By: Jonathan A. Cass and Carl L. Engel
The impact of COVID-19 on businesses has been catastrophic, with many forced to close altogether, and others required to scale back operations significantly. Put simply, the pandemic has caused widespread business interruption, which poses to each affected business the question of whether there is coverage for the current shutdown-related interruption under its insurance program. In this article, we provide basic information necessary for business leaders to assess whether, and to what extent, coverage is available for their businesses.
Coverage for business interruption is typically provided through an endorsement that is added to a policy for property insurance (often titled the “Business Income (and Expense) Coverage Form”). As a general practice, it is “add-on” coverage that must be specifically purchased by the policyholder. To trigger business-interruption coverage, there must be a “direct physical loss of or damage to property at the premises which are described in the Declaration.” A fire that destroys or damages a building out of which the company operates is an example of such a “direct physical loss.” Put another way, as a threshold matter, to have coverage for business interruption arising from COVID-19, a company must establish that COVID-19 caused a “direct physical loss or damage” to the building(s) insured under the property-insurance policy.
Further, many property policies also contain an “Exclusion of Loss Due to Virus or Bacteria.” The insurance industry adopted this exclusion in the aftermath of the SARS epidemic of 2003 in response to carriers’ concerns that viral epidemics could increase their exposure to business interruption claims. This exclusion provides in relevant parts as follows: “[The Insurance Company] will not pay for 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.” Accordingly, even if an insured company can establish that COVID-19 created a “direct physical loss or damage” to the building out of which it operates, its insurance carrier certainly will cite to this endorsement to deny coverage for a business-interruption claim.
In response to the unbelievable economic toll that the COVID-19 shutdown is having on businesses, a number of lawsuits have already been filed seeking coverage for business interruption claims. These lawsuits have been brought by restaurants that closed involuntarily in response to the pandemic. They seek to overcome the threshold requirement of “direct physical loss or damage” by arguing that COVID-19 physically infects and “stays on surfaces or objects or material,” thereby causing damage to the covered building. Whether this argument (and the scientific theory behind it) will suffice to overcome the physical-loss requirement remains to be seen. Also, based on the lawsuits filed so far, the property policies at issue do not appear to have the above-discussed “Exclusion of Loss Due to Virus or Bacteria.” However, lawsuits making creative arguments as to why the virus exclusion does not apply, or should not be enforced, certainly will be forthcoming.
In addition to lawsuits seeking coverage for business-interruptions arising from COVID-19, there has been a legislative response to the forced closures of businesses in response to the pandemic. The New Jersey State Legislature, for example, recently introduced a bill that is intended to force insurance companies to pay some business-interruption claims arising from COVID-19 by voiding the virus exclusion in policies that contain it. We expect that such policyholder-friendly legislative initiatives, both in New Jersey and elsewhere, will be opposed fiercely by a well-financed lobbying effort from the insurance industry. We also anticipate that the constitutionality of such measures that are enacted by legislatures will be challenged by the same industry groups in the courts.
Notwithstanding the heavy-handed response anticipated from industry lobbyists and their attorneys, there is reason for policyholders to be hopeful for relief. Attorneys like ourselves who represent policyholders, have a well-established record of successfully deploying creative arguments to convince courts that there should be coverage for claims which insurance companies initially insist are excluded under their policies.
From this knowledge, there emerges a framework for business leaders to use to evaluate potential pandemic-related business interruption claims. First, you should review the company’s property policy to determine whether there is business-interruption coverage. Second, if there is such coverage, you should determine whether the policy has a virus exclusion like the example discussed above. Third, if you do have business interruption coverage, and even if there is a virus exclusion, we would recommend that you have your agent/broker put your property carrier on notice of a potential COVID-19 business interruption claim, followed by an actual claim. You should expect that your company’s business interruption claim, if submitted, will be promptly denied by the insurance company.
Why should you submit a claim when you know it is going to be denied? To use an adage favored by the lottery industry, “you can’t win if you don’t play.” The same applies here. By submitting and having your company’s business interruption claim denied, the company is in the position to pursue a coverage lawsuit for damages against your insurance company once the initial COVID-19 litigation dust settles, and we have a better understanding as to whether, and how, to attack the coverage denial.
Cohen Seglias’ Insurance Coverage & Risk Management Group is available to discuss any questions that you may have about a business interruption claim or other insurance issues related to the COVID-19 pandemic. Jonathan A. Cass can be reached at email@example.com and Carl Engel can be reached at firstname.lastname@example.org.