It is difficult to overstate the immediate impact of the COVID-19 outbreak on American business, and indeed on American life. No event of the last century, save two World Wars, the Spanish Flu of 1918, and the 9-11 terrorist attacks has disrupted the daily interactions that power business across all sectors quite like the present pandemic.
With the pandemic prompting school closures, cancellations of major sports and entertainment events, government recommendations to stay home, “social distancing,” and the resulting impairment of the workforce and supply chain, businesses may be looking to their insurance policies for assistance with the negative impact on their bottom lines.
As in all cases, every insurance policy is different, so while the following addresses generally applicable terms common in the industry, we strongly recommend reviewing the specific language of your policy and consulting with your attorney and your broker to determine what coverage may be available to you. In general, however, absent specifically-negotiated language obtained by a particularly adept broker, most policies are unlikely to provide relief.
Business Interruption Coverage – Physical Damage Required
Property insurance as commonly understood provides coverage for physical loss or damage to an insured’s property. The business interruption insurance provisions of such policies cover financial impacts (i.e., revenue loss) resulting from such covered events. Most property insurance policies including business interruption coverage require a direct relationship between the underlying physical loss or damage and the resulting lost income. The Insurance Services Office (ISO) form for commercial property coverage – the basis of many policies – includes language requiring that the “suspension” of business operations must be caused by “direct physical loss of or damage to property at premises which are described in the Declarations.”
The losses experienced by most businesses due to COVID-19 – with certain exceptions in health care – are generally due to employees and customers remaining absent, supply chain disruptions and other factors. The economic impact of these activities generally do not relate to or result in physical damage, and as a result, coverage may not be available under these policies in many if not most circumstances.
Some insureds are likely to argue, however, that covered losses can occur even where the damages to property cannot be seen or touched. Indeed, just because damage is microscopic in scale, significant losses may still accrue. With potentially infected customers and employees coughing and sneezing on store shelves and product packaging — why can’t the virus itself be deemed to cause physical damage?
In one case where this matter was considered (outside of present circumstances), the New Hampshire Supreme Court found that an odor emanating from a neighboring property was sufficient to cause a physical loss, as a “[the] contaminant or condition that causes a change to the property…that cannot be seen or touched” can still cause insurable damage under the policy. However even in this finding, the court noted that physical loss still requires a “demonstrable alteration of the insured property.” As another court noted, “the mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage.”
Further, it is unlikely, particularly given how many common household cleaners can be used to disinfect surfaces from contamination caused by the virus, that businesses would be successful in demonstrating the existence of an actual physically damaging event as opposed to a merely theoretical one, or a matter requiring routine cleanup. Whether COVID-19 causes “physical damage” to a workplace is a question that will likely be litigated in the aftermath of this outbreak.
The relatively easy cleanup of the virus from surfaces and other policy terms may present additional challenges to businesses seeking interruption coverage. For example, insurers’ compensation under covered circumstances generally only includes the lesser amount of the cost to repair or replace any damaged property. When wiping a store shelf with bleach is arguably sufficient to eliminate a risk only theoretically covered at all, the diminishing likelihood of significant coverage offsets to business losses from this line of coverage becomes clear.
Exclusions specifically applicable to contamination may also limit coverage. Following some substantial payouts on claims prompted by the Severe Acute Respiratory Syndrome (SARS) outbreak of 2003, many insurers revised their policies to exclude from coverage claims arising from the outbreak of communicable diseases. “Pandemics” may even be specifically excluded. If a company’s policy includes some of these exclusions, coverage may effectively be blocked. Without these specific exclusions, the common “contamination” exclusion may also be applicable, though case law demonstrates that these provisions may be interpreted narrowly. Specific policy language is needed to cover such risks, and can be costly. While coverage extensions and specific endorsements may be available, including those related to “crisis management,” there is no certainty that the language will provide coverage for losses derived from diseases. Insurance carriers can be relied upon to adopt a narrow view of these provisions, particularly in light of such a broad-based event that, if viewed differently, would have far-reaching industry implications.
Civil Authority and Contingent Business Interruption
With the response to the outbreak peaking in the United States during mid-March, one need only view news reports from college spring break destinations like Miami Beach to understand the reluctance of business owners (in this case, especially restaurant and bar operators) to close down their establishments during one of their most profitable seasons. As executive orders from governors and local officials around the country have forced their hand, many businesses may wonder if “civil authority coverage,” which generally applies when an order from a governmental authority prevents access to insured’s property, will be available to them.
Unfortunately for business owners, this coverage will not apply unless the order from civil authorities resulted from circumstances caused by physical damage to the insured’s property. This premise was widely tested in the courts following the 9-11 attacks, when airlines sought recovery based on decisions by local governments and the Federal Aviation Administration to close airports in response. In one case, the second circuit found in United Airlines v. Insurance Co. of Pennsylvania, 439 F. 3d 128 (2d Cir. 2006) that the underlying government orders were caused by the fear of future attacks, not “repairing, mitigating, or responding” to damage caused by previous attacks. As a result, United Airlines’ loss was determined not to be due to covered physical damage and therefore excluded.
Coverage under Contingent Business Interruption provisions requires a similar analysis, but may present an avenue for recovery. Contingent business interruption coverage is available and sometimes included in the property policy to address circumstances where a key customer or the insured’s business supply chain is impacted, thus preventing an insured from producing its product or services. This coverage can assist in paying rent, funding payroll or other expenses not otherwise covered by standard business interruption provisions. Coverage must, however, also emanate from a covered physical loss. If property or services would be contaminated by the coronavirus, and would be covered as described earlier in this article, these provisions may provide some coverage for insureds. However, insureds should be aware that if their policy contains such language, it is often subject to a “sub-limit” that is materially below the standard coverage limits in their property policy.
It’s worth reviewing your coverage to see if any assistance may be available, however, do not be surprised if your business interruption coverage does not cover this particular interruption to your business.
Event Cancellation and Travel Insurance
Personal events, business conferences and international gatherings around the world — including the Tokyo Summer Olympics — have been the subject of much public speculation and discussion in the wake of COVID-19. As cancellations mount, policyholders will be looking to their event cancellation and travel insurance policies to determine the availability of coverage.
Individuals and businesses often purchase event cancellation insurance coverage either for specific circumstances (i.e., weddings, concerts and tournaments) or on an annual basis if the business is regularly engaged in hosting covered events. The purpose of these policies is to insure against losses to event-related revenue or expenses resulting from a cancellation due to circumstances beyond the control of the insured.
Situations that often give rise to claims under such policies include weather or other natural events (i.e., hurricanes, tornadoes, wildfires, earthquakes) or human-caused events such as labor strikes and acts of terrorism. In the event an insured’s policy is an “all-cause” or otherwise unlimited policy, it could provide coverage due to the outbreak of COVID-19, particularly if purchased prior to 2020 when the virus began to spread globally. Notably, such coverage is all but impossible to obtain in the market at this time without exclusions. Further, “infectious or communicable diseases” are often excluded as covered causes, and require separate expensive endorsements to be available to policyholders.
The coverage analysis in the context of travel insurance is similar. Unless the specific policy includes language related to “cancellations for any reason,” coverage may not be available, particularly as concerns about contracting the virus represent prospective or theoretical bases for cancellation not otherwise covered. Certain major providers, however, have posted specific guidance on how COVID-19 will be viewed under their policies. Allianz Global, for example, is accommodating claims for (1) emergency medical care for insureds who become ill with COVID-19 while traveling and (2) trip cancellation or trip interruption if an insured becomes ill with COVID-19 either before or during their trip. Note that the unifying thread in both circumstances is that the insured must become ill with COVID-19 for coverage to be available. Fear of becoming ill driving an insured to cancel on a precautionary basis is not covered.
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