The outbreak of the coronavirus (COVID-19) has stopped or stalled thousands of American business in its wake. The economic results of the pandemic are only starting to be realized, and the National State of Emergency and related shuttering of many businesses will only add fuel to this fire. As a result, many businesses are looking for financial relief by virtue of their commercial property insurance policies. The purpose of this article is to assist insureds in understanding how insurance policies can potentially assist them in dealing with the virus’ effect on their business.
- What is Business Interruption Coverage?
First Party commercial property insurance policies often contain clauses insuring against any financial losses sustained by the insured business if a “covered loss” causes the business to close all or a portion of the business, or if the normal operation of the business is otherwise interrupted by the “covered loss.” Contingent business interruption coverage is for loss resulting from damage to others such as suppliers. Civil Authority coverage is loss caused when civil authority prohibits access to the premises.
It is important to understand that Business Interruption Coverage (BIC) is not contained in all policies, and that it is usually limited by either a dollar figure or a duration of time. Any BIC claim will usually be evaluated by comparing a businesses’ profit and losses following a loss to the profits and losses when the business was operating at full capacity. Accordingly new businesses or businesses whose profits and losses have dramatically changed in the past year likely will not be able to show a viable business interruption loss based simply on past tax returns and financial documents, and may need the assistance of a forensic accountant to prove their loss.
2. All Risk and Designated Peril Policies
After determining whether or not a commercial policy contains BIC coverage, the next step would be to determine what constitutes a “covered loss” under the policy. There are generally two types of property insurance policies: all risk policies cover any “direct physical loss” to the property unless specifically excluded under the policy whereas designated peril policies list specific perils (i.e. fire, hail, wind) that are covered. If an insured has a designated peril policy, there is only BIC coverage for those “covered losses” or “covered perils” designated in the policy. In the context of the coronavirus outbreak, an insured should look for designated perils such as “contamination” or “spread of infectious disease or virus.” A peril listed a “traumatic event” may also broadly provide coverage unless that peril is limited in the policy by its definition. Under a designated peril policy, there must be some listed peril, which could be construed as providing coverage for the spread of an infectious disease or virus, in order for there to be any BIC coverage for this event.
3. Direct Physical Loss?
Under either a designated peril or all risk policy, there must a direct physical loss in order for the policy to provide coverage for the loss. This means that a business which shuts down because its employees refuse to come to work likely has not suffered a direct physical loss. Conversely, a business which has had to shut down because the business location has become physically contaminated by the virus likely does have a direct physical loss.
An insured should be mindful of the fact that while many policies require a direct physical loss or occurrence to the insured property, others do not. Accordingly, if the policy does not require the physical loss or occurrence to occur on the premises of the insured property, a business which has been forced to close by civil authority because a neighboring property was infected with COVID-19 may have a covered BIC loss.
Some executive orders issued by civil authorities closing businesses have specifically referenced property damage from COVID-19 in their closure orders. Such language may help to satisfy the”direct physical” loss requirement.
Even if the commercial property policy provides an initial grant of coverage for losses related to infectious disease and/or viruses, and the insured has sustained a direct physical loss as a result, the policy may also contain language which excludes losses related to infectious disease or viruses, or otherwise limits coverage to only certain types of claims.
The following is an example of exclusionary language that would broadly attempt to exclude most claims brought under a commercial property insurance policy for losses related to the coronavirus (COVID-19):
The additional exclusion set forth below applies to all coverages, coverage extensions, supplemental coverages, optional coverages, and endorsements that are provided by the policy to which this endorsement is attached, including, but not limited to, those that provide coverage for property, earnings, extra expense, or interruption by civil authority.
1. The following exclusion is added under Perils Excluded, item 1:
Virus or Bacteria —
“We” do not pay for loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.
This exclusion applies to, but is not limited to, any loss, cost, or expense as a result of:
a. any contamination by any virus, bacterium, or other microorganism; or
b. any denial of access to property because of any virus, bacterium, or other microorganism.
2. Superseded Exclusions — The Virus or Bacteria exclusion set forth by this endorsement supersedes the “terms” of any other exclusions referring to “pollutants” or to contamination with respect to any loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.
As is always the case, when determining whether you might have coverage, the insurance policy language will control. Be sure to review it with your broker, agent or insurance coverage attorney to be sure you fully understand potential coverages and exclusions.
5. Legislative Action
A number of bills are being proposed in states to try to obtain business interruption coverage based on closures due to COVID-19. Some seek to include such coverage retroactively which will be resisted by insurers and others seek to expand policy coverage based on existing policy language.
6. Third Party Liability for Business Loss
No doubt some businesses will suffer loss due to another party’s fault or negligence. General Liability policies often respond to damage claims by third parties caused by their insured’s negligent conduct. Where a business suffers loss because another party failed to follow appropriate safety procedures a General Liability policy might afford coverage. However, General Liability policies may also contain exclusions for liability resulting from pollutants, irritants or contaminants. In some instances coverage has been found where the contaminant did not emanate from the environment. Third party liability coverage may also exist in other liability policies such as Directors and Offices and Professional Liability. As is always the case the duty of an insurance company to provide it’s insured with a defense is always broader than the duty to actually cover the loss.