Business Interruption Insurance Claims Arising Out of Coronavirus/covid-19
| Citation | Vol. 26 No. 1 Pg. 0018 |
| Pages | 0018 |
| Publication year | 2020 |
This article serves as an introduction to first-party coverage for business interruption losses, including (1) sources of business interruption coverage; (2) how losses arising out of coronavirus/COVID-19 potentially are covered; (3) expected arguments against coverage by insurers. . . ; and (4) policyholder responses to insurers' arguments, with an emphasis on Georgia law.
BY GREGORY G. SCHULTZ AND DONALD P. BOYLE JR.
Business owners who have had to cease operations and suffered a loss of income due to public concerns over coronavirus/COVID-19 understandably have inquired about the availability of insurance coverage, particularly business interruption coverage. These questions remain largely unanswered, although we know that several significant contractual impediments to coverage are likely to exist. Additionally, insurers are likely to scrutinize claims carefully because of the high volume of such claims and the magnitude of potential claims. A spate of recent cases filed against insurers seeking business interruption coverage for coronavirus/COVID-19 losses suggests that insurers intend to aggressively defend against those claims. For example, one publication has suggested that business interruption losses could cost the insurance industry up to $383 billion per month.[1] As of this writing, at least eight U.S. states have introduced bills that would require insurance companies to pay business interruption claims (irrespective of policy language), primarily to small businesses. Most of such legislation allows insurers to pursue reimbursement from the respective states.[2]
Apart from legislative proposals, judicial battles over business interruption coverage began soon after the initial closures of businesses in March 2020. Examples of complaints recently filed are:
• Oceana Grill v. Certain Underwriters at Lloyd's, London[3]: New Orleans restaurant alleges coronavirus/COVID-19 damaged property;
• French Laundry Partners, LP v. Hartford Fire Insurance Co.[4]: Upscale California restaurant filed declaratory judgment action for coverage due to losses caused by Napa County "stay at home" order to fight the spread of coronavirus;
• Indiana Repertory Theatre, Inc. v. Cincinnati Casualty Co.[5]: Complaint for declaratory judgment that "all risks" coverage applies to forced closure resulting from stay-at-home order by governor, requiring business interruption coverage;
• Mace Marine Inc., v. Toki Marine Specialty Insurance Co.[6]: Scuba diving shop argues potential contamination of shop should be a "direct physical loss" that triggers business interruption coverage;
• Choctaw Nation of Oklahoma v. Lexington Insurance Co.[7] and Chickasaw Nation Department of Commerce v. Lexington Insurance Co.[8]: Petitions for declaratory judgment under "all risk" policies, including business interruption coverage, based on damage to "the Nation's Property"; and
• In-N-Out Burgers v. Zurich American Insurance Co.[9]: Suit to recover on business interruption coverage after chain of restaurants was forced to close by city and county orders; policy removed "virus and disease-causing illness or agent" from the exclusion.
This article serves as an introduction to first-party coverage for business interruption losses, including (1) sources of business interruption coverage; (2) how losses arising out of coronavirus/COVID-19 potentially are covered; (3) expected arguments against coverage by insurers (chiefly, lack of "direct physical loss," the 2006 Insurance Services Office (ISO) Virus Exclusion and/or the Pollution Exclusion); and (4) policyholder responses to insurers' arguments, with an emphasis on Georgia law.
Business interruption insurance is a type of "time element" coverage; i.e., it provides coverage for the period of time that the insured is unable to use the covered property.
Business Interruption Insurance Generally
Business interruption insurance can provide the insured compensation for losses while the business is unable to operate because of a covered loss. For example, if a hurricane causes flooding damage to a restaurant, which has to close for a week to clean up the damage, the lost revenue during the cleanup period may be covered.
Business interruption insurance is a type of "time element" coverage; i.e., it provides coverage for the period of time that the insured is unable to use the covered property.[10] Business interruption insurance (like event cancellation insurance) can be stand-alone insurance, or more often is a coverage offered under a typical property and casualty insurance policy. Sometimes it is bundled with property, casualty and commercial liability insurance under a "business owner's policy."
Every policy is different, but one example of the insuring clause of a business-interruption policy is as follows: "We will pay up to the Business Income Limit of Insurance stated in the Declarations for the actual loss of Business Income you sustain and actual and necessary Extra Expense you incur due to direct physical loss of or damage caused by or resulting from a Covered Cause of loss to Property ...."[11]
Assuming that the insuring clause has been triggered, there are other policy requirements and exclusions to be navigated as conditions of obtaining coverage.
Direct Physical Loss Requirement
Business interruption coverage almost always requires the insured to show that the business interruption resulted from "direct physical loss or damage covered by [the] Policy," as in the quotations from the previous section. An insured may argue that coronavirus/COVID-19 has resulted in a direct physical loss or damage to property based on prior case law relating to the presence of other substances, such as asbestos, E. coli contamination and odors.
In Yale University v. Cigna Insurance Co.,[12] the university successfully made a claim under an "all risk" policy for asbestos and lead in its buildings. The policy did not contain an asbestos exclusion.[13] Relying on cases from around the country, the U.S. District Court for the District of Connecticut held that the presence of asbestos and lead contamination constituted "physical loss of or damage to property" sufficient to trigger coverage under the all risk policy.[14]
In Motorists Mutual Insurance Co. v. Hardinger,[15] the U.S. Court of Appeals for the Third Circuit reversed the district court's holding that E. coli contamination did not constitute "direct physical loss or risk of a direct physical loss" under a homeowner's insurance policy.[16] Applying Pennsylvania law, the court held that loss of use of the property would constitute a physical loss, and found that there was a genuine issue of fact on "whether the functionality of the [insureds'] property was nearly eliminated or destroyed, or whether their property was made useless or uninhabitable."[17]
In TRAVCO Insurance Co. v. Ward,[18] the insured's home had been rendered uninhabitable by defective drywall that released sulfide gases.[19] Relying on precedent from multiple jurisdictions, the U.S. District Court for the Eastern District of Virginia held that "physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces."[20] Underlining the importance of the actual policy language, the court concluded:
The Court's conclusion that Defendant has suffered a direct physical loss is strengthened by the fact that the Policy specifically defines "Property Damage" to include "loss of use of tangible property." When read in the context of the precedent discussed above, this definition suggests that the parties intended to define "direct physical loss" to include total loss of use. If Plaintiff intended to define covered losses more narrowly, it should have done so more clearly. "Having failed to do so, [Plaintiff] cannot now rewrite a policy it issued in hopes of avoiding the terms of an instrument it drafted."[21]
The insured needs to be careful, however, to show that the...
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