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Business Interruption Coverage for First-Party Losses Caused by the Coronavirus (COVID-19) Pandemic

March 23, 2020


Shelter-in place orders, responsible social distancing directives, curfews, closure orders, and contamination will have an impact on businesses – especially small businesses. A bipartisan group of members of Congress asked the insurance industry to recognize financial losses relating to COVID-19 under commercial business interruption coverage for their policyholders. For now, the insurers have declined. Some states are considering legislation to require coverage retroactively for small businesses located in their state. If the insurance industry holds firm, and there is no overriding legislation, business owners should know their rights under their insurance policies for business losses caused by COVID-19 and how to distinguish between insured risks and business risks.

Business interruption coverage is usually part of a commercial property policy. Policy language can vary, but in the typical case, at least with standard insurers, the coverage applies to business interruptions caused by “physical loss or damage” to insured property as a result of a covered cause of loss. In the case of harm to a business’ insured property caused by a hurricane or fire, the case for coverage is clear. In the case of losses caused by a virus, or government shut down order, the case is less clear where the policy has a physical loss or harm requirement.

If the business sustains losses because its property is contaminated and rendered uninhabitable, there is a good argument that a physical loss has occurred. If the loss is caused because of a closure order, and the policy requires harm to property for a covered “business interruption”, a lot will depend on how that term is defined in the policy and by the courts. For example, in different contexts, some courts have permitted the functional impairment of property to satisfy that requirement. If the policy is written in such a way that it is not clear, and an interpretation favoring the business owner is as likely as one favoring the insurance company, most courts will side with the business owner.

Some policies will expressly extend business interruption coverages to other scenarios. For example, some policies will cover losses caused by supply shortages where the supplier suffers a covered loss. Some policies will cover losses caused by the denial of access to insured premises occasioned by disruptions in the area of the insured or because of unforeseen shutdowns by public authorities. An issue to look for in both types of extension coverages is whether there is a requirement for a physical loss of, or harm to, property-either the insured’s, the supplier’s, or some property in the insured’s vicinity.

Claims may also include losses as a result of other policy endorsements such as: ingress/egress, civil authority, and service interruption. Some policies extend business interruption coverage to losses caused by “communicable or infectious diseases.” Some polices exclude coverage for “viruses” and/or “bacterial infections.” If the policy only excludes coverage for bacteria, the exclusion may not apply to COVID-19.

If business owners suffer a loss due to COVID-19, they should seek the assistance of counsel. In light of the industry’s response to Congress, it would not be surprising for claims for business losses due to COVID-19 to be quickly denied. With all of the variations in policy language and facts, framing the claim correctly from the outset will be important – especially if litigation is necessary.

If counsel determines there is coverage, the business owner should report the claim to the carrier. The business owner should also marshal all of the facts and data supporting the claim – especially emails, text messages, alerts, reports, and the like. Even if the claim is covered, the business owner will still have to prove the losses that resulted from covered causes. In the business interruption scenario, this can be challenging.

Montgomery McCracken attorneys are available to assist clients with numerous issues related to COVID-19.  Montgomery McCracken’s COVID-19 Resource Center is available here.