Many companies have Business Interruption insurance included as part of their Commercial Property and Casualty Insurance. While not every policyholder may be entitled to insurance coverage, Business Interruption insurance could be a source of insurance coverage in the COVID-19 scenario, and policyholders should work with their professional advisors and check the specific terms of their policy.
We have heard that many insurance companies are summarily denying claims on the grounds that COVID-19 has not caused any physical damage, or due to exclusions in the relevant policies for pandemics, epidemics and viruses. However, merely assuming that an answer of non-coverage is correct based on blanket statements from insurance companies or even agents and brokers (who may be financially connected to the insurance companies) is not advisable. The specific terms of the policy itself (and not a mere summary of terms) should be carefully read by an independent advisor who is skilled in reading and evaluating complicated contractual language.
Moreover, recent legislation proposed in seven US states and in the US House of Representatives would overrule recent insurance company denials and force commercial property insurers to provide retroactive coverage to insured businesses for losses resulting from the COVID-19 pandemic. While we cannot say if such legislation will be adopted, it is even more relevant for policyholders to examine their Business Interruption policies now and consider whether to make a claim.
Business Interruption Insurance Generally
Business Interruption insurance is often included as part of a Commercial Property and Casualty Insurance, or Business Owners Insurance. Business Interruption insurance is not typically sold as a separate policy, rather, it can be either added to a property/casualty policy or included in a comprehensive package policy as an add-on or “rider”. Business Interruption coverage is generally written on either a “named perils” or, more often, an “all risk” or “open perils” basis.
Generally, a named perils policy pays if the damage or loss was caused by a peril named in the policy. Common named perils include fire, theft, vandalism, and wind damage. If a loss occurs due to an unnamed peril, a business might not be able to get a reimbursement for the loss.
On the other hand, “all-risk” policies typically allow for all perils, unless specifically excluded. All perils allow coverage for acts of civil or military authority, such as for example recent orders from state governors ordering businesses to close.
But even in covering all perils, policies may require an occurrence of direct physical loss or damage to covered property for coverage to apply. Furthermore, even all risk policies contain specific exclusions from coverage, such as exclusion for damage from hurricanes, floods or earthquakes, and, since the 2002/2003 occurrence of the SARS epidemic, many all-risk polices may also have specific exclusions for pandemics, epidemics or viruses. In addition, some policies may have express exclusions for loss of use attributable to governmental orders. If the applicable policy has these types of express exclusions, then recovery based on the terms of the policy may be challenging.
Would COVID-19 be Covered Under an All-Risk Business Interruption Policy?
We have heard that many insurance companies are summarily denying claims on the grounds that COVID-19 has not caused any physical damage.
We consider two typical examples of COVID-19 claims brought under Business Interruption policies: (i) the first example, which may have a greater probability of success, is where there has been a specific occurrence of COVID-19 in the insured premises, such as for example where an employee infected with COVID-19 was present in the insured premises, and (ii) the second example is where there is no specific allegation of COVID-19 in the insured premises, but rather, the loss arises because a governor has ordered their businesses to close due to COVID-19 emergency.
In the first example, the fundamental question is whether the mere presence of the virus on the insured premises can cause or constitute “physical damage” and whether such damage played a role in the loss of income. Arguably, the answer is yes. One can argue that the presence of microscopic organisms such as COVID-19 is in fact direct physical loss or damage triggering business interruption coverages. Assuming that there is no specific exclusion for pandemics, epidemics and viruses in the policy (we recognize that such exclusions are common, however, we are aware of several cases where there are no such exclusions), insurance might cover both the cost of cleaning and remediating the COVID-19 in the premises, but also the lost profits of the business as a result of it being closed for this remediation.
In the second example dealing with losses due to a governors’ emergency order, while this may be a more challenging claim to make, the answer depends on specific language in the policy and also in which US State, the loss occurs. For example, in some policies the Business Interruption policy terms cover “all risk of physical loss or damage.” The use of the conjunctive “or” is critical. Stated another way, the policy covers both “all risk of physical loss” and also covers “all risk of damage”. Thus damage may be broader than just physical damage. Depending on the relevant jurisdiction, some courts provide that a sufficient loss has occurred to qualify for coverage if events occur where the property can no longer be used by the insured for its purpose, even if the physical structure itself suffered no damage.
Recent Court Activity for COVID-19 Insurance Cases
There are a great deal of recent court cases filed in connection with COVID-19 insurance coverage and this article does not seek to provide a comprehensive analysis of where states are coming out on these issues. Rather, we wish to point out a few new cases that are testing the denials of coverage that insurance companies had routinely been providing.
Prior to the current COVID-19 crisis, court decisions tended to interpret “all risk” policies broadly for coverage purposes absent an express exclusion, and express exclusions were interpreted narrowly.
Since the commencement of this crisis, more than 50 lawsuits have been filed nationwide against insurance companies denying Business Interruption claims. These lawsuits generally allege that a civil authority, either a county or state official, ordered the business to cease normal operations to contain the spread of COVID-19 and that potential COVID-19 contamination constitutes physical damage or loss, which is either expressly covered by the policy or is not expressly excluded by the policy.
Furthermore, companies in the hospitality, manufacturing and health care industries are increasingly turning to litigation and specifically class action litigation, alleging their insurers have been systematically denying Business Interruption claims stemming from the pandemic. In the few weeks prior to the date of this article, companies based in nine different states filed a dozen new proposed class action complaints seeking certification of both national classes of insureds and various subclasses based on insureds states of residence or their specific types of damages.
The insureds arguments cover various Business Interruption policy language. For example, Truhaven Enterprises Inc., (“Truhaven”) doing business as Fiorino Ristorante in Summit, New Jersey, filed a class action complaint against Chubb Ltd. on April 20, 2020 in which it argued that Chubb Ltd. improperly rejected its claim for business interruption coverage on the grounds that the restaurant had not been “physically altered,” saying that determination runs afoul of applicable case law. While Truhaven’s policy contains an exclusion for losses tied to viruses, bacteria or microorganisms, Truhaven’s argument is that the clause doesn’t bar coverage under the circumstances because its losses are attributable not to the coronavirus itself but to New Jersey’s lockdown order.
Other litigation involves cases where the relevant policies do not contain virus or bacteria exclusions. For example, Café International Holding Company LLC, owner of IT! Italy Ristorante Café & Bar in downtown Fort Lauderdale, Florida, emphasized that its policy lacks such an exclusion in its April 20, 2020 putative class action complaint against Chubb Ltd. and its Westchester Surplus Lines unit.
On the opposite side of the spectrum, one insurance company, Travelers Casualty Insurance Co. of America, filed on April 20, 2020 in California federal court a complaint against Geragos & Geragos APC, seeking a declaration that the law firm’s business losses due to COVID-19 are not covered because the virus has not caused “physical loss or damage” to the firm’s offices. This complaint came in response to Geragos & Geragos five separate suits filed the previous week in Los Angeles Superior Court accusing Travelers of wrongfully denying coverage to it and several other California businesses.
These cases have not been decided, and in any event, their legal conclusions would be limited to the specific states in question. However, the key takeaways for now are that many businesses are testing denials in court and we should be mindful to watch whether these arguments prevail once courts make their rulings.
Proposed State legislation affecting Business Interruption policies
Perhaps the most significant developments for Business Interruption policies are that as of the date of this article, legislation has been proposed in seven US states and in the US House of Representatives which seeks to force commercial property insurers to provide retroactive coverage to insured businesses for losses resulting from the COVID-19 pandemic regardless of the policies’ exclusions and the existence of physical damage to the business’ property.
In the United States, insurance is generally regulated at the State level by a State’s Insurance Commission (or similar office) and led by a senior state official often referred to as the Commissioner of Insurance (or similar title). The fifty States of the United States, as is well known, are not uniform in their laws and regulations. For that reason, the applicable policy may have a provision that provides that the policy terms will be deemed automatically amended in order to conform to the State law where the particular policy is issued. Accordingly, actions by a State’s legislature could lead to an automatic amendment to an insurance policy that could potentially provide insurance coverage even if previously the policy did not.
Seven states currently have proposed bills that would require commercial property insurers to retroactively cover losses that insureds statewide have accumulated as a result of COVID-19. On March 16 New Jersey was the first to introduce such bill, A-3844, Ohio, Massachusetts, New York, Louisiana, Pennsylvania and South Carolina have so far followed suit. The bills are currently at various legislation stages. In some states, such as New Jersey, the bill’s sponsors retracted the bill before it reached the General Assembly, reportedly in order to give insurers and lawmakers more time to come up with a solution.
A New York state bill that was proposed by both the General Assembly and the State Senate, provides that “every policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic”, and “any clause or provision of a policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, which allows the insurer to deny coverage based on a virus, bacterium, or other micro-organism that causes disease, illness, or physical distress or that is capable of causing disease illness, or physical distress shall be null and void”.
The proposed federal bill is intended to ensure businesses who purchase interruption insurance will not get their claims denied because of major events, such as the Coronavirus pandemic, public safety power shutoffs or evacuations. The federal bill also provides that any exclusion in a contract for business interruption insurance shall be void and goes on to preempt state law by providing that any state approval of any exclusion of losses from a contract for business interruption insurance shall also be void to the extent that it excludes losses. The proposed federal bill has not been approved, and in the meantime U.S. Congressional Representatives have written a letter to insurance industry groups asking that they work with member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption insurance. Such industry groups have responded noting that while they will work with insurers to make sure prompt payments are made where coverage exists, business interruption policies “do not and were not designed to, provide coverage against communicable diseases such as COVID-19.”
Therefore, while this legislation has not been approved, if approved, it could cover our previously mentioned second example of a claim where there is no allegation of specific incidence of COVID-19 in the insured premises, but rather, the claim is based on a business interruption during a period of a declared state emergency due to COVID-19, and the damages could include lost profits of the insured during the relevant period of business closure.
Insurance companies and state insurance commissioners have been vocal in their opposition to such state bills. If such bills are passed, we can expect to see legal challenges from insurance companies including challenges under the Contracts Clause of the US constitution which restricts the power of States to disrupt contractual arrangements by providing “no state shall pass any Law impairing the Obligation of Contracts.” On the other hand, the U.S. Supreme Court ruled in U.S. Tr. Co. of N.Y. v. New Jersey that “States must possess broad power to adopt general regulatory measures without being concerned that private contracts will be impaired, or even destroyed, as a result.”
We cannot predict whether the currently proposed bills will pass into law, and if they do whether they can withstand legal challenges. Clearly there is legal uncertainty with respect to Business Interruption insurance coverage in connection with COVID-19 and such uncertainty may continue over the next few months. Generally speaking, however, insurance policies require the insured to file claims within a certain period of time. Therefore, an insured business should consider conducting a thorough review and analysis of the actual policy terms (again, not the summary terms but the actual policy terms) with professional advisors. Whether the insured had a specific occurrence of COVID-19 at the insured premises, or if the insured suffered a loss due to emergency declarations of closure, your professional advisors may recommend providing notice to the insurance company and commencing the claim process. Even if the claim is denied, the insured is on record of making a timely claim. That not only preserves the right to argue with the insurance company if the business feels the claim has been wrongly denied, but also preserves the right if future legislative changes act to legislatively amend the policy terms to provide coverage.