Business interruption coverage cannot be triggered without “direct physical loss of or damage to property at premises which are described in the Declarations.” But, what if instead of visible damage to the property—as would be the case in a fire, hurricane, or tornado—the loss of or damage to the property were to be intangible and come in the form of a deadly and virulent microscopic organism not visible to the naked eye? Is there business interruption coverage available to those businesses that have been forced to shut down and/or halt operations due to the COVID-19 crisis? Maybe. And, if past crises are any indication, litigation surrounding business interruption coverage will be extensive, as there will be significant amounts at stake. Below we review a few key decisions that may impact how courts will assess whether the “direct physical loss of or damage to property” requirement has been met for business interruption coverage to be triggered.
Although the Connecticut courts have not yet been faced with deciding whether contamination of physical property constitutes a physical loss or damage, there may be some precedent for arguing that the COVID-19 situations should be covered, especially where there is a documented and known exposure. For example, in Yale University v. CIGNA Insurance Co., a Connecticut federal court determined that contamination by the presence of friable asbestos and non-intact lead-based paint in the university’s buildings constituted physical loss or damage. 224 F. Supp. 2d 402 (D. Conn. 2002). The court drew a distinction between claims for the “mere presence of intact materials containing lead and asbestos” and the “presence of friable asbestos and non-intact lead-based paint.” The court agreed that there was no coverage “for costs incurred due to the mere presence of asbestos-and-lead-containing materials in its buildings.” Drawing a parallel to the Yale case, if the presence of COVID-19 has been confirmed within a building and the risk of exposure is not merely speculative, it stands to reason that such an instance could be considered contamination constituting physical loss or damage.
Other jurisdictions have also found that the ““direct physical loss of or damage to” requirement can be met even in instances where the physical loss or damage is not tangible, structural, or even visible. Specifically, courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage For example, in Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, No. 12-cv-04418, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014), applying New Jersey law, the federal court found that there is no genuine dispute that the ammonia release physically transformed the air within the facility so that it was unsafe and unfit for occupancy, and that this constituted a physical loss to the facility under the terms of the policy. Similarly, in Motorists Mutual Ins. Co. v. Hardinger, applying Pennsylvania law, the Third Circuit found that the bacteria contamination of a home's water supply constituted a "direct physical loss" when it rendered the home uninhabitable. 131 Fed. Appx. 823, 825-27 (3d Cir. 2005). See also, Essex v. Bloom South Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (finding that, under Massachusetts law, an unpleasant odor rendering property unusable constituted physical injury to the property); TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 709 (E.D.Va. 2010), aff'd, 504 F. App'x. 251 (4th Cir. 2013) (finding "direct physical loss" where "home was rendered uninhabitable by the toxic gases" released by defective drywall); Western Fire Insurance Co. v. First Presbyterian Church, 437 P.2d 53 (Sup. Ct. Col. 1968 (in addressing the issue of whether a church that was vacated by a local fire department because of gasoline fumes had incurred “direct physical loss,” the court reasoned that the accumulation of gasoline under and around the church built up to the point that there was such infiltration and contamination, making further use of the building highly dangerous.”)
On the other end of the spectrum are courts that have interpreted “physical loss” narrowly such that exposure of covered property to contaminant (e.g. mold) which can be removed with routine cleaning, but which did not tangibly damage property, is an economic loss which does not constitute “direct physical loss or damage.” See e.g., Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 709 (E.D. Mich. 2010), aff’d sub nom. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569 (6th Cir. 2012) (insured did not suffer a direct physical loss (insured did not suffer a direct physical loss when water seepage caused “pervasive odor [and] mold and bacterial contamination (both visual and aerosolized)” that was resolved through cleaning); Mastellone v. Lightning Rod Mut. Ins. Co.,884 N.E.2d 1130, 1144 (Ohio App. Ct. 2008) (mold and mildew staining to the exterior siding of residence did not constitute direct physical loss “because it was only temporary and did not affect the structure of the wood” and it “could be cleaned from the siding by using a solution of bleach and trisodium phosphate.”); Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass'n,953 F.2d 1387 (9th Cir. 1992) (although an insured may have sustained a consequential economic loss as a result of cleaning a building contaminated with asbestos, there was no “direct physical loss” because the building was physically unchanged); Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. CIV. 98-43 4-HU, 1999 WL 6i 9100 (D. Or. Aug. 4, 1999) (noting in dicta that a piece of clothing in an individual's wardrobe that was worn around a smokey campfire would not be said to be physically damaged if a mere washing would remove the odor and that "[t]he mere adherence of molecules to porous surfaces, without more, does not equate physical loss or damage").
The “physical loss of or damage to” requirement remains a necessary predicate to trigger business interruption coverage. As demonstrated above, the issue of whether an intangible, such as the COVID-19 virus, meets this requirement will vary by jurisdiction and is dependent on the specific language in the policy. Accordingly, it will be crucial to scrutinize the particular facts and policy of each case carefully to determine the availability of business interruption coverage, especially as many business interruption policies also contain exclusions and/or endorsements disclaiming losses due to virus or bacteria and specifically state that it applies, among other things, to “business income.”