Business Interruption Insurance in the COVID-19 Era: Specific Policy Language Will Matter

Oakland, CA – In our continuing examination of legal issues surrounding COVID-19, we offer this analysis of business interruption insurance, which will undoubtedly be at the forefront of COVID-19-related litigation. Businesses are reviewing their insurance contracts for coverage to limit their financial exposure to the impacts of COVID-19. While policyholders may have several coverages triggered by COVID-19-related losses, the scope of coverage will depend on each insurance contract’s specific terms and conditions.

I. Business Interruption Insurance

Typically, companies purchase business interruption insurance as part of their commercial property insurance portfolio to recover lost revenue should a business be forced to unexpectedly halt operations. Standard business interruption policies usually exclude viruses and/or pandemics from coverage, unless added by endorsement. See, e.g., Meyer v. Nat. Foods, LLC v. Liberty Mut. Fire Ins. Co., 218 F. Supp. 3d 1034 (D. Neb. 2016) (holding contamination exclusion barred coverage for contamination of beef by E. coli while in insured’s possession). Additionally, contingent business interruption insurance provides insurance for financial losses resulting from disruptions to a business’s customers or suppliers. Coverage, however, depends on each insurance contract’s terms and conditions and the specific circumstances of the loss, which will vary.

II. “Physical Damage” to property is typically a threshold requirement

In many commercial property insurance policies, business interruption coverage is triggered when the policyholder suffers a “direct physical loss of or damage to” insured property by a covered cause of loss. In the event of a claim brought on by COVID-19 circumstances, litigation will likely center on whether this “physical loss” requirement has been satisfied. Courts, however, have not articulated a uniform rule on when insured property has sustained a “physical loss.” Thus, this determination requires a detailed analysis of each case’s specific facts and circumstances and the law of the jurisdiction. See, e.g., Source Food Tech., Inc. v. U.S. Fidelity & Guar. Co., 465 F.3d 834, 838 (8th Cir. 2006) (signaling that, depending on the policy’s language and the facts of the loss, contamination of insured property may constitute “physical damage” where there is satisfactory proof of contamination); General Mills, Inc v. Gold Metal Ins. Co., 622 N.W.2d 147, 155 (Minn. Ct. App. 2001) (finding “direct physical loss” where unapproved, but non-toxic, pesticide sprayed on oats that then, while safe for consumption, could not be sold under FDA regulations); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. App. 1997) (“[W]e must conclude that contamination by asbestos may constitute a direct, physical loss to property under an all-risk insurance policy.”).

III. “Civil Authority” coverage may also be available

Commercial property policies often also provide coverage for business revenue losses incurred where a “civil authority” prohibits or impairs the access to the policyholder’s insured premises. Governmental responses to COVID-19 are therefore likely to be the basis for arguments in litigation concerning claims related to “civil authority” actions. For example, on March 12, 2020, California Governor Newsom issued the California Emergency Services Act (Cal. Gov. Code §§ 8550–8669.7), which authorizes Governor Newsom to commandeer or use any private property or personnel deemed necessary through emergency powers during a state of emergency or war. Depending on the insurance contract, a government order that commandeers a policyholder’s insured business premises may trigger business interruption coverage.Additionally, if a federal, state, or local government authority restricts access to or from areas where active transmission of an infectious disease has been identified, “civil authority” coverage may insure attendant revenue losses sustained by affected businesses. Again, the policy’s specific terms and conditions are crucial: “civil authority” coverage may or may not require that the limitation on access be caused by a “physical loss” from a covered cause of loss. If the policy requires physical damage to adjacent or nearby property and an insured cannot establish a causal connection between the governmental action and that physical damage, then coverage may not be triggered. Two cases illustrate this point. First, in United Air Lines, Inc. v. Insurance Company of the State of Pennsylvania, an airline was not entitled to civil authority coverage where an insured airport was shut down before the September 11 terrorist attack on the Pentagon and so the closing was not “a direct result of damage” to adjacent property, as required by the policy. 439 F.3d 128 (2d Cir. 2008). On the other hand, in Sloan v. Phoenix of Hartford Insurance Company, a Michigan court held that a policy’s civil authority provision did not require physical damage to insured property to trigger business interruption coverage for movie theaters where an order by Michigan’s governor imposed a curfew in response to widespread riots. 46 Mich. App. 46 (1973).

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Careful analysis of a policy’s provisions and the circumstances contributing the loss will be critical. A loss may have multiple contributing factors—some covered and some not covered. Quantifying the loss and proving the cause of the loss will be hotly contested issues. For more information, please contact Bobby Debelak or Alec Dimario.