Covid-19’s Effects on Real Estate Law—part 2: the Business Interruption Insurance Puzzle

Publication year2021
50 Colo.Law. 50
COVID-19’s Effects on Real Estate Law—Part 2: The Business Interruption Insurance Puzzle
No. Vol. 50, No. 7 [Page 50]
Colorado Lawyer
July, 2021



This three-part series examines how COVID-19 and associated legal developments have affected real estate law. Part 1 featured commercial leasing. This part 2 covers business interruption insurance. Part 3 will provide an update on eviction law in light of the pandemic.

Since March 2020, businesses large and small have suffered monumental financial losses because of COVID-19. The pandemic prompted governmental actions that have resulted in intermittent and sometimes permanent business shutdowns. Consequently, many affected businesses have made insurance claims to cover their losses.

This article addresses business interruption coverage and insurance claims made under that coverage due to the COVID-19 pandemic and resulting state and local governmental actions. It explains how to analyze coverage and discusses recent COVID-19 business interruption lawsuits.

The Current Environment

The first major governmental action in Colorado occurred on March 16,2020, when the Colorado Department of Public Health and Environment (CDPHE) issued a public health order,[1] stating in part:

The Colorado Department of Public Health and Environment (CDPHE) is working to stop the spread of novel coronavirus 2019 (COVID-19).... [It is] necessary to implement emergency measures to close down all bars, restaurants, theaters, gymnasiums and casinos in Colorado in an effort to protect and preserve the public health.

Subsequent stay-at-home orders prohibited nonessential movement by all residents. Today, many businesses remain closed or operate at partial capacity. Those businesses experiencing shutdowns and slowdowns that turned to their insurers for commercial property coverage for business losses have faced mixed results, and many have filed suit in federal or state courts to obtain coverage. Nationwide, as of April 2021:[2]

■ Over 1,700 COVID-19 business interruption lawsuits have been filed, and that number continues to grow.

■ Courts have granted insurers' motions to dismiss COVID-19 business interruption lawsuits with prejudice 264 times and without prejudice 36 times.[3]

■ Courts have denied insurers' motions to dismiss on 49 occasions.[4]

■ Courts have granted seven summary judgment motions for policyholders and 15 such motions for insurers.[5]

Litigation is just beginning, and many claims are sure to follow. Practitioners contemplating business interruption actions must understand how to evaluate the coverage landscape.

Evaluating Business Interruption Claims

Analyzing an insurance policy is a lot like assembling a jigsaw puzzle: one missing piece leads to a frustratingly incomplete result. And just as randomly forcing pieces together won't conjure the desired puzzle box image, assembling an insurance policy in a haphazard fashion won't result in the client's full coverage picture. To successfully assemble the coverage puzzle, practitioners should follow the steps and heed the practice pointers below.

Step 1: Obtain a Copy of the Complete Policy

The first step in solving a jigsaw puzzle is to take all the puzzle pieces out of the box and arrange diem in a coherent order. Like the puzzler sorting pieces, the practitioner evaluating coverage must collect the parts of the policy and sort them logically. The policy includes the declarations (the declarations of the policy period in which the loss occurred list all applicable forms within that policy), coverage forms, and all endorsements. The practitioner must ensure that the forms and endorsements match the declaration's list of these items. Once the policy's parts are sorted out, the practitioner's coverage puzzle assembly begins.

As a threshold matter, the practitioner must determine whether the commercial property insurance coverage is "all risks" or "named risks." An all risks policy provides coverage for any incident that the insurance policy does not specifically exclude. It offers much broader protection than a named risks policy, which only covers incidents the policy specifically enumerates. However, the term "all risks coverage" is somewhat misleading because all insurance policies contain several exclusions. In a named risks policy, the policyholder agrees that the insurance company is responsible only for losses related to the policy's specifically identified risks. Named risks often include vandalism, fire, lightning, wind damage, explosions, falling objects that damage the exterior of the property, frozen pipes, ice and snow damage, theft, and accidental water damage.

Practice Pointer: The complete list of coverage forms, including business interruption coverage, is typically listed in the policy's declarations. To ensure you have the entire policy, request a certified copy of the policy from the insurer.

Step 2: Know the Law on Insurance Policy Interpretation

Insurance contracts are construed in accordance with general contract law.[6] Courts interpret the language of insurance contracts according to their plain and ordinary meaning.[7] "When the language used in a contract is plain and its meaning is clear, the agreement must be enforced as written."[8] Courts do not rewrite clear and unambiguous policy provisions.[9] Exclusionary terms must also be construed according to their plain and apparent meaning.[10]

A term is ambiguous when it is reasonably susceptible of more than one meaning.[11] If an insurance policy's limitation or exclusion is unambiguous, courts will enforce that limitation or exclusion.[12] The insured generally bears the burden of proving that coverage for a particular cause of loss is triggered, and the insurer bears the burden of showing an exclusion applies in a particular case and that it is not subject to any other reasonable interpretation.[13] If the insurer shows that the exclusion applies, the burden shifts back to the insured to prove the applicability of an exception to the exclusion.[14] An insurer cannot be liable beyond the scope of risks covered in the policy.[15] When interpreting insurance contracts, courts will not force an ambiguity to resolve it against an insurer.[16] And courts may not make a new contract between the insurer and the insured.[17]

Practice Pointer: Once all potentially relevant policy terms are identified, review Colorado case law to determine whether any policy provisions have been previously analyzed under Colorado law. Some provisions may be ambiguous, and some may be void for violation of a statute or as against public policy.

Step 3: Consider the Coverage Grants

Businesses generally obtain coverage for business losses as part of their commercial property insurance policies. While many policies include standard language derived from Insurance Services Organization (ISO) forms, others vary, sometimes significantly, from t hose forms. Commercial property insurance typically includes business income and extra expense or business interruption coverage, civil authority coverage, additional business income coverage, and contingent business income or contingent business interruption coverage. This article references ISO forms in most instances. The ISO "special form" commercial property insurance agreement coverage grant provides: We will pay for direct physical loss of or damage to Covered Property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.[18]

"Covered Property" under the ISO form includes the building identified in the declarations, the policyholder's business personal property, and the personal property of others.[19]

By using this form, the insurer agrees to pay for direct physical loss of or damage to such things as structures, buildings, equipment, furniture, inventory, supplies, and fixtures at the premises caused by or resulting from a covered cause of loss. As this is an all risks policy, the next step requires determining what is a "covered cause of loss." To that end, the policy's section on "causes of loss" must be located and reviewed. This is usually on a different form or in a different section than the commercial property insurance agreement.

The ISO "Causes of Loss—Special Form" policy form states that "[w]hen Special is shown in the Declarations, Covered Cause of Loss means direct physical loss unless the loss is excluded or limited in this policy."[20] Given that a Covered Cause of Loss means "direct physical loss unless excluded or limited" by the policy, the inclination may be to search for the exclusions next. But that would be like trying to match all the dark colors of the puzzle together without first separating the dark edge pieces from the dark middle pieces. So far, the only fact determined is that the commercial property policy provides coverage for physical loss or damage at the premises. These two forms are simply the starting place; they do not extend coverage to business income losses and extra expenses.

If the policyholder purchased business income loss coverage, a separate form then extends coverage for those financial losses caused by direct physical loss or damage. This coverage is commonly provided through the ISO "Business Income (and Extra Expense) Coverage Form," which provides:

We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during die "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 ... .[21]

Under this form, the insurer agrees to pay for loss of business income incurred due to necessary...

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