By Frank Weiss
Now that many businesses have been shut down for weeks as a result of the COVID-19 virus, there have been a number of important developments affecting the availability of business interruption insurance to help mitigate the losses experienced as a consequence of closures. The following is an update on recent developments and a reminder that there may be more coverage available than the insurance industry would like you to believe.
How claims are being handled.
From the onset, the insurance industry has taken the position that the business interruption coverages available in a typical commercial property insurance policy do not provide coverage for interruptions caused by the novel coronavirus. Since this is the only form of business interruption coverage held by most businesses, insurers are basically telling their customers that they are on their own for this one. Given the industry’s strong initial stance that COVID-19 related interruptions are not covered, it is unsurprising that claims are being uniformly denied, often without any investigation. However, as explained below, the issue is not nearly as clear cut as the insurance industry makes it out to be.
The scope of coverage.
A standard commercial property policy covers losses caused by “physical loss or damage” to property. In the context of business interruption claims, policies typically cover losses arising out of disruptions to the policy holder’s business caused by physical loss or damage to their property, or for losses suffered when a civil authority prevents access to the policy holder’s property as a result of damage suffered by other property in the vicinity.
Insurance companies have uniformly relied upon the requirement of direct physical loss or damage to property to argue that there is no coverage for disruptions caused by the novel coronavirus because it does not cause structural damage to property. In short, because there is no visible damage to the property, the carriers assert that there can be no coverage.
In reality, no court has decided whether the virus causes the requisite property damage. However, we do know that the virus has the capacity to linger on surfaces for days, and that property will likely need to decontaminated in some manner before it reopens, suggesting that it does indeed cause physical damage, regardless of whether it is perceptible to the naked eye.
It is true that some courts, in other jurisdictions, have interpreted physical loss or damage narrowly. For example, a federal district court in Michigan held that the presence of mold and bacteria in ductwork and a resulting odor did not constitute direct physical harm despite the fact that the ductwork needed to be physically cleaned as part of remediation. Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010). However, in Oregon (and many other states) courts have appropriately taken a much broader view of what constitutes physical property damage. In one recent decision, an Oregon federal court rejected the argument that there must be structural damage to property to trigger coverage, and held that coverage existed when smoke from a nearby wildfire made it necessary to cancel plays scheduled to be held at an outdoor theater. In reaching this conclusion, the court accepted the policy holder’s argument that that the wildfire smoke caused injury or harm to the interior of the theater, which includes the air within the theater. Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247 (D. Ore., 2016) An earlier case decided by the Oregon Court of Appeals held that “pervasive odor” in a residential home caused by a subtenant's illegal methamphetamine operation constituted a direct physical loss sufficient to trigger coverage. Farmers Ins. Co. v. Trutanich, 123 Or. App. 6, 858 P.2d 1332 (1993) Similarly here, a compelling argument can be made that the presence of the virus on the surfaces and in the air within a building represents physical damage to the property sufficient to trigger coverage.
What should policy holders do?
Companies that have suffered losses as a consequence of disruptions caused by COVID-19 should, at a minimum, take the following steps:
- Read your full policy. This update primarily addresses the coverage available under a typical commercial property insurance policy. However, a number of businesses, most commonly those in hospitality, travel, healthcare, or event-based industries, have unique forms of business interruption policies or other forms of insurance covering losses due to a shutdown. Wimbledon, for example, famously paid $2 million a year for pandemic insurance, and is now asserting a $141 million insurance claim. These specialized business interruption policies can vary significantly, so it is not possible to make generalized conclusions about whether coverage is available without analyzing the specific policy terms. However, the specific language of the coverage grant and the presence or absence of certain exclusions will be critical to assessing whether coverage is available. Even the standard commercial property policies can have important differences. Most significantly, some property insurance policies have a specific exclusion for losses due to virus or bacteria. Obviously, the presence of such an exclusion will complicate claims for losses arising out of the COVID-19 virus, while the absence of such an exclusion suggests that the carrier did not intend to exclude such losses.
- Tender your claim. Even if your insurer or broker has advised you that coverage is not available, it is important to go ahead and tender your claim anyway. For one thing, as explained above, the situation is nowhere near as clear as the insurance industry claims it is. For another, the landscape is constantly changing and there is at least some reason to hope that coverage may be available even under policies that arguably would not otherwise provide it. Among other things, many states are considering legislation that would expand the availability of business interruption coverage for certain businesses that have been harmed by the shutdown. At the moment, bills of this sort are under consideration in at least Pennsylvania, New Jersey, Ohio, New York, Massachusetts and Louisiana. It is likely that more state’s will follow suit. Indeed, Oregon Governor Kate Brown has indicated that she is looking into the coverage issues. Accordingly, it is wise to at least tender the claim and put a stake in the ground just in case governmental action or subsequent court decisions clarify or expand the availability of coverage.
- Don’t take no for an answer. After the claim is tendered, it will almost certainly be promptly denied, but that does not necessarily mean you should give up. Certainly, pursuing coverage claims for disruption caused by COVID-19 will be challenging. Insurance companies will defend fiercely, and expert testimony may be required concerning the attributes or presence of the virus. Nevertheless, policy holders who have suffered significant losses should not be discouraged when their claim is initially denied and should, at a minimum, consult with a qualified attorney about whether pursuing a coverage claim makes sense for them.
See our previous discussion of business interruption insurance here. To have your policy properly reviewed, or for specific advice regarding your coronavirus-related insurance concerns, please contact Frank Weiss or the Tonkon Torp attorney with whom you normally consult.