Many of our clients have recently asked whether they should bring claims against their insurance carriers in order to recover business losses caused by the COVID-19 pandemic. Faced with pronouncements by their insurance carriers that they do not plan on covering coronavirus-related losses, these businesses are left wondering whether legal action is the correct course. While the answer to that depends on the particular facts and circumstances, understanding the type of coverage that may cover these business losses, as well as any applicable exclusions, is critical in assessing the likelihood of lodging a successful suit.
What Type of Insurance Could Cover Losses Caused by COVID-19?
Two principal forms of coverage, found in most commercial insurance policies, may cover business losses associated with the COVID-19 pandemic: (a) Business Interruption Coverage; and (b) Civil Authority Coverage.
Business Interruption Coverage allows a business to recover losses sustained as a result of direct physical loss or damage that prevents the company from operating its business. Civil Authority Coverage allows a business to recover losses sustained as a result of an order from a civil authority preventing access to an insured’s property typically as a result of direct physical loss or damage to an adjacent property.
If your business has a policy containing coverage in one or more of these areas, you need to review the actual policy language to determine the viability of your claim.
What Does Business Loss Insurance Cover?
Business interruption coverage typically covers lost revenue and certain fixed expenses, such as rent, employee wages, and taxes. Coverage may also include certain extra expenses that a business may incur in excess of normal operating expenses, i.e., temporary office space, computer equipment, overtime wages, which are necessary to mitigate damages during a period of restoration. These latter expenses may have less relevance for COVID-19 losses since many businesses cannot operate in any form or fashion at present.
What Are the Coverage Requirements Associated with Business Loss Insurance?
A. The Direct Physical Damage or Loss of Property Requirement
Almost every business loss insurance policy, whether based on business interruption or civil authority coverage, contains a requirement that the business losses stem or flow from “direct physical damage” or “loss to property.” Accordingly, the business must be able to connect the suspension of operations or other business loss to one of these conditions.
The leading argument on behalf of business owners is that the presence of the coronavirus on or around the business properties has rendered the premises unsafe and unfit for their intended use and, therefore, caused physical property damage or loss as required by the applicable policy. This argument is strengthened by the fact that most states have issued stay-at-home or lockdown orders in response to these physical conditions.
Many insurers, however, have predictably taken the position that the presence of an infectious agent or communicable disease generally does not constitute physical loss or damage to the property, and that physical loss or damage to the property typically means that the physical structure or physical characteristics of the property have been altered by a covered peril. At least one carrier has explicitly noted that loss of use or diminished value of property does not constitute physical loss or damage.
Ultimately, the courts will determine which of these conflicting positions will prevail. Most insurance policies do not define the phrase “direct physical loss or damage” so the courts will have to analyze the phrase based on its plain meaning and relevant case law. New Jersey may be a favorable venue for business owners presenting their business loss claims since the Third Circuit (and New Jersey district courts) have been more flexible in their interpretation of “direct physical loss or damage.” Of particular import to the COVID-19 insurance claims, these courts have held that unseen contaminants, such as asbestos and ammonia -- which do not alter a building’s physical structure -- can cause “direct physical loss or damage” when such contaminants render a building “useless or uninhabitable” or “unfit for normal human occupancy.” Since COVID-19 contaminants can linger on surfaces for days, the contaminants themselves may amount to physical loss or damage.
This is one of the arguments advocated by Fiorino’s, a local restaurant in Summit, New Jersey, in its class action against Chubb. Specifically, Fiorino alleges, among other things, that COVID-19 contaminants caused direct physical loss and damage, thereby, triggering policy coverage.
B. Virus Exclusions
In addition to determining whether policy coverage has been triggered, policies must be reviewed carefully for any relevant exclusions. Notably, following the SARS outbreak in and around 2003, many insurers began including an exclusion for viruses and bacteria. The typical exclusion reads as follows: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness, or disease.”
Accordingly, as with all coverage claims, the ability to recover against carriers will rest primarily on the underlying circumstances, the specific language contained in the insurance policy at issue, as well as the case law interpreting the applicable policy provisions. However, it is important for business owners to review their policies, to gather information regarding their damages, and to evaluate the strength of their claims as soon as possible. Failure to do so may impact the viability of any potential claim and may even result in a waiver of rights.
Please do not hesitate to reach out to Karen Stringer or Christian Jensen in OlenderFeldman’s Litigation Department for an in-depth assessment of your claim and a recommended strategy with your carrier.