Business Interruption Caused by COVID 19: Is it Covered?
As economic losses from the COVID-19 pandemic mount, businesses and
employers of all types-restaurants, manufacturers, distributors, event
sponsors, educational institutions, health care facilities, just to name a few, are
asking: Do I have insurance coverage for my losses? This Alert provides some
basic information about insurance coverage for Business Interruption and is a
starting point for further inquiry. The focus here is on the most common
Business Interruption policy forms in the marketplace.
Due to the different risks presented by and the insurance needs of, the
diverse enterprises that comprise our economic community, many specialty
insurance products exist that are not reviewed here. The needs of one
business or employer are not the same as the next and there is no “one size
fits all” answer to the question: “Is my loss covered?” A few specialty products
are mentioned at the end of this Alert, along with a short discussion of other
types of claims that may arise from COVID-19 and the categories of coverages
that might respond.
As you consider the coverage challenges posed by COVID-19-related
losses, keep these Golden Rules in mind:
- Golden Rule No. 1: No two policies are necessarily the same. That is
because no two enterprises are the same and even within the same risk
category, for example, restaurants, policies are underwritten differently.
Always, and I mean ALWAYS, start with the language of your policy. If
you do not have a complete copy of all your policies, ask your broker to
get them for you. - Golden Rule No. 2: The cause and profile of a loss sustained by one
business enterprise will not be the same as the cause and profile of a
loss sustained by another. One insured’s facility may itself be
contaminated with COVID-19. Another insured’s facility may shut down
because patrons or employees are afraid to access it, or because a civil
authority has ordered closure. Another business may cease operations
because raw materials are unavailable. - Golden Rule No. 3: Understand the legal landscape will evolve. Much is
at stake-for policyholders and insurers. There will be coverage litigation
over the interpretation and application of the insurance contract language
discussed below, and over many other policy terms, conditions and
exclusions not described herein. The outcome of that litigation will vary
by state because the law of each state may differ, by the specific
language of the insurance contract at issue, and by the facts and
circumstances giving rise to the actual loss or claim that is presented for
legal adjudication. Just as no two policies are identical and no two losses
are the same, we also live in a country of fifty states, each with its own
hierarchy of courts. We have an even greater number of federal judicial
districts where cases can be heard. Insurance coverage disputes will be
brought in many venues and different outcomes may obtain throughout
the land.
Business Interruption and Contingent Business Interruption 101
Generally, business interruption insurance, which a policy may call
“Business Income and Extra Expense” coverage, pays for the “actual loss of
Business Income” sustained due to the necessary “suspension” of the
insured’s “operations” during the “period of restoration.” (Terms in quotes are
usually defined in the applicable policy.) The “suspension” must be caused
(drum roll here) by direct physical loss of or damage to property at the
premises shown on the policy’s Declarations Page or on a separate Schedule
of Insured Premises. The loss or damage must be caused by or result from a
“Covered Cause of Loss.” “Business income” means the net income that
would have been earned or incurred, and continuing normal operating
expenses incurred, including payroll. “Extra Expense” means necessary
expenses you incur during the “period of restoration” that you would not have
incurred if there had been no direct physical loss or damage to property from a
Covered Cause of Loss. “Suspension” means the slowdown or cessation of
the insured’s business activities or that part of the insured premises that is
untenantable if coverage for rental value applies. “Operations” generally
means the insured’s business activities at the insured premises, and the
tenantability of the premises if rental value applies. “Period of restoration”
begins at a specified time (e.g. seventy-two hours) after the direct physical
loss or damage occurs and ends when the property is repaired or replaced or
when the business is resumed at a new permanent location. (Terms in your
policy may differ.)
To summarize, four criteria must be satisfied for business interruption
insurance to apply:
- Insured property,
- for which business interruption coverage has been purchased, and
- that has sustained direct physical loss or damage
- from a Covered Cause of Loss or peril.
A “Covered Cause of Loss” or peril will be whatever risks or causes of loss
the insurance policy covers, the description of which typically takes one of two
forms. A policy can be a “named perils” policy, which means the covered
causes of loss are only those perils expressly listed on the policy form. Or, the
policy can be an “all risks” or “Causes of Loss Special Form.” This means the
policy will cover all causes of direct physical loss to the insured property, other
than expressly excluded perils that are listed on the policy form. There is also
Difference in Conditions coverage, which is not addressed here.
The requirement of direct physical loss or damage to insured property will
be a significant challenge for policyholders to meet if operations are
suspended due to COVID-19. (In the case of Contingent Business Interruption
coverage, it is the designated property of others such as suppliers, that must
sustain the direct physical loss or damage by a covered peril, which results in
suspension of the insured’s operations, before this coverage will kick in. The
requirements are otherwise similar.)
In most situations involving an insured’s suspension of operations due to
COVID-19, the requirement of “direct physical loss or damage” will not be met.
However, in some instances the physical presence of COVID-19 virus at the
insured premises may qualify. Most assuredly, this argument will be raised in
courts as insureds challenge their insurers. The assertion already has been
raised in one case recently filed in Louisiana. There, the plaintiff, a restaurant,
has alleged: “It is clear that contamination of the insured premises by the
Coronavirus would be a direct physical loss needing remediation to clean the
surfaces of the establishment.”
The covered peril or risk of loss requirement is another hurdle many
policyholders will face. Fifteen years ago, an endorsement called “Exclusion of
Loss Due to Virus or Bacteria” began appearing in policies. It applies to “all
forms and endorsements that comprise” the policy, including but not limited to
“forms or endorsements that cover property damage to buildings or personal
property and forms or endorsements that cover business income, extra
expense or action of civil authority.” This standard, commonly used exclusion
states:
We will not pay for loss or damage caused by or resulting from any virus
that induces or is capable of inducing physical distress, illness or
disease.
New Jersey’s legislature is fast-tracking a law that would prevent insurers
of New Jersey policyholders from applying this exclusion. And, certain
members of the United States Congress have written to insurer associations
asking their members to relax the requirement for direct physical loss or
damage. Both efforts raise constitutional concerns involving the right to
freedom of contract, i.e., imposing terms different from those the parties
bargained for; and give little weight to the law of large numbers and other
fundamental principles of risk spreading that underlie the business of
insurance.
Action of Civil Authority
Many policies purchased to cover business interruption include an
additional coverage that applies when a civil authority prohibits access to the
insured premises. However, this additional coverage is subject to the same
requirements as basic business interruption and contingent business
interruption coverages already discussed. The prohibited access must result
from physical loss of or damage to property other than the insured premises
due to a Covered Cause of Loss. And, the civil authority’s action must be
taken in response to dangerous physical conditions resulting from the damage
or continuation of the Covered Cause of Loss that precipitated the damage in
the first instance; or the action enables a civil authority to have unimpeded
access to the damaged property. Also, time (e.g. four weeks of loss only) and
distance (e.g. within one mile of the insured premises) limitations usually
apply. In sum, unless a civil authority’s action in response to COVID-19
satisfies the physical loss, covered peril, and time and distance requirements,
the additional coverage for business income losses and extra expense
following actions by a civil authority will not apply.
Other Coverages
Before leaving the subject of business interruption entirely, enterprises
should be aware there are other insurance products in the marketplace that
may not have the requirements discussed above, such as direct physical loss.
For example, in recent years insurers began offering standalone supply-chain
insurance products that may allow for coverage when a communicable
disease affects a covered premises. Some pollution liability and first-party
policies may cover a loss-a topic that will be addressed in a future Alert. A
policy may not contain the Virus Exclusion, perhaps because the underwriter
neglected to include it. (The policy at issue in the Louisiana case did not have
this exclusion.) Policies written for health care providers may include a
coverage extension for communicable diseases that will cover typical business
interruption losses and certain expenses incurred because of the presence of
disease contaminants. ALWAYS review your policy with the nature of loss in
mind.
Insurance coverage for other kinds of losses associated with COVID-19
may exist under other types of policies. For example, Commercial General
Liability policies may be triggered if third parties bring bodily injury claims,
alleging they contracted COVID-19 on the insured’s premises, or because of
actions the insured took or failed to take that caused the virus to spread and
infect the plaintiff. With respect to Directors and Officers and Errors and
Omissions policies, shareholders may sue for malfeasance in addressing the
pandemic risk of COVID-19 that resulted in loss of share price. Employment
Practices Liability policies may be implicated if employers engage in conduct
that leads to discrimination and failure to accommodate claims by employees
who become infected. Workers Compensation programs may afford coverage
for health care workers and those employed in other essential occupations
who are, by nature of their employment, more exposed to the virus than the
general population. They may be able to establish their COVID-19 illnesses
are due to the conditions characteristic of and peculiar to their employment
and not an ordinary disease to which the general public is equally exposed.
There may be coverage for cancelled events under Event Cancellation
insurance, if the insuring terms of the policy are satisfied.
As with all things COVID-19, the world of insurance coverage for COVID19
related losses will be newsworthy for a while. Existing losses will develop
and require monitoring and measurement; unanticipated losses will emerge;
legislatures and civil authorities will act; and the legal landscape will change
and evolve. We have insurance expertise here at Karr Tuttle Campbell. We will
do our best to keep you informed and are ready to answer your questions-or
find answers to your questions, and provide informed advice. In the meantime,
we suggest two things specific to any business interruption loss you have: 1)
give notice to your insurer even if the loss does not appear covered at present.
Business interruption forms (and this is true of other policies) have notice
provisions that require compliance as a coverage condition; and 2) from the
outset, maintain accurate detailed records. These will be essential to
document your loss.
This Client Alert was prepared by Jacquelyn A. Beatty.
Please feel free to contact her with any questions.
Karr Tuttle Campbell | 206-223-1313 | karrtuttle.com
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information is not intended as legal advice or as a substitute for the particularized advice of your own counsel and should
not be relied upon as such. The advice appropriate for you will be dependent upon the particular facts and circumstances of
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