Business Interruption Coverage and COVID-19
Businesses racking up losses from the emergence of COVID-19 and related state orders that impact the operation of “non-essential” businesses have been reviewing their insurance policies for the availability of insurance coverage for business interruption losses as a potential source of relief. Most businesses are unlikely to find that coverage extends to COVID-19-related business interruption losses. However, coverage is dependent on the precise policy wording and businesses are encouraged to check with their agent or broker about the potential for coverage.
Direct Physical Injury or Loss Requirement
Most business policies provide coverage for “direct physical injury or loss” of insured real property or business personal property. This requirement presents the most significant obstacle to coverage as most COVID-19 claims for business interruption coverage will not involve direct physical injury to the insured’s property.
Some courts have found that the presence of contaminants, such as friable asbestos on building surfaces, constitute physical injury. But the law is not well-developed on this issue. For example, one court observed: “The recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable…. The mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage.” Given the reported limited lifespan of the virus on inanimate surfaces – hours or days – it is debatable whether the temporary presence of virus would constitute physical damage or loss.
Insurers will take the position that the threat or prospect of property damage is not sufficient to trigger coverage. Courts are likely to agree.
Communicable Disease Exclusion
A second obstacle to coverage is the presence of a virus or communicable disease exclusion. The Insurance Services Office (ISO) first introduced a standard form communicable disease exclusion in 2006 following the emergence of the SARS virus. Your policy may contain such an exclusion. However, the exclusion is often applicable to the liability coverage only and not to the property coverage. The absence of such an exclusion does not mean there is coverage. The requirement of direct physical loss or damage must still be satisfied.
Civil Authority Coverage
Many business policies provide Civil Authority Coverage, which may apply when an order of civil authority prohibits or prevents access to an insured business’ property. Coverage depends on meeting specific requirements, defined within the policy. A common Civil Authority Clause may provide, for example:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Civil Authority Coverage for Business Income will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premises and will apply for a period of up to four consecutive weeks from the date on which such coverage began.
Civil Authority Coverage for Extra Expense will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end:
(1) Four consecutive weeks after the date of that action; or
(2) When your Civil Authority Coverage for Business Income ends; whichever is later.
This policy language raises a number of issues that complicate access to coverage. For example, the coverage under the provision applies when there has been damage to third-party property that results in prohibition of access by a civil authority “as a result of the damage.” This language has been construed to mean that coverage is not available if the order by civil authorities is intended to prevent future damage. Thus, in the wake of the riots following the Rodney King beating, one court held that civil authority coverage was not available to a business owner for losses sustained during a subsequent curfew because the curfew was intended to prevent future damage and was not imposed to address past damage.
A recently filed lawsuit in Louisiana state court seeks coverage for COVID-19-related losses under a policy containing civil authority coverage and no communicable disease exclusion. We will monitor this case as it progresses.
“Loss of Attraction” and “Dependent Property” Coverage
Insurers offer specialized manuscript endorsements that may provide some coverage. For example, the Lloyd’s market offers “loss of attraction” coverage that is intended to cover business losses if some other facility, such as an airport, is damaged, thereby resulting in reduction of income as customers are prevented from using the insured property. A similar endorsement entitled “Business Income from Dependent Properties” is available in the domestic market. Businesses should check with their broker or agent to see if the policy includes one of these endorsements or an endorsement specifically covering losses arising from communicable diseases.