Efforts by the business community and government to protect employees and the public from the COVID-19 virus have led to a tsunami of business closures and massive losses in income, estimated in the billions of dollars in the U.S. alone. It remains to be seen whether business interruption insurance coverage, designed to cover for a business’ loss of income under certain circumstances that impair or suspend its operations, will provide relief to businesses impacted by COVID-19. Given insurers expectation that a wave of business interruption claim filings is coming, these policies are now under the microscope.
What Is Business Interruption Insurance?
Business interruption coverage is designed to provide businesses with protection for loss of income resulting from an event that directly or indirectly affects a business’ flow of income. Business interruption insurance is a packaged product, commonly offered as part of commercial property insurance policies. Typical business interruption coverage is triggered by a physical loss or damage to an insureds property that impairs that business’ stream of income and is often paired with extra expense insurance to cover unexpected costs that are necessary to continue operations in the event of a covered loss. For businesses reliant upon a supply chain, contingent business interruption coverage provides income protection to businesses that lose profits as a result of an interruption of business at the premises of a customer or supplier.
Business interruption coverage is generally triggered when the policyholder, customer or supplier sustains “direct physical loss of or damage to property”, such as damage caused by fires, explosions, hurricanes and other natural disasters. However, it is questionable whether a pandemic virus, like COVID-19, is a “direct physical loss” which triggers coverage. Given the devastating impact of COVID-19 on today’s increasingly interconnected and globalized businesses and supply chains around the globe, we should expect an increase in claims and coverage litigation are coming with policyholders arguing that viral contamination amounts to “direct physical loss”, and that government mandated closures or preventative measures render their property uninhabitable, thus triggering coverage.
In the first-known lawsuit touching on these issues, a New Orleans restaurant filed a petition seeking a declaration that its “all risk” commercial policy should cover its losses which stem from the state-mandated closure resulting from the COVID-19 outbreak. In its filing, the restaurant argues that the virus can remain on hard surfaces for days, the “direct physical loss” requirement is satisfied thus triggering coverage. This restaurant owner, and other business owners suffering losses of income, appear to face an uphill battle.
Business interruption claims are highly complex and raise a myriad of both coverage and claims issues ripe for litigation. Aside from the question of whether standard business interruption policy language covers a pandemic, courts are expected to determine the applicability of specific and less-than-specific policy exclusions and coverage under ‘civil authority’ provisions. Is there potential for coverage under pollution legal liability policies? Even if a policyholder can overcome coverage hurdles, fact-based questions await. Is actual contamination of a premises required to trigger coverage? What proof is needed to prove actual contamination? Is infection by an employee sufficient? Does an insured have access to reliable methods of testing? Can insureds claim an impossibility exception based on unavailability of reliable testing? How long does the virus last on surfaces? If contamination is proven, how long is a property considered ‘uninhabitable’? What is the duty of the insured to mitigate actual contamination? How are economic losses measured? What is the duty of an insured to mitigate economic losses through remote work, utilizing alternative supplier, etc.?
A Lot of Stake: Potential Costs
According to an Allianz report, between 2013 and 2018 business interruption claims totaled over $66 billion, with the average claim valued at more than $3.4M, and is approximately 39% greater than the average claim value for corresponding direct property damage ($2.4M). Analysis of claims data has shown a general shift towards business interruption claims. This trend poses problems for insurers, as BI claims are typically more complex and take longer to resolve.
Insurers Will Push Back
The first line of defense for insurers is specific exclusions. Following the SARS outbreak in 2004, insurers were forced to cover business losses arising from the outbreak. In response, insurers began to write specific exclusions for “loss or damage caused by or resulting from a virus… that induces or is capable of inducing physical distress, illness or disease.” Even where a policy does not specifically exclude communicable diseases, insurers are likely point to analogous cases reviewing typical business interruption policy language. For example, a 6th Circuit Court of Appeals case found that bacterial and mold contamination was not “direct physical loss” under the language of the policy.
Given the widespread government action in response to COVID-19, policyholders are expected to seek coverage under ‘civil authority’ provisions common in business interruption policies. Civil authority provisions provide protection for lost income arising from the suspension of business operations due to an government mandates, such as curfews, evacuations and other restrictions on access to places of business by customers, employees and owners. An example of common policy language provides coverage only when “an action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any covered cause of loss.” (emphasis added).
However, based on prior precedent in analogous events, policyholders may not be able to look to such coverage for relief. Again, the question of whether COVID-19 contamination is a “direct physical loss” remains. Additionally, business interruption coverage may not apply where damage to property has not actually occurred and a government’s closure mandate is taken in anticipation of, and to prevent, possible damage in the future. There are numerous examples in which courts have tossed out business interruption claims resulting from the 9/11 terrorist attacks, which led to a nationwide restriction of air travel for several days, and from Hurricanes Katrina and Rita, both of which led to mandatory evacuation orders issued in advance of the hurricane’s landfall and remaining in effect for a time thereafter.
Will Government Step In?
Policyholders best opportunity to recoup their losses may be to rely on government action and pressure.
A bipartisan group of Congressional lawmakers have already begun to pressure insurers to cover business interruption losses arising from COVID-19. In Massachusetts, New Jersey, Ohio and other states legislatures, bills have been filed to retroactive require coverage for COVID-19 losses under general terms of such policies in certain circumstances.
Insurance executives responded with a statement that business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. A group of state insurance regulators also issued a warning that forcing insurance companies to pay the massive number of business interruption claims could threaten the solvency of the insurance sector and further threatening an already-strained economy.
Recognizing the potential impact of government intervention, the insurance industry has discussed a proposal for a federal program directing money to businesses, similar to the September 11th Victim Compensation Fund, as an alternative to a massive wave of claims. This proposal, insurance executives argue, is a more efficient means of providing businesses with immediate liquidity rather than going through a lengthy and complex claims process.
As of this writing, Congress passed a $2 trillion stimulus package which is awaiting the President’s signature. This relief package includes $350 billion for small business owners in the form of “forgivable” loans, effectively turning them into grants. These “business interruption” loans provide relief to small business owners including payroll obligations to ensure employees are retained, utilities payments, rent, mortgage interest and other operating costs and obligations. However, while the relief package is touted as including “business interruption” relief, it appears this relief does not include protection to businesses loss of income. Without action by the federal government, states legislatures are beginning to take up this issue on their own, creating the potential for a tangled web of laws and regulations for the insurance industry to follow on a state-by-state basis. Given this, expect the insurance industry to apply pressure to the federal government to take action and provide clarity.
If you’d like to learn more about how CMBG3 can help you to navigate these complex coverage and claims issues, please contact Eric Robbie at 617-279-8209 or by email.