Survey of COVID-19 Insurance Issues Coverage for Business Income Interruptions—Part 1, 0920 COBJ, Vol. 49, No. 8 Pg. 56

PositionVol. 49, 8 [Page 56]

Survey of COVID-19 Insurance Issues Coverage for Business Income Interruptions—Part 1

Vol. 49, No. 8 [Page 56]

Colorado Lawyer

September, 2020

August, 2020



This two-part article surveys insurance issues relating to business income interruption and workers’ compensation arising from the COVID-19 pandemic.

If you’re part of an insurance law mailing list, or even just a casual news follower, you’ve likely seen headlines like these:

■ “Restaurant Groups Serve COVID-19 Coverage Lawsuits in California and Illinois”[1]

■ “COVID-19 Coverage Litigation Escalates”2

■ “Class Action Lawsuits Related to Coronavirus Spike across the Country”3

■ “Student files class-action lawsuit against Liberty University over coronavirus response”4

Discussions of insurance coverage for COVID-19 losses are taking up all the oxygen in the room. We are not only facing a once-in-a-generation health crisis, but an economic crisis as well—one that could have ripple effects for years. The stakes are high.

At the peak of this crisis, small businesses were losing anywhere from $220 to $383 billion a month.5 Independent restaurants have been particularly hard-hit, with approximately 80% of these businesses reporting that they do not expect to reopen.6 And while many businesses are looking to their insurance policies for a financial lifeline, insurers have been sounding the alarm about their financial health as well— after all, insurance giant AIG may have failed in 2008 if it weren’t for an $85 billion Federal Reserve loan.

It’s impossible to predict how long this health crisis will last, but it is unlikely that a vaccine will be available before spring 2021.7 Until this crisis is resolved, small business owners will continue to face many uncertainties. First and foremost, business owners are probably asking themselves:

■ How is my business going to survive after being closed for months, especially when I’m still unable to open at full capacity?

■ What will I do if there’s an outbreak among my employees?

Tis article provides guidance to help answer these questions. Tis Part 1 focuses on commercial property (CP) insurance coverage for business losses connected with the COVID-19 pandemic.

CP insurance issues tend to revolve around whether the actual or threatened presence of COVID-19 is a covered event under a CP policy, whether virus or similar exclusions bar such coverage, and whether specialty coverage applies, such as coverage for business losses due to “civil authority” or “governmental action.” The elephant in the room is the virus exclusion. Insurers have maintained that these exclusions, by their plain language, exclude all losses associated with COVID-19. But many of the businesses that have fled suits seeking coverage for business interruption losses have a virus exclusion in their policy. Tis article explains some of the reasons why these businesses have argued that the virus exclusion does not apply in their situations, and why insurers maintain that it does.

While this article discusses whether coverage exists under typical insurance policy forms and policy language, such forms and language differ from insurer to insurer and, often, from policy to policy. So determining whether coverage exists in a specific situation requires a thorough review of the entire policy at issue.8

COVID-19 and CP Insurance

Many small businesses that have suffered and are continuing to suffer loss of business income arising out of the COVID-19 pandemic are looking to their commercial insurance policies for help. Most commercial insurance policies include both CP and Commercial General Liability (CGL) coverage. CP coverage usually includes “business interruption” (BI) coverage, which generally covers business income loss resulting from “direct physical loss or damage” to covered property. BI coverage is subject to its own limit, by dollar amount, duration, or both. CGL coverage, on the other hand, protects insured businesses against third-party liability claims because of property damage (including loss of use of property) and bodily injury.

Hundreds of businesses in Colorado, and tens of thousands nationwide, have made claims under their CP policies for lost business income and extra expenses suffered in association with the COVID-19 pandemic and the accompanying government-ordered shutdowns and slowdowns. Insurers have denied these claims, principally relying on arguments that the businesses have not suffered “direct physical loss of or damage to” property, and/or that coverage is excluded by virus or similar exclusions often found in CP policies.

The bulk of COVID-19-related insurance lawsuits fled in March, April, and May 2020 have been brought by businesses with BI coverage seeking payment for losses incurred either due to (1) the presence of the coronavirus that causes COVID-19, or (2) government-mandated shutdowns of their business. Aside from BI coverage, businesses may be entitled to coverage for decontamination expenses or for other direct property losses or damage (e.g., inventory that was lost or destroyed), provided it was “Covered Property”[9] as defined in the policy.

The American Property Casualty Insurance Association (APCIA) contends that many insurance policies, including those with BI coverage, do not cover pandemics or viruses such as COVID-19.10 APCIA also claims that interpreting insurance policies to cover these losses would topple the insurance industry, especially given APCIA estimates that small businesses will lose up to $220 billion to $383 billion per month.11 However, commentators representing the interests of policyholders have countered that insurers collectively reported a surplus of approximately $800 billion last year.12

BI Coverage

The big question facing businesses that have been forced to shut their doors due to the presence of the coronavirus that causes COVID-19—or due to government-mandated business closures—is whether the BI coverage in their CP policies covers their loss of income during the shutdown. The insurance industry answers no, there has not been a “direct physical loss or damage”; alternatively, it maintains that the ubiquitous virus exclusion precludes coverage.13 H o w e v e r, a closer look at existing Colorado law and at the virus exclusion reveals arguments supporting coverage for business income losses associated with these closures.

In a typical CP policy, a business is covered for “direct physical loss of or damage to” the property covered by the policy that was caused by or resulted from a “Covered Cause of Loss,”14 subject to the policy’s exclusions. Tis coverage grant describes the trigger of coverage found in every CP policy. Most commercial policies define “Covered Cause of Loss” through an endorsement that provides what is commonly referred to as “all-risk” coverage, meaning that it covers all kinds of accidental losses that are not otherwise excluded.15

What the insurer will “pay for” also varies. For example, a business that can no longer operate because its building or other covered property, such as inventory, was destroyed by fire could expect that, at a minimum, the cost of repairing or replacing the property damaged by the fire would be covered. But what about the income the business lost while its building was closed for repairs? In this example, the business would likely be covered for these losses under the policy’s BI coverage.

If the business cannot carry on with normal business following the fire, while its “operations”16 have been “suspend[ed],”17 its lost income will be reimbursed under the BI coverage pursuant to a specified formula and a defined time. The BI calculation may require supporting documentation and an accountant’s assistance. BI coverage generally pays for net income the business would have reasonably expected to earn if not for the loss, as well as continuing normal operating expenses, including payroll, that are incurred even though the business is shut down.

CP policies also usually contain “extra expense” coverage, which pays the reasonable cost, over and above normal operating expenses, reasonably necessary to avoid having to shut down during the repair and restoration period, such as paying contractors extra to work at night so the business can stay open during the day.18 While policies vary as to the coverage levels, typically there would be little dispute as to whether the business in the preceding fire loss example is entitled to some BI coverage: the business suffered loss or damage to its property due to the fire; a fire is a “Covered Cause of Loss” in virtually every CP policy; and the business sustained income loss and some continuing expenses. Whether a business’s CP policy covers losses suffered in connection with the COVID-19 pandemic, however, is more complicated.

Overview of CP Property Claims Relating to COVID-19

As explained in the following section, businesses with BI coverage first need to establish that a covered cause of loss caused “direct physical loss of or damage” to their property. A typical business interruption provision states, in pertinent part:

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 the 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.19 (Emphasis added.)

Assuming this provision is satisfied, the next consideration is the policy’s...

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