Business Interruption Coverage for COVID-19-Related Losses under Commercial First-Party Property Policies

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Losses arising from COVID-19-related closures and curtailment of activities have caused businesses to analyze whether their insurance policies cover business interruption.  Policies and endorsements that may be relevant include first-party business interruption policies and endorsements, supply chain and trade disruption coverage, event cancellation policies, travel disruption policies, and communicable disease coverage.  Other policies may be relevant to liability arising from COVID-19-related claims, including workers’ compensation policies, commercial general liability policies, directors’ and officers’ policies, and employment practices liability coverage.

This alert focuses on potential coverage for business interruption losses under first-party property policies, exclusions for viruses, and legislative and regulatory activities in three states regarding that coverage.

Business Interruption Coverage

In general, commercial first-party property policies provide either (1) broad coverage for property loss unless the loss is expressly excluded or (2) coverage that is limited to enumerated causes. The first type of policy often is identified as an “all risk” policy.  The second type of policy is referred to as a “named peril” or “designated peril” policy.  As with all insurance policies, it is import to analyze carefully the coverage provided by a named peril policy to determine if the loss arises from an enumerated peril.

Either type of property policy may include a business interruption coverage part or endorsement.  To be covered, losses arising from the suspension of business must be accompanied by a direct physical loss to the property.  Ordinarily, this requirement is easily met.  For example, in the event of an explosion at, or close to, a property, business interruption insurance generally should cover losses resulting from the suspension of the business caused by physical damage to the property.

The direct physical loss issue is more complicated in the context of COVID-19-related business interruption.  For example, if the virus contaminates surfaces in a restaurant, a direct physical loss probably has occurred, which may trigger business interruption coverage.  This physical loss may be short-lived but business interruption losses could still be covered.  In Gregory Packaging, Inc. v. Travelers Property Casualty Co., No. 2:12-cv-04418, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014), the court held that the release of ammonia, which rendered a facility uninhabitable, was physical loss because, under New Jersey law, property can sustain physical loss without experiencing structural alteration.  The court reached the same result applying Georgia law, holding that a fortuitous event rendered the property unsatisfactory and in need of repair.  Id. at *7.  Likewise, in Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009), the court concluded that, under Massachusetts law, an unpleasant odor rendering property unusable constituted physical injury to the property.

In contrast, if a business has been closed because a governmental entity required closure, but the property has not been contaminated, there probably would not be a direct physical loss.  See generally Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 330–32 (S.D.N.Y. 2014) (distinguishing Essex and holding that, under New York law, no direct physical loss arising from policyholder’s inability to access office during power outage caused by Hurricane Sandy); N.E. Georgia Heart Ctr., P.C. v. Phoenix Ins. Co., No. 2:12-CV-00245, 2014 WL 12480022, at *5 (N.D. Ga. May 23, 2014) (reasoning that, under Georgia law, a direct physical loss requires “an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.”).  It is important to note that, some policies may cover business interruption losses caused by a government mandated closure even without direct physical loss.  Accordingly, a critical analysis of policy terms and conditions is essential.

Even if there has been a physical loss, the time period for business interruption coverage may be limited.  Some policies include limitations regarding the time period for which coverage is available for business interruption losses.  Moreover, policies typically include a duty by the policyholder to mitigate property damage.  Insurers may take the position that any physical loss and related business interruption will be short-lived because policyholders are required to decontaminate properties (although the cost to decontaminate may be covered).  Furthermore, insurers may contend that business interruption coverage should be limited to the period that COVID-19 remains active on surfaces.  Scientists are analyzing how long COVID-19 remains a contaminant on surfaces or materials. A recent New England Journal of Medicine report stated that the virus may be communicable from surfaces for up to three days. 

Many commercial first-party property policies include exclusions eliminating coverage for losses arising from viruses.  Typical is the 2006 Insurance Service Organization (“ISO”)  “Exclusion for Loss Due To Virus Or Bacteria” endorsement form CP 01 40 07 06, which was developed as a result of, among other viruses, SARS, a type of coronavirus.  The endorsement, which was approved by state regulators, excludes coverage for any “loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness or disease.”  This endorsement, if enforced, eliminates coverage for COVID-19 business interruption losses. 

Again, it is  important to note that some businesses may have purchased supplemental specialized coverage for viruses and pandemics.  Or, businesses may have purchased supply chain and trade disruption coverage for losses caused by or to a supplier or customer.  Analyzing all policies that potentially provide coverage is critical.

Legislative and Regulatory Activities Attempting to Expand Business Interruption Coverage

To address concerns that commercial property policies may not cover business interruptions caused by COVID-19, some legislators and regulators are attempting to provide relief.  New Jersey apparently is the first jurisdiction to draft legislation to address the issue.  And, regulators in Georgia and New York have issued declarations regarding this matter.

New Jersey

New Jersey is considering a bill that requires insurers to provide business-interruption coverage for coronavirus-related losses even if the policies contain a broad virus exclusion.  See New Jersey Bill A-3844.   If enacted, the bill would apply retroactively to any business-interruption policy that was issued prior to March 9, 2020 to a business with fewer than 100 employees.   Policy limits remain the same.  Insurers may request reimbursement from the New Jersey Commissioner of Banking and Insurance.  In creating a fund for reimbursing insurers, the Commissioner also may collect amounts from non-business-interruption carriers.  On March 16, 2020, the New Jersey Assembly Homeland Security and State Preparedness Committee voted 4-to-1 in favor of the draft.

Although these measures could relieve the economic burden imposed on businesses in the wake of COVID-19, requiring insurers to pay for a risk that was excluded may not withstand judicial scrutiny.  Courts in other jurisdictions have explained that, a state action that places a financial burden on an insurer that it specifically declined to accept would raise “grave constitutional questions,” including “the impairment of contracts and the taking of property without due process of law.”  AIU Ins. Co. v. Block Marina Inv., Inc., 544 So. 2d 998, 1000 (Fla. 1989).  On the other hand, a key inquiry in any constitutional challenge to such measures would be “whether a significant and legitimate public purpose justifies the regulation.”  State v. All Prop. & Cas. Ins. Carriers Authorized & Licensed To Do Bus. In State, 937 So. 2d 313, 325 (La. 2006) (upholding Contracts Clause challenge to legislation that extend the prescriptive period within which insured parties could file certain claims under their insurance policies for Katrina- and Rita-related losses).  Given the novelty of COVID-19, and its grave impact on the economy, courts may be more willing to defer to legislative judgment.  But, in light of insurers’ past successes in this area, businesses may not want to anchor their recovery plans on an expectation of expanded coverage. 

Georgia

On March 16, 2020, the Georgia Office of Insurance and Safety Fire Commissioner offered an expedited review process for insurers who adopt February 2020 coronavirus-related endorsements drafted by ISO.  The endorsements, not yet approved by any jurisdiction, are entitled:  (1) Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus; and (2) Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting Some Modes of Transportation).  The endorsements may provide limited business interruption caused by COVID-19.  However, the endorsements include significant limitations and it is not clear whether any coverage would exist for business interruption losses related to the current pandemic.

New York

On March 10, 2020, the New York Department of Financial Services issued a letter to property and casualty insurers mandating that they provide information regarding their business interruption coverage in the wake of COVID-19.  Responses were due on March 18, 2020.  The Department required that insurers provide the totality by volume of business interruption coverage, civil authority coverage, contingent business coverage, and supply chain coverage that the insurers have underwritten.  In addition, insurers are required to provide to their policyholders (with a copy to the Department) “a clear and concise explanation of benefits,” explaining for business interruption, contingent business, and supply chain coverages: (i) what perils are covered, (ii) whether the policyholder must provide proof of “physical damage or loss,” (iii) whether a pandemic-related contamination constitutes such “physical damage or loss,” and (iv) the waiting period to seek coverage.

Businesses should closely examine the scope of their business interruption coverage as insurers, governments, and the public navigate these uncharted waters. Each day, governments are exploring different ways to confront this novel economic crisis, including regulations designed to shift the brunt of the fallout to insurers. Seyfarth attorneys are working tirelessly to keep abreast of these and other developments.

Other Related Content: 
New York Insurance Coverage Under Certain Policies in the Wake of COVID-19