The economic devastation wrought by COVID-19 has prompted legislative, regulatory, and litigation efforts to tap insurance coverage. On March 16, 2020, Oceana Grill in New Orleans filed the first reported declaratory judgment action seeking coverage for losses sustained due to the ongoing pandemic. The insured asserts that coverage is available due to action by civil authorities ordering closure of the restaurant. Other suits have followed, including a California action by restaurants affiliated with Thomas Keller, and an Oklahoma action commenced by Native American tribes confronting lost casino revenue. Resolution of the litigated claims will turn on policy language, as well as law and facts specific to the jurisdiction. The threshold issue in most if not all such cases will be whether COVID-19 constitutes direct physical loss or damage to property. Generally, coverage under a property insurance policy depends upon such a showing. Unless the insured can demonstrate direct physical loss or damage to property, existing precedent in most jurisdictions suggests that a policyholder will be unable to recover, whether under business interruption coverage or civil authority coverage. Even in the presence of direct physical loss or damage, coverage may be impacted by potentially applicable policy exclusions.
Coverage under both business interruption and civil authority provisions usually depends upon a showing of direct physical loss or damage to property. Generally, business interruption coverage applies to cover lost income sustained due to a suspension of operations from a covered loss, i.e. direct physical loss or damage not otherwise excluded. Civil authority coverage applies to cover losses due to a civil authority action preventing access to the insured’s due to physical loss of or damage to property other than that belonging to the insured. e.g. Assurance Co. of Am. v. BBB Serv. Co., 265 Ga. App. 35, 36, 593 S.E.2d 7, 8 (2003). As such, both types of coverage require a showing of some physical loss or damage to property.
What constitutes “direct physical loss or damage” varies by jurisdiction. Courts interpreting the phrase narrowly require a showing of some structural or tangible change to property. For example, in Universal Image Prods., Inc. v. Chubb Corp., the Eastern District of Michigan rejected an insured’s claim for property damage for mold in the air and noxious odors. Because these harms were “intangible,” the Court ruled that there was no direct physical loss or damage. Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710 (E.D. Mich. 2010), aff'd sub nom. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App'x 569 (6th Cir. 2012). Likewise, in Columbiaknit, Inc. v. Affiliated FM Ins. Co., the District of Oregon held that to recover for damage to clothing, it was insufficient for the insured to show that it had been exposed to elevated levels of spore counts; some “physical damage or alteration of property” had to be shown, even if the damage was at a microscopic level. Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. CIV. 98-434-HU, 1999 WL 619100, at *7 (D. Or. Aug. 4, 1999). Under this standard, it is unlikely that the coronavirus constitutes direct physical loss or damage inasmuch as there has been no structural change or alteration to property.
Other courts have taken a more relaxed approach when interpreting “direct physical loss or damage,” at least in certain contexts, analyzing the phrase in the context of habitability of the premises. For example, in Matzner v. Seaco Ins. Co., the court ruled that there was “direct physical loss” when gasoline vapors rendered the insured’s premises unusable. Matzner v. Seaco Ins. Co., No. CIV. A. 96-0498-B, 1998 WL 566658, at *3 (Mass. Super. Aug. 12, 1998). Likewise, the Third Circuit ruled that bacteria in a home’s water pipes could constitute direct physical loss if it rendered the home uninhabitable. Motorists Mut. Ins. Co. v. Hardinger, 131 F. App'x 823, 825 (3d Cir. 2005). Neither of these cases involved structural changes to property and “direct physical loss or damage” was based on the loss of functionality. Under this standard, an insured may argue that, at a certain point, the presence of the virus (if established) or perhaps even the threat of infection renders office space unusable.
Assuming an insured is able to demonstrate direct physical loss, the insurer may seek to apply one or more exclusions to preclude coverage. Obviously, the specific exclusions will vary by policy, but virus and bacteria exclusions introduced after the SARS epidemic would appear to apply even when it is an insurer’s burden to show that an exclusion is clearly and unmistakably applicable. Among other common exclusions, pollution/contamination could apply. Application of such an exclusion will turn on whether the coronavirus should be considered a pollutant or contaminant. To the extent the policy in question defines these terms to encompass viruses, the answer is straightforward. e.g. Meyer Nat. Foods, LLC v. Liberty Mut. Fire Ins. Co., 218 F. Supp. 3d 1034, 1038 (D. Neb. 2016). However, such a definition is not often seen. Indeed, to the extent that the policies define “pollutant” and/or “contamination” and fail to reference viruses, such omission could be seen as evidence that viruses do not fall within the scope of the exclusion. See Sphere Drake Ins. Co. v. Y.L. Realty Co., 990 F. Supp. 240, 243 (S.D.N.Y. 1997) (noting that when pollution exclusion referenced products of or byproducts from operation of machinery, lead paint was outside the scope of the exclusion). Nonetheless, several courts have viewed infectious agents as a type of contamination or pollution. For example, in Tudor Ins. Co. v. BWW, Inc., the District of Alabama held that bacteria could form a type of pollutant, even though not expressly referenced in the policy’s definition. Tudor Ins. Co. v. BWW, Inc., No. 1:09-CV-00025-HGD, 2010 WL 11561239, at *2 (N.D. Ala. Sept. 13, 2010), report and recommendation adopted, No. 109CV00025RBPHGD, 2010 WL 11561238 (N.D. Ala. Sept. 30, 2010). Likewise, in Nova Cas. Co. v. Waserstein, the Southern District of Florida held that bacteria fell within the ordinary meaning of “contaminant.” Nova Cas. Co. v. Waserstein, 424 F. Supp. 2d 1325, 1334 (S.D. Fla. 2006). By contrast, in Keggi v. Northbrook Prop. & Cas. Ins. Co., the court rejected an insurer’s attempt to apply a pollution exclusion to waterborne bacteria. Keggi v. Northbrook Prop. & Cas. Ins. Co., 199 Ariz. 43, 50, 13 P.3d 785, 792 (Ct. App. 2000).
On the legislative front, certain states have proposed (or are entertaining) laws intended to compel coverage of coronavirus losses. The New Jersey General Assembly has promulgated a proposal which would retroactively attempt to require coverage under business interruption coverages notwithstanding policy exclusions to the contrary. Massachusetts and Ohio have similar proposals. Any attempt to enforce a law compelling retroactive changes to the terms of private contracts is likely to face substantial legal hurdles. Other states are considering a requirement that automobile policies suspend operation of livery exclusions, so that deliveries of food and materials during this crisis will be insured under private passenger and commercial automobile policies. On the workers compensation front, certain labor groups are advocating for a presumption that a coronavirus diagnosis is a workplace-acquired occupational disease.
In the current pandemic, the actions of civil authorities affecting access to and operation of business vary across the country, often municipality to municipality. These actions, the relevant insurance policy language and the facts and circumstances of each loss would need to be analyzed individually to determine whether they give rise to coverage under the specific policy in question.