Insurance Claims for Business Disruption Due to COVID-19
According to one estimate, small businesses may be losing as much as $431 billion of income per month as a result of the COVID-19 pandemic. Naturally, many of these small businesses turned to their insurance policies for a financial lifeline to help them stay afloat until they can begin generating revenue again.
A common form of insurance carried by many small businesses is business interruption (or business income) insurance, which is typically found in a commercial property policy, either in the original policy itself, or as an endorsement. Businesses who have filed claims under such policies are finding, however, that—at least from their insurers’ perspective—no coverage for COVID-19-related income losses exists. Indeed, several insurers have taken public coverage positions with respect to such losses to discourage businesses from making business loss claims under such policies. These denials have resulted in a number of lawsuits filed by insureds over the last thirty days challenging their insurers’ claim denials.
These lawsuits raise novel questions about what the language of the business income loss clauses in a commercial property policy mean. And although a general consensus among courts as to how to resolve these COVID-19-related coverage questions will not materialize anytime soon, existing case law addressing such policies provides some guidance as to how courts may resolve them.
Although the focus of this blog is on business interruption insurance found in commercial property policies, coverage for COVID-19-related losses may be covered by other types of insurance. Businesses should therefore ensure they have a full copy (with all endorsements and riders) of each insurance policy in effect when the COVID-19-related loss was suffered, and review each to determine if a particular loss may be covered. Insurance policies require insureds to provide timely notice of a potential claim, so acting promptly is critical. Whether coverage for a particular loss exists cannot be determined in the abstract, but must instead be determined by the language of the insurance policy itself, and the specific facts giving rise to the loss.
Business Interruption Insurance and COVID-19
Business income insurance, also referred to as business interruption insurance, is a form of first-party insurance, that is, it covers the named insured against actual business income losses the named insured suffers as a result of a covered risk. Such insurance is carried as a part of a commercial property policy, either in the original policy itself, or through an endorsement. Commercial property policies sold in the United States are frequently sold as “all risks” policies, in that they cover any “direct loss” unless expressly excluded or limited by the policy.
* The term “business income” is typically defined as:
- Net Income (Net Profit or Less before income taxes) that would have been earned or incurred; and
- Continuing normal operating expenses incurred, including payroll.
Capitalized terms like “Net Income” are further defined in the policy.
Typical business income coverage language will read as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
Business income coverage may also include “civil authority” coverage. The language of clauses providing such coverage will typically read as follows:
We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.
Thus, the threshold question with such language is whether COVID-19-related business income losses can be said to be caused by “physical loss or damage to property.”
In an insurance coverage action, the initial burden falls on the insured to establish that the incident giving rise to the loss was within the scope of the policy. Insureds who have filed lawsuits against their insurers for denying coverage for COVID-19-related business income losses argue that the presence of a virus on covered property is “physical damage” to the property, and that state-ordered shutdowns have prohibited access to the insured’s premises as a result of “damage” to property caused by the novel coronavirus.
Insurers have taken the position that such insurance covers business income losses caused by damage to property from events like hurricanes, fires, wind damage, or theft, and not viruses. In denying coverage, insurers will rely on case law suggesting that for “physical damage” to property to occur, it must alter or otherwise affect the “structural integrity” of the property.
Other courts have taken a broader view of what may constitute “physical damage or loss” to covered property. A common standard applied by courts is whether the physical damage renders the covered property “uninhabitable or substantially unusable.” See Universal Image Prods., Inc. v. Federal Ins. Co., 457 Fed. App’x 569, 575 (6th Cir. 2012) (applying Michigan law). In an asbestos case, the Minnesota Court of Appeals expressly rejected the structural integrity argument, and reasoned that “[a]lthough asbestos contamination does not result in tangible injury to the physical structure of a building, a building’s function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants.” Sentinel Management Co. v. New Hampshire Insurance Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997).
Another fact that may aid insureds in arguing that a virus can cause direct physical damage to a property within the meaning of a commercial property policy is the standard ISO commercial property form endorsement excluding loss due to virus or bacteria. This form provides that the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.”
Plaintiffs who have sued insurers for denying business interruption claims on policies without this exclusion have cited a statement sent by ISO to state insurance regulators regarding this exclusion in which the ISO stated that “[w]hen disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property (for example, the milk), cost of decontamination (for example, interior building surfaces), and business interruption (time element) losses.” The recent COVID-19 business interruption coverage lawsuits rely on this statement as support for the argument that insurers themselves recognized that the presence of a virus on covered property can constitute physical damage to property.
Civil authority coverage raises its own set of issues. It too requires “direct physical loss of or damage to property,” but to property “other than at the described premises.” A claimant must also show that the civil authority action prohibited access to the covered property. Whether these requirements can be met will depend on the specific shut-down order at issue, the type of access prohibited, and resolution of the question whether direct physical damage to other property due to the presence of the novel coronavirus can be shown.
Resolution of the threshold issues outlined above will not, however, end the coverage inquiry. Insurers will invoke exclusions to coverage and other defenses that may justify denial of a claim.
Recognizing the obstacles to coverage most businesses will face when seeking reimbursement for COVID-19-related business income losses, several states have introduced legislation seeking to mandate coverage for such losses. In Ohio, House Bill 589, introduced on March 24, provides that
[n]otwithstanding any other law or rule to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, in force in this state on the effective date of this section, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.
The bill only applies to businesses located in Ohio who employ one hundred or fewer eligible employees. Under the bill, the Superintendent of Insurance is directed to create a “Business Interruption Insurance Fund” to be used to reimburse insurers who pay such claims under the bill, which is to be funded by an assessment against insurers that do business in the state. Similar legislation has been introduced in other states.
Even if such legislation passes in Ohio and elsewhere, insurers are unlikely to accede to the legislative mandates without a fight. And indeed, the legislation raises some constitutional issues that are unlikely to be resolved quickly enough to serve the purpose for which it is intended—“to protect small businesses from catastrophic losses caused by commercial decline necessary to prevent the spread of COVID-19.”
Impact on Restaurant and Hospitality Industry
Bars and restaurants have been especially impacted by the COVID-19 pandemic and shut-down orders, and are already encountering many issues outlined in this article. In Ohio for example, Gov. DeWine announced during a Sunday afternoon briefing that all Ohio bars and restaurants were ordered to shut-down to only take-out sales effective that evening. This was a sudden and abrupt interruption for the industry which very few were ready for.
One example of this is a Columbus, Ohio based brewpub, which filed a lawsuit against its insurance company seeking to force coverage. In the claim filed by Troy Stacy Enterprises Inc. (d/b/a Craft & Vinyl), the brewpub asserts that it had to suddenly suspend operations for reasons outside of its control, and that the insurer’s business disruption coverage does not provide a policy exclusion for losses caused by viruses. Time will tell how successful their argument will ultimately be.
As noted, whether insurance coverage exists for a particular loss suffered as a result of the COVID-19 pandemic and related government shut-down orders cannot be determined in the abstract, and will depend on the language of the insurance policy, and specific facts giving rise to the loss. There are however several steps a business should take to protect any rights to reimbursement it may have under existing policies:
- Document any losses suffered, the cause of the loss, and the steps taken to mitigate existing losses and prevent future losses. Consider establishing separate accounts to track losses and loss-related expenses;
- Ensure you have full copies of any potentially applicable insurance policies, and conduct a thorough review. If needed, request copies from the broker or insurance agent.
- Place the insurance carrier for any potentially applicable policy on notice of your potential claim. The policy will most likely include instructions for how to provide compliant notice, and these instructions should be followed precisely. The insurance agent or broker who sold the policy should also be notified of the loss. Any doubts about whether coverage for a particular loss exists should be resolved in favor of providing notice to the insurer.
- Document any communications with your insurer, broker, or insurance agent about any claims made;
- Follow the requirements of the policy to preserve any claim. Policies may require proof of loss to be submitted promptly after the loss event;
- Preserve all documents and electronically stored information that may pertain to losses for which coverage has or may be sought;
- Respond promptly to any requests from your insurer for information related to a claim;
- Cooperate with any investigation of a claim the insurer may elect to conduct;
- In the event a claim is denied, consider retaining competent coverage counsel for advice regarding the insurer’s coverage position.
We are continuously monitoring this and other matters related to the COVID-19 pandemic and will provide updated guidance as it is available. The Graydon COVID-19 Task Force stands ready to assist with any questions you may have about your insurance coverage.