COVID-19 Disruptions – Can Business Insurance Cover Losses?
By Edward D. Greenberg
(Mr. Greenberg is General Counsel of the NCBFAA and is a member of the GKG Law, P.C. firm. His contact information is 202.342-5277; firstname.lastname@example.org.)
The coronavirus (COVID-19) pandemic has disrupted business operations on a worldwide scale. As a result, many businesses have looked to government loans and aid to help offset their losses. It is important to remember, however, that business insurance policies also may cover some of a company’s losses depending on the language of its insurance policy and the law in its jurisdiction. Indeed, while some business owners (and most insurers) assume that business interruption coverage does not apply in the absence of direct physical harm to its premises, this assumption may not be well-founded.
Does Your Policy Include Business Interruption Insurance?
Business interruption insurance is intended to compensate policyholders for loss of income caused by certain damaging events that require a company to vacate insured property. The scope of business interruption coverage varies widely between policies but often requires the policyholder to demonstrate direct physical loss or damage to insured property. If a company has business interruption insurance, it is important to identify what types of events are explicitly covered or excluded from the policy.
While some business interruption insurance policies may only require that the policyholder demonstrate direct physical loss or damage to the premises, other policies may limit business interruption coverage to loss or damage resulting from covered events, such as fires. Policyholders should review their business interruption coverage to determine how it fits into the broader insurance policy. For example, a company’s policy (or the underlying property insurance) may cover infectious diseases, government mandates, or even its supply chain (through contingent or dependent property insurance).
Infectious Disease Coverage
A policy may include infectious disease coverage and could cover business interruption caused by COVID-19. While many insurers may be updating their infectious disease coverage to expressly exclude the coronavirus, pre-existing policies from 2019 may not include this carve-out.
“Civil Authority” Clauses
Civil Authority coverage is intended to apply to situations where government mandates prevent the use of property. For example, Civil Authority insurance often covers business interruption where the government prevents the policyholder from using its facility because a nearby or adjacent property was damaged in a fire or natural disaster. Accordingly, while the state-wide coronavirus lockdowns would likely meet a policy’s definition of a government mandate, the more contentious question for courts may be whether pandemic contamination constitutes a direct physical loss to property (somewhere) that triggers coverage.
Contingent or Dependent Property Insurance?
Contingent or dependent property insurance can cover business interruption resulting from issues in the supply chain. Like standard business interruption coverage, policyholders will likely need to demonstrate some type of physical damage or loss to property somewhere in the supply chain.
How Courts Interpret “Direct Physical Loss or Damage”
Not surprisingly, businesses and insurance companies are currently evaluating to what extent the COVID-19 pandemic or facility contamination may constitute or cause direct physical loss. If it does, companies may have multiple paths for compensation under business interruption, civil authority, or contingent property insurance. Some courts (prior to the coronavirus pandemic) have held that direct physical loss requires damage to the insured’s premises. Courts in other jurisdictions, however, have not construed the language so narrowly. Further, although different jurisdictions have interpreted the scope of direct physical loss differently, the unprecedented circumstances of the coronavirus pandemic may re-open the question for many courts seeking to determine the scope of the applicable coverage.
As noted above, a number of courts have held that direct physical loss can exist without actual destruction or structural damage to property. For example, courts have found direct physical loss in situations where facilities become unusable as a result of contamination by a substance that is harmful to workers (e.g., lead, asbestos, sulfur gas) even where the substance does not harm the property itself. Depending on the pandemic’s effect on a company, it may have grounds to argue that its facility, nearby property, or property in the supply chain was contaminated by the coronavirus.
These issues are currently being examined by businesses, insurance companies, and courts across the country. Some jurisdictions may also answer this question through legislation. For example, legislatures in Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina are considering legislation expressly providing that business interruption insurance covers losses attributable to the coronavirus pandemic and associated government mandates.
In view of the complicated legal issues that could be involved, the NCBFAA suggests that you consider seeking legal counsel to answer any questions you may have regarding business interruption or related insurance coverage for losses suffered during the coronavirus pandemic.