(May 29, 2020) Governments and health authorities across the United States are responding to the outbreak of COVID-19 through the use of stay-at-home orders and other federal, state, and local orders in an attempt to disrupt the spread of COVID-19. As a result of these measures to disrupt the spread of COVID-19, many businesses have fallen on tough times and are looking to their commercial property insurance in an attempt to cover the losses they’ve experienced since the enactment of these protective measures through their policy’s business interruption insurance.
This article will explain what business interruption insurance is, analyze current arguments being made in COVID-19-related business interruption cases, and evaluate how current case law may predict how courts will rule. What is important to remember when reading this article is that each property insurance policy and program should be reviewed on its own merits as the language of commercial property insurance policies can materially differ from one insurer and/or policyholder to the next.
What is Business Interruption Insurance?
In general, the purpose of business interruption insurance is to reimburse the policyholder for lost profits and fixed costs associated with operating the business during the period of restoration from that interruption. Fire loss or damage causing a business suspension have been the risks most frequently specified in the policies with which the courts have dealt, but business interruption resulting from explosion, accidental damage to equipment and machines, riot and civil commotion, order of civil authority, the elements, and other causes have also been included.
Typically, property insurance policies do not provide standalone coverage for business interruption losses. Instead, property insurance policies usually provide coverage for business interruption losses solely to the extent that the interruption results from covered property damage either to the business. Additionally, where the insured’s business was ordered closed by a civil authority without having sustained any physical damage or loss, the courts, sometimes depending on the specific terms of the business interruption policy at issue, will determine the business interruption loss was covered by the insured’s property insurance policy.
Analysis of COVID-19 Business Interruption Litigation
The main argument that Plaintiffs attorneys are putting forth is that under a typical property insurance policy, all risks of loss or damage to insured property are covered except those specifically excluded by the policy. Many insurance policies, do not include and are not subject to, any exclusions or limitations for losses caused by viruses or communicable diseases. Thus, Plaintiff’s position is that losses due to COVID-19 should be a covered cause of loss under the policy language.
However, Defendants are arguing that the presence of COVID-19 at an establishment, assuming Plaintiffs can prove that the virus was or currently is present at the establishment, is an economic loss rather than a direct physical loss and thus they are not required to provide business interruption insurance in the wake of the COVID-19 outbreak. Specifically, they are stating that the losses are economic as the position Defendants are taking is that cleaning is the only thing required to mitigate the spread of COVID-19 and case law has shown that cleaning is not considered a direct physical loss. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569, 573 (6th Cir. 2012).
Additionally, Plaintiffs attorneys are pointing to the measures taken in response to the pandemic and threatened spread of COVID-19 throughout the United States, as state and county governments began issuing orders requiring that establishments such as bars, restaurants, and hotels close to the public or operate under specific significant restraints. Many of these orders also prohibited all non-essential travel, thereby preventing customers from traveling to and staying at Plaintiff’s hotel. Statewide “Stay-at-Home,” “Shelter-in-Place,” or other similarly-termed closure orders, have also closed or substantially limited the operation of Plaintiff’s business. These orders were issued in direct response to the dangerous physical conditions, and/or threat thereof, and prohibited the public from accessing Plaintiff’s operations, thereby causing the necessary limitation or suspension of Plaintiff’s operations and triggering coverage under the insurance policy.
In response, Defendants argue that these civil authority orders do not render Plaintiffs buildings uninhabitable or unusable, especially those businesses which have been deemed to be “essential businesses” during the COVID-19 pandemic such as hotels and restaurants. In particular, Defendants state that although Plaintiffs businesses may be experiencing reduced business as a result of the civil authority orders issues in response to the pandemic, the business interruption coverage still does not trigger in this scenario. Defendants point to many restaurants that are still able to provide delivery and takeout services during pandemic as evidence that the Plaintiffs premises are not uninhabitable and that there has been no property loss. Defendants also argue that any civil authority coverage requires damage to property away from the insured premises and a civil authority prohibiting access to an area surrounding that damage as a result of it, and the insured property being within that area of civil authority prohibition. As stated previously, Defendants take the position that the presence of COVID-19 on the Plaintiffs premises does not constitute physical damage and thus civil authority coverage is not required to be provided.
How Does Current Case Law Highlight How Courts May Rule
Significant case law has shown that when deciding whether or not to enforce business interruption/civil authority claims that many courts typically follow a literal interpretation of physical loss and damage. However, there is some case law that shows courts can have an open view to the definition of physical loss. See Am. Guar & Liab Ins. Co. v. Ingram Micro, Inc., 2000 WL 7267789 (D. Ariz. 2000) (“physical damage” is not restricted to the physical destruction or harm of computer circuitry but includes loss of access, loss of use, and loss of functionality.”); TRAVCO Ins. CO. v. Ward, 715 F.Supp.2d 669 (E.D. Va. 2010) (court held that release of sulfuric gas constituted “direct physical loss to property.”); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st. Cir. 2009) (unpleasant odor rendering property unsuable constituted physical injury to property). Nevertheless, prevailing on a business interruption claim would be highly dependent on the court’s interpretation of whether COVID-19 has caused physical loss or damage.
With regards to business interruptions due to civil authority, the case law has also shown that courts are generally not willing to rule in favor of the insured if the insured is merely running at a reduced capacity rather than being fully closed. Many stay-at-home orders list “hotels, motels, [and] other commercial lodging establishments” as essential businesses that may remain open during the COVID-19 pandemic. Thus, the civil authority does not prohibit access to the insured’s establishment even if the civil authority may reduce business overall. Based on this case law, it would appear difficult for hotels, restaurants, and other businesses that were deemed to be essential businesses to prevail on this issue as they are still operating as an essential business, albeit at a reduced capacity, during the COVID-19 pandemic.
In conclusion, there is no telling whether the courts will cast aside current precedent due to the novel threat that COVID-19 has posed, but the precedent that has been established has shown that the courts are not likely to force the insurer to provide business interruption coverage in the wake of the COVID-19 pandemic unless it can be shown that there was actual direct physical loss or damage or that the civil authority specifically prohibited access to the establishment. Thus, it is imperative for Plaintiffs to prove that COVID-19 is or was present on the insured property and demonstrate that the COVID-19 virus has directly caused loss or physical damage to the property.
For additional information on the author or to contact the MSP Recovery Law Firm:
Adam R. Rivera, Esq.
E-mail: [email protected]
Firm website: msprecoverylawfirm.com
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