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Despite pushback from the insurance industry, businesses should not assume that no coverage exists for business income losses related to the COVID-19 pandemic. Knowing what to look for in your insurance policy can help you determine if you have a claim, and how to pursue it.
While policies vary, most policy holders need to determine (1) whether coverage is triggered by “physical loss or damage” to property; (2) the existence and terms of any coverage extensions; and (3) the existence and terms of any exclusions.
What is “Physical Loss or Damage”?
In most commercial property policies, coverage is triggered when the policyholder sustains “physical loss or damage” to insured property. Insurers are routinely taking the position that coverage is not available due to COVID-19 because the virus has not caused “physical loss or damage” to property.
But the “physical loss or damage” that triggers coverage is not necessarily limited to the physical destruction of property. Many courts have held that this requirement can be met if the property is rendered uninhabitable or otherwise unfit for its intended use as a result of contamination. Many courts have also concluded that conditions such as bacteria, gases, and fumes caused physical loss or damage to the affected property.
Does the Impact of a Virus Constitute Physical Loss or Damage?
There is a cognizable legal argument that the impact of a virus on property constitutes the “physical loss or damage” needed to trigger coverage where the impact renders the affected property unusable. This argument will soon be put to the test in courts across the country, as policyholders in a wide range of businesses have already brought individual and class action lawsuits against insurers claiming wrongful denial of coverage for COVID-19-related losses.
Does Civil Authority Coverage Apply to Business Interruption Losses?
A common insurance coverage extension is “civil authority” coverage, which generally covers business income losses sustained when a civil authority prohibits or impairs access to the insured’s property due to damage to the insured property or to other property in the vicinity.
Because state and local governments across the United States have issued orders closing nonessential businesses and restricting public gatherings, “civil authority” coverage–depending on the language of individual policies and the facts of each case—may apply to business interruption losses.
Generally, civil authority clauses still require an underlying finding of physical loss or damage to property.
Look for Additional Coverages in Your Policy
In addition, commercial property policies often include coverage for the following:
- Contingent Business Interruption: This insurance generally covers financial losses stemming from supply chain disruptions and typically requires that the underlying cause of damage to the suppliers be of a type covered with respect to the business’s own property.
- Loss of Attraction: This type of coverage can apply for destruction of an “attraction” in close proximity to the insured property.
- Losses Caused by “Communicable Diseases”: Often sold to policyholders in the healthcare and hospitality industries, this type of coverage typically does not require physical loss or damage to insured property.
Such coverages underscore the impropriety of insurers’ sweeping assertions that no coverage exists for COVID-19-related losses.
Examine Exclusions Closely
In the wake of the SARS epidemic, many insurers added specific exclusions for bacterial or viral infections to their policies. Because viruses are distinct from bacteria, the particular wording of these exclusions is critical. A policy that only excludes coverage for bacteria may still provide coverage for the COVID-19.
Policy holders should closely examine the policy’s specific terms and definitions. Where a policy includes a “contamination” exclusion, for example, the policyholder should review the policy’s definition of “contaminant” to determine whether it encompasses viruses, diseases, or other illness-causing agents.
Legislative Remedies
Several members of the U.S. House of Representatives have proposed legislation which, if passed, would nullify any provisions in business interruption policies purporting to exclude coverage for losses resulting from viral pandemics, forced closures of businesses, mandatory evacuations, and public safety power shut-offs. This federal override would also preempt any conflicting state laws permitting contrary exclusions. We will keep you posted of these developments.
We Can Help
If you would like to discuss asserting your rights under your insurance policy, please contact us.
JMBM’s Insurance Counseling & Recovery Group assists corporate policyholders in negotiating policy coverages, performs insurance due diligence in commercial transactions, and represents them in coverage disputes with their insurance companies. We have recovered hundreds of millions of insurance dollars for our clients, allowing them to recover losses, stay in business, and plan confidently for the future.
Contact Us:
Matthew S. Kenefick
Partner
MKenefick@jmbm.com
415.984.9677
Stanley M. Gibson
Partner
SGibson@jmbm.com
310.201.3548
Guy Maisnik
Partner
MGM@jmbm.com
310.201.3588
This update is provided to our clients, business associates and friends for informational purposes only. Legal advice should be based on your specific situation and provided by a qualified attorney.
