These are unprecedented times. People are suffering, and businesses are suffering. Many businesses are either closed entirely or barely open at greatly diminished capacities. Businesses may have insurance for some of the lost revenue through business interruption coverage, although that will often be an uphill battle.
Most business and commercial property policies that include coverage for “business interruption” are triggered by “direct physical loss” to property (i.e., physical damage to property). Without “direct physical loss,” there generally is no coverage. Many pro-carrier experts contend the coronavirus does not qualify as direct physical loss to property. Indeed, the law in many states is that contamination without damage to a building’s physical structure will not trigger coverage. On the other hand, others argue that contamination from the coronavirus—e.g., virus droplets deposited on doorknobs, table surfaces, etc.—qualifies as property damage because these surfaces must be decontaminated before the building can be used. Some businesses have already filed lawsuits seeking a preemptive declaration that business losses due to the coronavirus are covered, arguing that contamination is physical damage to property.
The fact that governments are now ordering businesses to close could help the argument for coverage. Under some insurance policies, an order from a civil authority closing business triggers coverage. Most of these policies continue to tie that coverage trigger to a “direct physical loss.” Thus, even if a policy provides coverage where the government closes businesses, the insured generally will still have to prove that there has been a “direct physical loss.” Notably, the physical loss required to trigger coverage for closures by the government can be to any property, not just the insured’s property. In other words, if another business in the local area has been contaminated with the virus, and the government shuts down all businesses in the area, there could be coverage, assuming the court finds “direct physical loss” to any property.
In addition to the direct physical loss requirement, many policies have an absolute exclusion for viruses and bacteria. Under this exclusion, there is no coverage for the coronavirus even if there is a direct physical loss. Insurers developed this exclusion in 2006 after the SARS outbreak in China and Hong Kong because insurers wanted to limit their exposure to pandemics. While this exclusion was to be “mandatory”, many policies still do not have it. If a policy has a virus exclusion, it is unlikely there would be any coverage under that policy.
Finally, while unusual, some business insurance policies contain pandemic coverage. These policies are generally written on non-standard forms and are specially negotiated with the insurer.
The financial losses that businesses have incurred due to the coronavirus are substantial and, unfortunately, will continue to grow. Businesses should have their insurance policies reviewed for possible coverage. Given the substantial business interruption COVID-19 has caused and will continue to cause, it is definitely worth checking to see if coverage exists. Please contact Alan Rogers, Chris Yeilding, Martha Thompson, or Steven Corhern on Balch and Bingham’s insurance coverage team if we can help you navigate these difficult first-of-a-kind issues.