Business Interruption Insurance During COVID-19

Posted: August 6, 2020 | News

COVID-19 has led to interruptions in sales, disrupted supply chains, sinking or disappearing revenues, and rising  expenses.  As a consequence, businesses have filed a flood of insurance claims against policies that offer coverage for business interruption.  Whether or not the claims are covered will depend on the terms of the insurance policy and the nature of the loss. While some insurance industry experts maintain that the outlook for coverage for COVID-19 related claims is not good, there are a number of legal arguments and policy provisions that can increase the likelihood of coverage.

One expert has stated that  “successful claims under business interruption coverage for infection are not common.” (Crawford & Co., “Insurance Impacts of the 2019 Novel Coronavirus,” Jan. 30, 2020, https://bit.ly/3bATZDn)  There are no reported cases in the U.S. regarding business interruption insurance coverage, in connection with human infectious disease epidemics or pandemics. That said, there has never been a pandemic as global and pervasive as COVID-19.  Case law is developing and good arguments exists for coverage in an appropriate case.

1. BUSINESS INTERRUPTION INSURANCE DEFINED

Business interruption insurance protects from “loss of business income” resulting from a business’ inability to put the insured property to its normal use due to damage, loss of, or destruction of insured property from a covered peril.  Such insurance is designed “to indemnify the insured against losses arising from his [or her] inability to continue the normal operation and function of the business…consequent upon the destruction of the building, plant, or parts thereof.” [1]  

This insurance is typically purchased as a separate policy, either within a commercial property insurance policy, or an endorsement to that policy. The Declarations Page will specify the policy limit and coverage forms for ”Business Income,” “Commercial Income,” “Business Interruption,” and the like. (The policy limit for business income could be a certain number of “months of actual loss sustained” or a numerical dollar amount).

2.  PERILS COVERED BY BUSINESS INTERRUPTION INSURANCE

Business interruption losses must be caused by a “peril” that is covered.  In general, two kinds of business interruption policies exist that cover different perils. First, a so-called “open peril policy” insures for all risks of physical loss or damage, unless the loss is specifically excluded. This kind of policy is the more common and has broader coverage.[2]

The second kind of policy is a so-called “specified/named peril policy.” This policy covers only specified perils (such as fire, wind, hail, flood, lightening, etc.) and is subject to additional exclusions.  It will be considerably more difficult to establish coverage under this kind of policy for business interruption for COVID-19. In addition, proof of financial losses can be complex. The loss claim is similar to proving lost profits in a business litigation.

1. What About Partial v. Complete Slowdown?

If the policy defines ‘suspension’ to mean both the “partial or complete cessation of the Insured’s business operations,” both a complete shutdown and partial shutdown could be covered events.  But if the policy does not provide such a definition or broader definition of “suspension,” some courts have required a complete shutdown (with no coverage for a partial shutdown).

2. Calculating The Loss

A given policy’s definition of “business income” should answer the question of how the loss is calculated.  A more robust insurance policy will cover both net profit and continuing operating expenses incurred, including payroll. A policy that only provides recovery for “net profit” is less generous, and may be of little help for a start-up business, or one that operates on narrow margins.

3. PHYSICAL LOSS OR DAMAGE AS A THRESHHOLD REQUIREMENT

Because business interruption insurance is usually part of a commercial property policy, physical damage or loss to insured property is typically required to trigger coverage, as business interruption by itself is insufficient.

Insurance policies usually impose two requirements for coverage (1) Loss must be caused by “physical loss or damage” or, alternatively, “physical loss of or damage to property” and (2) loss must be caused by or result from a “covered cause of loss.”  The required cause may, depending on the policy, be either an “open peril cause” [one not specifically excluded] or a “stated peril cause” [one both specifically enumerated and not excluded]. The key question, of course, is “What does “physical loss or damage” mean?”  Most policies do not define the term and there are few cases giving the term meaning. Therefore, the meaning remains open to courts on a nationwide basis to determine the meaning, and it has been interpreted in different ways.

A number of courts have interpreted it narrowly, concluding that it means a “distinct, demonstrable, physical alteration “of the covered property.[3]  But there is a nationwide trend to apply a broader definition of “physical loss or damage” (and especially to policy language “loss of or damage to”). Courts that have applied the broader definition have included loss of access, utility, use, or function, even without structural damaged to covered property.[4]  This broader interpretation opens the door to insured parties  to argue that losses due to COVID-19 issues are covered.

4. Many Policies Have Some Form of Virus Exclusion, But That Provision Does Not Necessarily Determine Coverage.

The insurer carries the burden to prove that the policy contains the exclusion, that the exclusion applies, and that it is enforceable.[5]  Viruses and disease are generally not insured perils, in themselves, unless of course they are added by endorsement. A healthcare endorsement may include communicable disease coverage.  Viruses and communicable disease may be expressly excluded from coverage.[6]

Insurers typically claim that if the policy has this exclusion, this ends the matter there  is no coverage. But this conclusion is too hasty, at least in California. It disregards the fact that many cases have applied the “efficient proximate cause doctrine.” See Cal. Insurance Code § 530. The California Supreme Court has held that when a loss is caused by two or more concurrent causes, one of which is covered and one excluded, courts must engage in a proximate cause analysis to determine if the loss is covered or excluded by the policy.[7]  The inquiry focuses on determining the “most important cause” of the loss.[8]

Applying this standard, in the case of COVID-19 related losses, Insureds should argue that (i) the government-ordered mandates (e.g. shutting down non-essential businesses and schools, social distancing, etc.) ( ii) the associated fear and panic that keeps the public away from patronizing businesses, etc.) and (iii) that a pandemic (not a mere “virus” or one-off disease) are the covered losses that were the efficient proximate cause of the insured’s losses.  In essence, the business shut-downs were not due to viral contamination or presence, but were due to the pervasive government orders, fear, and panic. Thus, according to this argument, the efficient proximate cause–a covered cause of the loss–controls, and an Insured’s losses should be covered.

Further, where an insurance policy purports to exclude coverage for losses that are due to a concurrent cause that is excluded, the provision is unenforceable. An insurance policy cannot contract away the proximate cause analysis under Ins. Code § 530. “Policy exclusions are unenforceable to the extent they conflict with section 530 and the efficient proximate cause doctrine.”[9]

5. CIVIL AUTHORITY COVERAGE

Commercial property policies may include coverage for losses caused by forced closure of property by civil authority. The coverage, if found in a policy, typically applies when the insured is unable to access its property due to a government order as result of physical damage to adjacent or nearby property. Therefore, typically, civil authority coverage requires physical damage to property to trigger coverage.  Further, only government orders causing a business to close will constitute a civil authority order. Closure out of fear or government restrictions that do not actually order a closure, such as an advisory to stay off the streets, will not establish civil authority coverage.

6. POSSIBLE JUDICIAL AND LEGISLATIVE ACTION

A variety of state laws have been proposed or introduced around the nation to address business interruption insurance. Insureds should keep a careful watch on these proposed laws as they may improve the prospects for coverage. Most proposed laws require payment of business interruption claims, if included in a policy without regard to virus exclusions, or with insurers who are able to seek reimbursement from the state. In California, an Assembly bill was introduced. This bill would provide in policies without virus exclusions, a rebuttable presumption, that income losses suffered by a business as a result of the pandemic, result from physical damage.  In addition, California, together with other states, has a bill introducing that would mandate retroactive business interruption coverage.

IF YOU HAVE QUESTIONS ABOUT BUSINESS INTERRUPTION INSURANCE, PLEASE CONTACT THE ATTORNEYS AT North & Nash, A Professional Law Corporation.