COVID-19: Business Interruption Coverage May Require Creativity

By Jason M. Rosenthal

Insurance is intended to cover unexpected losses. COVID-19 is surely causing unexpected losses worldwide. As business is interrupted, many are asking: Are the resulting lost profits or other damages covered by business interruption insurance? The answer depends on the policy language and perhaps creative thinking.

Most businesses carry commercial property insurance, which often includes a separate business income coverage form. This form adds coverage, in certain instances, for lost business income, contingent business interruption losses and losses due to certain action taken by civil authorities. Each of these are explained below.

Business Income/Interruption Coverage

First, the business income coverage form provides coverage for loss of business income sustained due to the necessary suspension of the insured's operations during a "period of restoration." The suspension of operations, however, must be caused by a "covered cause of loss" that results in direct physical loss of or damage to the covered property. In other words, if a fire (which is a covered cause of loss) damages a factory, which shuts down production, the business interruption coverage should activate to pay for lost income until the damage can be repaired and production can be restored.

To obtain coverage resulting from the current COVID-19 crisis, the existence of the virus would need to constitute a covered cause of loss, which results in physical loss of or damage to the covered property. This is unlike a fire, hurricane or tornado, which are common causes of losses that cause visible damage to property.

Now, across the world, businesses are closing due to COVID-19, even though there may be no apparent damage at all. But particularly if COVID-19 is found within the confines of a workplace or business, this arguably constitutes damage to the property, although at a microscopic level that cannot be seen.

There may be some precedent for arguing that this situation should be covered. For example, in prior situations involving asbestos contamination, some courts have indicated that the presence of asbestos, even though it did not cause physical damage to the property, might constitute covered property damage.

In another case, gasoline infiltrated the soil under and around a building, which contaminated the foundation and rooms and made the building uninhabitable. The insurer argued that its policy only covered "direct physical loss," and that the infiltration did not meet this requirement. The court disagreed and found coverage.

Thus, a business able to confirm (or at least make a plausible showing) that COVID-19 has been found at their premises may be able to argue that this constitutes "direct physical loss" to the property by a covered peril (which may be depend on how the policy defines "covered peril"), thereby triggering the resulting business income insurance, until the contaminant is remediated or eliminated.

In recent years, however, many insurers began to include endorsements excluding coverage for losses due to a virus or bacteria. Typically, these will preclude coverage for damages "caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease." This exclusion may present additional challenges to coverage. Other policies sometimes exclude damages relating to "fungi" or "bacteria." Because COVID-19 is a virus, however, arguably such an exclusion would not apply.

Contingent Business Interruption

Contingent business interruption is usually also a part of the additional coverage afforded by property insurance policies. This coverage applies where damage occurs not to the insured's property itself, but instead to property owned by others that your business depends upon to (a) deliver materials or services to you, (b) accept your products or services, or (c) manufacture products for delivery to your customers.

Again, however, policies typically require direct physical loss to that property, caused by a covered peril. If that other property is contaminated with or by COVID-19, as in the circumstances explained previously, the insured may be able to argue that this coverage also applies.

Civil Authority Coverage

Property policies also typically include civil authority insurance. This coverage usually applies where a "covered cause of loss" causes damage to property other than the insured's property, resulting in lost business income because a civil authority prohibits access to the insured's property.

The standard policy language requires two additional conditions to be satisfied:

"Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area" but no more than a certain distance from the damaged property; and
"The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of loss that caused the damage ..." To avoid paying for short delays, this coverage often does not begin until 72 hours after the civil authority first prohibits access, and coverage only lasts for a specific time period, such as one month. Again, whether this coverage applies will depend on the specific action taken by local or federal authorities, as well as the location of any contamination.

COVID-19 has left businesses in uncharted waters. It is often insurance that carries businesses through these waters. But policyholders need to know where to look for this life raft, and how to navigate these murky waters.

It is important to promptly review policies, notify insurers of claims, and track losses, even if there are issues or questions that may ultimately preclude coverage. Taking early action, with a dose of creativity, may be the cure for lost profits.

Jason M. Rosenthal is a principal at Chicago-based law firm Much Shelist. He has significant experience representing corporate policyholders in a wide range of insurance coverage disputes. Jason may be contacted at [email protected].