To trigger business interruption coverage, there must be “direct physical loss of or damage to property at premises” – the property described within the “Declarations” of the policy. This property damage requirement may not be satisfied on the basis that coronavirus-tied losses resulted in a general decline in economic activity. However, policyholders may argue that the presence of the coronavirus in a structure satisfies the “direct physical loss of or damage to” requirement.
The case frequently cited by policyholders, in support of an argument that the presence of the coronavirus in a structure satisfies the “direct physical loss of or damage to” requirement involved the release of an unsafe amount of ammonia from a refrigeration system contained inside a facility.
The court determined that, while structural alteration provides the most obvious sign of physical damage, a property can sustain physical loss or damage without experiencing structural alteration. The court concluded that ammonia, a dangerous gas, which rendered the buildings uninhabitable in this case constituted a “direct physical loss,” sufficient to trigger coverage.
A Federal Court in South Florida took a different view of what constitutes a “physical loss.” It held that a restaurant did not sustain direct physical loss from dust and debris generated by nearby roadwork because the situation could be remediated by cleaning.
Whether there has been “direct physical loss of or damage to” the covered property, may be for naught. Many business interruption policies contain an exclusion for “Loss Due To Virus Or Bacteria.” “Probably 99.9 percent of insurance policies do not cover the virus,” an insurance consultant told FOX Business. “There are specific exclusions.” The virus exclusion was added to most insurance policies in 2006 after SARS. The Insurance Services Office (ISO) endorsed the exclusion. The exclusion endorsed by the ISO specifically says insurance companies won’t pay for losses or damages — including lost business income – from “any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The exclusion goes on to specifically state that it applies, among other things, to “business income,” i.e., business interruption.
COVID Cases Already Filed
On March 16,2020, a suit was filed in a Louisiana state court by a restaurant seeking a declaration of coverage for coronavirus-caused losses under a business interruption policy.
In likely the first case of its kind, Oceana Grill, which describes itself as “a well-known New Orleans restaurant in the heart of the French Quarter,” alleges that it is an insured under an “all risks” property policy issued by Lloyd’s that includes business interruption and an “extension of coverage in the event of the businesses closure by order of Civil Authority.” The policy covers “direct physical loss unless the loss is specifically excluded or limited.”
The seafood establishment is seeking a judicial determination that the Louisiana governor’s public gathering restriction, and New Orleans mayor’s restriction on restaurant operations, trigger the Civil Authority provision of the Lloyd’s policy.
In particular, the complaint seeks a declaration that “the policy provides coverage to plaintiffs for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from coronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises.”
Oceana Grill’s apparent argument is that the presence of the coronavirus causes physical loss to the affected premises. Thus, if Oceana Grill is shut down, because other restaurants in the area have suffered a physical loss on account of the presence of the coronavirus, then it is entitled to so-called Civil Authority coverage for its losses. If the coronavirus were present in Oceana Grill itself, then the restaurant asserts that it would be owed coverage for business interruption.
It cannot be overstated that the complaint alleges that the Lloyd’s policy does not contain a “virus” exclusion.
On Wednesday, March 25, 2020, Thomas Keller Restaurant Group filed a declaratory judgment action against Hartford Fire Insurance Company, in the Superior Court of California, seeking coverage for business income losses on account of COVID-19. Two Napa County restaurants – The French Laundry and Bouchon Bistro – allege that their operations were shut down by a March 18th order, of a Napa County health officer, which required all Napa County residents to stay at home unless they are performing certain essential activities or running certain essential businesses.
The restaurants allege that they are insured under an “all risks” policy issued by Hartford which provides coverage for lost business income and extra expenses incurred if access to the restaurants has been prohibited by an order of civil authority as a direct result of a covered loss in the immediate area. Plaintiffs claim that the policy provides coverage for any current or future civil authority closures in Napa County restaurants due to physical loss or damage from the coronavirus under the Civil Authority coverage part of the policy. The Plaintiffs claim that the March 18th order triggers coverage because the policy does not include an exclusion for viral pandemic and the “policy’s Property Choice Deluxe Form specifically extends coverage to direct physical loss or damage caused by virus.” No further background is provided regarding the terms of the policy.
It has been widely discussed that, in general, to implicate “Civil Authority” coverage, there must be physical damage to property other than the covered premises. But businesses have been closed principally to foster social distancing and not on account of the presence of the virus inside a premises.
As far as we are aware, no similar lawsuits have been filed in Florida to date.
As the crisis arising out of the COVID-19 virus and disease continues, efforts are already underway at the state and federal level to enact legislation to help corporate policyholders obtain insurance coverage for business interruption losses and closures arising out of the pandemic. Progress on these pieces of legislation will be closely watched by corporate policyholders everywhere and can serve as a model for those that seek to advocate for similar legislation elsewhere.
At the federal level, a bipartisan group of members of the US House of Representatives sent an initial letter on March 18, 2020 to national insurance company and insurance agent/broker associations, including the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Council of Insurance Agents and Brokers, and the Independent Insurance Agents and Brokers of America, regarding the impact of COVID-19 on corporate policyholders nationwide.
In the letter, the federal lawmakers “urge[d] [the associations] to work with [the associations’] member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage,” citing the fact that “[b]usiness interruption insurance is intended to protect businesses against income losses as a result of disruptions to their operations and recognizing income losses due to COVID-19 will help sustain America’s businesses through these turbulent times, keep their doors open and retain employees on the payroll.” The lawmakers further indicated that the federal government is “ready and willing to work with [the associations] on any future measures that might be necessary to see our country through this trying time.”
The letter was met later the same day with an immediate “no” from the national insurance company and insurance agent/broker associations, who responded that “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19” and instead suggested that the crisis “will require federal assistance that provides funding directly to those American individuals and businesses most in need.”