Business Interruption Coverage: Recent Developments

The current COVID-19 pandemic has caused widespread closure of non-essential businesses, the financial and economic effects of which are already being felt across the country. Many business owners are looking to their business interruption coverage to mitigate the financial impact this crisis is having.

Business interruption coverage insures against financial loss resulting from the closure of a business caused by a covered loss. In order to trigger coverage, however, there must be a direct physical loss to the insured property, such as damage resulting from a hurricane that forces a business to close. Insurers are taking the position that closures resulting from COVID-19, even those mandated by state and local governments, are not covered because there is no direct physical loss to property.  Because forced closures of this magnitude are unprecedented, insurers and insureds alike are looking to the courts and to pending legislation to determine whether business owners will be compensated for losses resulting from government-mandated shutdowns and COVID-19 damages. 

Recently, the Pennsylvania Supreme Court weighed in and its decision could have a significant impact on business interruption claims throughout the country. In Friends of DeVito, et al v. Tom Wolf, Governor, et al, (Case No. 2020), petitioners challenged the Governor’s authority to issue an Executive Order prohibiting non-life sustaining businesses from operating physical locations. The Court ruled in favor of the State, holding that the Governor has broad authority to issue orders in an effort to combat public health emergencies. That authority, the Court held, allows the Governor to shutdown certain businesses in order to protect the public from damage, injury, and loss of life and property resulting from disasters. The Court ruled that COVID-19 is “by all definitions, a natural disaster…” as it involves “substantial damage to property, hardship, suffering or possible loss of life.”

By holding that COVID-19 causes damage to property, not unlike a hurricane or other natural disaster, the Court has given business owners making business interruption claims an opportunity to overcome the direct physical loss requirement necessary to trigger business interruption coverage. Significantly, the Court drew no distinction between a business closed because of the presence of the virus and a business closed solely because of the Executive Order. Because COVID-19 is spread person-to-person and can live on surfaces for up to four days, the Court held that any business where two or more people congregate is in the disaster area, regardless of whether the virus is actually present in the specific location.

While DeVito did not involve an insurance claim, the Court’s holding could have a profound impact on business owners with denied business interruption claims and will likely be cited in the litigation already pending in many states. For instance, in Oklahoma, the Chickasaw and Choctaw Tribal Nations have brought suit against their insurer, arguing that COVID-19 has caused a direct physical loss resulting in business interruption. If, under DeVito, the COVID-19 pandemic constitutes a natural disaster that causes damage to property even where the virus is not present, insureds like the Chickasaw and Choctaw Tribal Nations will have a stronger case against insurers denying coverage for losses resulting from COVID-19 related mandatory closures.

Insureds may also find help in pending legislation which aims to address coverage related to COVID-19. In New York, for example, Draft Assembly Bill A10226 would require property insurers to cover certain business interruption losses stemming from the COVID-19 pandemic. It would have immediate retroactive affect and apply to property policies containing business interruption coverage in force on March 7, 2020, the date Governor Cuomo declared a state of emergency. This bill would effectively void any argument as to whether COVID-19 triggers the direct physical loss requirement and would negate virus exclusions contained in such policies. Many other states, including New Jersey, Massachusetts, and Ohio, are considering similar legislation which would require property insurance companies to pay COVID-19 related business interruption claims.

If your business has suffered a business interruption loss and you believe you have coverage, there are several steps you can take now. After a careful review of your policy, you should promptly put your insurance carrier on notice. Be sure to thoroughly document your loss and the circumstances surrounding any damages you have relative to COVID-19. This may include gathering documentation such as annual profit and loss statements; tax returns; monthly bank statements; inventory and payroll records; records that establish costs due to COVID-19 such as receipts, advertising costs, and timesheets; as well as any forecasts or projections that existed before the pandemic. As an insured, you have a duty to mitigate your losses so, if possible, consider alternative means of operating. For example, a restaurant should consider delivery or take-out only, other businesses might consider providing services remotely via video conferencing. Each of these steps could assist you in pursuing your business interruption claim. (See our blog – COVID-19 Business Interruption/Extra Expense Coverage Check List)

The foregoing information and advice are intended to provide a brief overview of business interruption coverage and general guidelines in these uncertain times. Because every policy is unique, a thorough policy review may be appropriate. If you believe you have a covered business interruption loss and have been denied compensation for your damages, we are available to conduct a policy review and to discuss the circumstances of your loss.

A copy of the DeVito ruling can be found here. On May 6, 2020, the United States Supreme Court denied the petitioners’ Writ of Certiorari seeking review and reversal of the PA Supreme Court’s decision. A copy of New York’s Draft Assembly Bill A10226 can be found here.

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