COVID-19 Interrupts Your Business: Will Your Business Interruption Coverage Apply?

Author: Louis R. Barella

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May 11, 2020 9:00am

Overview of Business interruption Insurance– Virus Exclusions

As businesses in California remain closed due to the coronavirus pandemic, their owners have looked to recoup their losses by turning to their insurance policies.  The American Property Casualty Insurance Association estimated nationwide virus-related losses to businesses with 100 or fewer employees would amount to between $220 billion and $383 billion a month. (S.F. Chronicle, April 28, 2020).

About one-third of U.S. Businesses have “business interruption” insurance, which is intended to cover losses due to an event that forces companies to suspend or stop operations. Many policies also have “civil authority” clauses that cover losses when a governmental agency stops a business from operating. A common example would be where a fire causes damages to a restaurant and leads the fire marshal to close it down. (Washington Post, April 2, 2020).

While COVID-19 has clearly interrupted business, it is critical to review the specific policy language as there may be an express policy exclusion, such as for all loss arising out of or related to a “contagious illness”.

“‘[I]nterpretation of an insurance policy is a question of law.’ (Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 18, 44 Cal.Rptr.2d 370, 900 P.2d 619 (Waller).) ‘While insurance contracts have special features, they are still contracts to which the ordinary rules of contractual interpretation apply.’ (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545 (Bank of the West).) Thus, ‘the mutual intention of the parties at the time the contract is formed governs interpretation.’ (AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 821, 274 Cal.Rptr. 820, 799 P.2d 1253 (AIU Ins.).) If possible, the Court infers this intent solely from the written provisions of the insurance policy. (See id. at p. 822, 274 Cal.Rptr. 820, 799 P.2d 1253.) If the policy language ‘is clear and explicit, it governs.’ (Bank of the West, supra, 2 Cal.4th at p. 1264, 10 Cal.Rptr.2d 538, 833 P.2d 545.)” (Palmer v. Truck Ins. Exchange (1999) 21 Cal.4th 1109, 1115, 90 Cal.Rptr.2d 647, 988 P.2d 568.)

Accordingly, a business whose policy expressly covers viral contamination or a pandemic is more likely to succeed on a claim for coverage than a business whose policy expressly excludes coverage for viruses.  (The rationale is the policies expressly exclude insurance for harm caused by viruses, in consideration for lower premiums.)  Given the variations in policies, whether a particular policy will provide coverage will depend upon the actual language of the policy and the specific circumstances giving rise to the claim.  Businesses should therefore review their policies to determine their rights.

Business interruption Insurance

Business interruption insurance typically compensates a business for lost revenue and other expenses if a fire or other property insurance claim forces a business to close its doors temporarily, normally after a disaster. (It is normally an optional coverage that may be purchased as part of a comprehensive multi-peril commercial policy.)  Business interruption insurance policies typically cover loss of income, rental value, or both. In general, business interruption insurance policies require a direct physical loss or damage to a property caused by a covered peril (i.e. fire, water damage, etc.) in order for business interruption coverage to apply.

Business Interruption Insurance– Virus Exclusions

Most companies will probably find it difficult to get an insurance payout because of policy changes made after the 2002-2003 SARS outbreak, according to insurance experts and regulators. SARS is now seen as foreshadowing the current pandemic, as it led to millions of dollars in business-interruption insurance claims. As a result of SARS, many insurers added exclusions to standard commercial policies for losses caused by viruses or bacteria. Now, the added policy language will potentially allow insurance companies to avoid paying billions of dollars in business-interruption losses because of the Covid-19 pandemic.

A typical exclusion for loss due to contamination by virus and similar perils, such as pandemics, provides:

We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that includes or is capable of inducing physical distress, illness or disease.

Currently, some state legislators, including lawmakers in New Jersey, New York, Ohio, Louisiana and Pennsylvania, have proposed legislation that would require insurers to provide some coverage for losses stemming from COVID-19.  On April 14, 2020, Rep. Mike Thompson (CA-05) introduced a bill to the House of Representatives of the United States to ensure businesses in the future that purchase interruption insurance will not have their claims denied because of major events, such as the Coronavirus pandemic, public safety power shutoffs or evacuations. (H.R. 6494) As of today, the bill is at the House Committee on Financial Services.

Business Interruption Insurance– No Virus Exclusions

In the absence of an applicable exclusion, many businesses are making claims and filing lawsuits on the premise that losses resulting from COVID-19, if not expressly excluded, are thereby covered.  Although there are many clauses in use today, a typical business income insurance clause reads as follows:

We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.

Therefore, the primary issue in triggering the policy is whether the insured’s loss as a result of the coronavirus pandemic can be characterized as “physical loss or damage.”  The issue pertaining to coverage for COVID-19-related property claims will be whether the presence or threat of the virus on insured property satisfies this requirement, i.e., do “loss” and “damage” have different meanings?, Is “physical loss” satisfied by an inability to access property?  As to the term “damage”, what property must be damaged? Does a virus that contaminates and survives on surfaces cause “physical damage,” and if so how can this be established?

The Insurance Commissioner for the State of California is looking into coverage issues

Ricardo Lara, the Insurance Commissioner for the State of California, posted on the State of California website pertaining to business interruption insurance and other issues affecting California small businesses.  In pertinent part, Mr. Lara stated, “Most commercial policies have exclusions for loss due to contamination by virus and similar perils. You should check your policy for a specific exclusion for viral/bacterial contamination or an incident triggered by an epidemic/pandemic, which means insurance would not cover losses related to COVID-19. Also, any claim would still need to be related to your property damage for coverage to be triggered. Conversely, check to see if you have a special endorsement for virus and pandemic although very few, if any, policies are known to have these.”

Commissioner Lara sent a letter to Speaker Nancy Pelosi and California’s Congressional delegation alerting them to the scale of the business interruption crisis and calling on them to take immediate action now to protect these businesses and their workers.

In order to inform state policymakers working to protect small businesses, the Department of Insurance is conducting a mandatory request to insurance companies for data about the number and type of small businesses with business interruption coverage and the scale of both covered and uninsured business losses.

Conclusion

Plaintiff lawyers will be fighting to establish their clients’ business interruption policy should cover losses due to the business interruption caused by COVID-19.   The California Department of Insurance is working with federal authorities and state and local leaders to help businesses who are losing income due to government actions and business closures as a result of the COVID-19 pandemic.  As the above illustrates, insurance companies need to prepare for an onslaught of claims, lawsuits and legislation, as the coronavirus crisis is affecting millions of business owners and workers.

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