Will Insurance Provide Coverage for Business Losses Caused by Coronavirus?
The Department of Health and Human Services (HHS) declared a public health emergency due to the continued spread of COVID-19 (coronavirus) on January 31, 2020, and the World Health Organization (WHO) declared the outbreak an international pandemic on March 11, 2020. As a consequence of the recent governmental travel advisories/restrictions and increasing government action restricting “normal” life for the indefinite future, many businesses will experience significant disruptions to their economic activities. Coronavirus is disrupting the global supply chains and trade, businesses are losing income and incurring additional expense a result of this emergent and evolving situation.
These recent disruptions can cause immediate liquidity issues and adversely impacting businesses. Most businesses carry some form of business interruption coverage, which can replace business income lost in a disaster, such as a fire or other natural catastrophe. Business interruption insurance is not sold as a separate policy, but is either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider. We expect an increase in insurance claims against insurance companies related to coronavirus caused business losses and provide the following general guidance in evaluating insurance policies for potential coverage to offset the business interruption associated with the coronavirus.
BUSINESS INTERRUPTION COVERAGE
For businesses with business interruption insurance, recovery often depends on a series of factors:
- The property must sustain damage.
- The property must be insured.
- The peril itself must be insured and not specifically excluded.
- The loss must be quantifiable.
As reflected in item number 1 above, business interruption coverage is typically triggered when the policy holder sustains “direct physical loss of or damage to insured property by a covered cause of loss.” In the event of a claim for coronavirus-related business interruption, certain insurance carriers may dispute whether this “physical loss” requirement has been met. Courts across the country have not reached consensus regarding when insured property has suffered a “physical loss” sufficient to trigger insurance coverage under a business interruption policy. Courts in a number of U.S. jurisdictions have determined that contamination and other incidents that render property uninhabitable or otherwise unfit for its intended use constitutes a “physical loss” sufficient to trigger business interruption coverage. In the context of coronavirus, the requirement for physical loss or damage will create difficult evidentiary issues for many insureds because this coverage generally requires that the virus physically damage or contaminate the insured’s property. Some U.S. Courts generally hold that policies requiring “direct physical loss or damage” provide no coverage in absence of “actual” or “physical” damage. Under this precedent, a mere loss of use, or lost access to property would not trigger such coverage. It is important to closely examine the policy language and the relevant facts to determine the coverage available (or not) within existing policies.
CONTINGENT BUSINESS INTERRUPTION COVERAGE
Contingent business interruption coverage is a specialized form of business interruption coverage that provides insurance for losses resulting from disruptions to a business insured’s customers or suppliers, as long as the underlying cause of damage to the customer or supplier is of the type covered by the insured business owner’s own property policy. Once again, courts across the country have not reached consensus regarding when a customer or supplier’s property has suffered a “physical loss” sufficient to trigger insurance coverage under a business interruption policy. In the context of an insured claiming contingent business interruption coverage related to the disruption to the business of a third party (either the insured’s customer or supplier), the requirement for physical loss or damage will create even more difficult evidentiary issues for many insureds because they may not have first-hand knowledge of or access to the evidence establishing that that the virus physically damaged or contaminated the property of a third party.
CIVIL AUTHORITY COVERAGE
Commercial property policies may also include coverage for losses caused by a civil authority ordering the forced closure of property. Like business interruption coverage, the insuring policy typically applies when an insured is unable to access its property due to a government order as a result of physical damage to adjacent or nearby property. If the insurance policy requires physical damage to adjacent or nearby property and the insured is unable to establish a causal connection between the government order and that physical damage, the policy will likely not provide for the claim. Once again, it is important to review the applicable policy and marshal the appropriate facts to determine the potential for coverage.
VIRUS AND DISEASE
Some commercial insurance policies include viruses and disease as an insured peril by endorsement. Although that type of coverage typically will not require a direct physical loss, like business interruption or civil authority coverage, it will specify only certain diseases triggering coverage. Once again, it is important to carefully read the policy language since some policies require that only the actual presence of the disease trigger coverage, and not the potential or suspected presence that currently motivates so many people to isolate during these turbulent times.
In response to the current pandemic, ISO developed two new endorsement forms that are now available — “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus” and “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting some Modes of Public Transportation.”[1] These forms were not filed with any states and are not being added to ISO’s form portfolio but would provide coverage for actual loss of business income and extra expenses caused by a government order closing the insured’s property or from government suspension of some modes of public transportation.
Ultimately, these are uncertain and turbulent times in a myriad of different ways, including whether businesses will be able to successfully offset some of their ongoing economic losses with existing insurance coverage. The terms, conditions, and exclusions of the applicable insurance policy along with the circumstances of the losses will dictate whether insurance companies are responsible for these claims. Should you have any questions regarding this or other insurance coverage issues, please do not hesitate to contact any of the coverage attorneys at Ford Richardson.
[1] Christine G. Barlow, Coronavirus spurs ISO to provide business interruption endorsement, PropertyCasualty360, Feb. 10, 2020, https://www.propertycasualty360.com/2020/02/10/iso-provides-business-interruption-endorsement-in-response-to-coronavirus-414-171888/ (last visited March 20, 2020).______________________________________________________________________________________________________________
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