemic-related losses because of the magnitude of the potential losses. Insurability requires that loss events are due to chance and that potential losses are not too heavily concentrated or catastrophic….Consider the difference…between losses suffered from a hurricane and the losses resulting from COVID-19. The hurricane losses affect certain areas on the coast…but the losses from this pandemic cover the entire nation. Therefore, mandating coverage for this size and type of loss while canceling existing exclusions in the policies would end the very existence of the business interruption insurance market….We can’t legally force insurers to cover a risk which they didn’t intend to cover and which, in some instances, was specifically excluded in the policy.
Insurance Companies’ Position. The American Property Casualty Insurance Association has stated that most insurance policies – including those with business interruption coverage – do not cover shut downs caused by COVID-19 or other viruses. Some policies specifically exclude losses resulting from a virus or bacteria. Insurers also take the position that coverage requires “physical damage to adjacent or nearby property” and the pandemic did not physically damage any property.
Legal Basis for the Insured’s Claim.
Requirement for “Physical Loss.” Courts have been split as to whether this coverage may apply where buildings have become uninhabitable or nonoperational because of contamination, including from airborne contaminants. Coronavirus can physically affect property – it can survive for days on plastic and stainless steel.
Here is a sampling of cases addressing the question of “physical loss” (note that some interpret that phrase, but not in the context of business interruption insurance) include:
Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010) (intangible harms, such as pervasive odor, mold and bacterial contamination did not constitute physical loss), aff’d sub nom. Universal Image Prod. v. Federal Ins. Co., 475 Fed. Appx. 569 (6th Cir. 2012)
Great Northern Ins. v. Benjamin Franklin Fed. S & L, 793 F. Supp. 259 (D. Or. 1990) (finding no direct physical loss from discovery of asbestos insulating material because building “remained physically intact and undamaged”), aff’d, 953 F.2d 1387 (9th Cir. 1992)
Yale University v. Cigna Ins. Co., 224 F. Supp. 2d 402 (D. Conn. 2002) (citing cases and concluding that insured suffered physical loss of or damage to property by alleging presence of asbestos and lead contamination in buildings)
Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America, Civ. No. 2:12-cv-04418 (WHW), 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014)(rejecting argument that physical loss or damage requires physical change or alteration to insured property, but can cover loss when ammonia spill incapacitated facility rendering it unfit for occupancy; the spill changed the facility’s condition to an unsatisfactory state needing repair)
In North Carolina, in the case of Harry’s Cadillac-Pontiac-GMC Truck Co. v. Motor Ins. Corp., 126 N.C. App. 698, 486 S.E.2d 249 (1997), plaintiff’s car dealership was insured by defendant-insurer for protection against loss of income resulting from the suspension of business due to property repairs. After a snowstorm struck the area, plaintiff filed a claim under its basic coverage for damage to its roof sustained as a result of the storm, and for lost profits because of the interruption of its business due to the snowstorm. The insurer paid for the damages to the roof but denied business interruption loss because the roof damage did not cause an interruption of the insured’s business. The business interruption clause provided coverage for loss of business income due to the “necessary suspension of your operations…caused by direct physical loss of or damage to property….” The period of restoration was defined to begin on the date of the direct physical loss, and ending on the date when the property is “repaired, rebuilt, or replaced….” The Court of Appeals pointed out that insurance policies are to be strictly construed against the insurance company. The Court of Appeals found for the insurance company; the insured-business did not allege that it lost business income was due to damage to the property, but instead only offered evidence that the business income was lost due to the inability to access the dealership due to the snowstorm. Under the language of the policy, coverage is only provided when loss results from damage to or destruction of business property.
A subsequent case involved a policy that provided coverage when a business loss occurred during a period of time when ingress to or egress from the property was prevented. Fountain Powerboat Indus. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 556 (E.D.N.C. 2000). In this case, Hurricane Floyd caused a dramatic fall in production at Plaintiff’s manufacturing facility. The ingress-egress clause did not require physical damage, but required only the reduction of business operations caused by “loss, damage, or destruction….” Flooding made the property inaccessible, and the route to the facility was also inaccessible. The court concluded that physical loss to the insured property was not required to trigger coverage under the ingress-egress clause.
Looking for some guidance regarding other “airborne” pathogens, an insured may look at cases where mold or contamination losses resulted from an event covered by an insurance policy. In HoneyBaked Foods, Inc. v. Affiliated FM Ins. Co., 757 F. Supp. 2d 738 (N.D. Ohio 2010), the discovery of listeria caused the plaintiff to suspend production. The policy excluded coverage for “fungus, mold, or mildew” (defined to include bacteria), but an extension of coverage provided coverage for the “direct physical loss or damage to insured property caused by or resulting from fungus, mold, or mildew when fungus, mold, or mildew is the direct result of direct physical loss or damage….” The court found that the policy would only provide coverage when the bacteria resulted from property damage and therefore would not apply in this case since there was no property damage that caused the listeria. See, also, Liristis v. Am. Family Mut. Ins. Co., 204 Ariz. 140, 61 P.3d 22, 25 (Ariz. App. Ct. 2002) (“[M]old damage caused by a covered event is covered . . . . On the other hand, losses caused by mold may be excluded.”); Simonetti v. Selective Ins. Co., 372 N.J. Super. 421, 859 A.2d 694, 699 (N.J. 2004) (mold damage covered despite policy exclusion for “loss caused by mold” where plaintiff could prove mold resulted from rainstorm, a covered peril); Graff v. Allstate Ins. Co., 113 Wn. App. 799, 54 P.3d 1266, 1268-69 (Wash. App. Ct. 2002) (contamination exclusion did not bar coverage where vandalism, a covered peril, resulted in the contamination).
Civil Authority closure. A South Carolina case,Kelaher, Connell & Conner, P.C. v. Auto-Owners Ins. Co., No. 4:19-cv-00693-SAL, 2020 U.S. Dist. LEXIS 31081 (D.S.C. Feb. 24, 2020), involved a law firm that closed because of a mandatory evacuation ordered by the Governor of South Carolina because of the threat of Hurricane Florence and subsequently made a claim for business interruption loss for the days that it closed during the evacuation order. The policy contained an extension of coverage for actual loss sustained as a direct result of an interruption of business “because access to the … business premises is prohibited by order of civil authority because of damage or destruction of property adjacent to the … premises….” The court found that the policy unambiguously required a link between the civil authority order and property damage. Therefore, the policy would not cover this loss since there was no evidence that the civil authority issued the order because of the existence of property damage or destruction at the time of the order (but, instead, issued the evacuation order because of an expectation of property damage).
The court summarized other cases involving civil authority orders:
Dickie Brennan & Co., Inc. v. Lexington Insurance Co., 636 F.3d 683 (5th Cir. 2011)(noting the “general rule” that “[c]ivil authority coverage is intended to apply to situations where access to an insured’s property is prevented or prohibited by an order of civil authority issued as a direct result of physical damage to other premises in the proximity of the insured’s property”).
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, LLP v. Chubb Corp., No. 09-6057, 2010 U.S. Dist. LEXIS 109055, 2010 WL 4026375 (E.D. La. Oct. 12, 2010)(provision allowed recovery of business income loss incurred “due to the actual impairment of [ ] operations, directly caused by the prohibition of access to [the] premises by a civil authority” and further provided that “prohibition of access by a civil authority must be the direct result of direct physical loss or damage to property away from such premises[.];court found that the provision “does not insure against impairment of operations that occurs simply because a civil authority prohibits access.”)
United Air Lines, Inc. v. Insurance Co. of Pa., 439 F.3d 128 (2d Cir. 2006)(denial of coverage to airline when civil authority order halted flights due to 9/11 terrorist attacks; concluding airport was not shut down “as a direct result of damage to” the Pentagon);
Allen Park Theatre Co., Inc. v. Michigan Millers Mutual Insurance Co., 48 Mich. App. 199, 210 N.W.2d 402 (Mich. Ct. App. 1973)(following the death of Dr. Martin Luther King, Jr., and several riots around Detroit, the Governor of Michigan issued an executive order, closing all “places of amusement” until further notice; theatre owner sought coverage under the civil authority order provision that allowed coverage of actual loss incurred, “[w]hen as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority”, the court affirmed the trial court’s award to plaintiff).
Conclusion. The question about coverage for a COVID-19 business interruption claim will primarily be based upon the language of the policy. If the policy is not clear, there is legal precedent and moral authority that appears to dictate that an insurer should be required to pay a claim.
If you would like to discuss issues regarding business interruption insurance coverage on your business, please contact Bert Andia at 336.273.1600 or [email protected]