Many companies that have suffered business income disruptions and losses as a result of the coronavirus are asking their insurance brokers if there is coverage for such losses under the business interruption or contingent business interruption provisions of their all-risk insurance policies.
The response is typically “No,” with the stated reason being that there has been no direct physical loss or damage to insured property. Direct physical loss or damage is typically a prerequisite for coverage under such insurance policies. But the coronavirus may be deemed by a court to have caused physical loss or damage to the insured property. Policyholders should not accept a “No” answer at face value, and insurers should evaluate such a request for coverage seriously. The answer in each instance depends upon the language of the policy, and an analysis of applicable case law.
One case to consider is Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005), wherein the Third Circuit Court of Appeals concluded that there was an issue of fact, preventing summary judgment in favor of the insurer, on the question of whether bacteria caused direct physical damage under a homeowners policy. In Hardinger, a well at the insured’s home had been contaminated with e-coli bacteria. It caused illness to the insured’s family, including respiratory, viral, and skin conditions. The insurer moved for judgment as a matter of law that the bacteria had not caused a “direct physical loss,” which was necessary to trigger coverage under the policy. The Third Circuit relied upon its prior decision in Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002), in denying the insurer’s motion for summary judgment. In Port Authority, the Court held that the insurer was required to cover the expense of remedying the existence of asbestos in a building, and articulated the standard for determining whether “physical loss or damage” to an insured structure has occurred, as follows:
[O]nly if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed or the structure is made useless or uninhabitable, or if there exists an imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility. Hardinger, 131 F. App’x at 826 (quoting Port Auth. of N.Y. and N.J., 311 F.2d at 236) (emphasis added by the Hardinger Court).
Hardinger and Port Authority may support the argument that the coronavirus can result in a facility becoming uninhabitable, within the meaning of the direct physical loss or damage provisions of an all-risk policy, sufficient to trigger coverage for a business interruption loss. See also Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (unpleasant odor rendered property unusable and constituted physical injury within the meaning of policy); 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 toxic gases released by defective drywall); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-cv-04418 (WHW)(CLW), 2014 WL 6675934 (D. N.J. Nov. 25, 2014) (ammonia released in insured facility caused direct physical loss under the policy); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 38-39 (1968) (term “direct physical loss” included loss of use of insured property caused by accumulation of gasoline around and under property, which rendered it uninhabitable).
We note that business interruption coverage may apply to both: (a) direct loss to an insured resulting from it closing its own facility; or (b) loss to the insured resulting indirectly from, for example, the closure of another company’s facility within its distribution network.
Even if the language of the policy and applicable case law indicate that coverage has been triggered, the policy’s exclusions must next be analyzed. For instance, most policies contain a pollution exclusion. The language of the pollution exclusion, and applicable case law interpreting it, must be considered. We note that the case law is split on whether bacteria falls within or without the definition of a “pollutant” in a policy. Compare Keggi v. Northbrook Prop. And Cas. Ins. Co., 199 Ariz. 43, 47 (Ariz. Ct. App. 2000) (bacteria does not constitute a pollutant under pollution exclusion); withLandshire Fast Foods of Milwaukee v. Employers Mut. Cas. Co., 676 N.W.2d 528, 532 (Wis. Ct. App. 2003) (“bacteria, when it renders a product impaired or impure,” falls within “the ordinary, unambiguous definition of ‘contaminant.’”). Such cases would likely provide guidance on the question of whether the policy’s pollution exclusion would apply to a claim based on the coronavirus.
In short, a company may or may not have business interruption coverage under its existing insurance policies. A review of the policy language, and the case law in relevant jurisdiction, is necessary to answer the question. We will be providing further guidance this week on other aspects of insurance in respect of COVID-19, including “Contingent Business Interruption” coverage.