Business Interruption – COVID-19 Pandemic

The outbreak of the COVID-19 virus has affected businesses all over America, ranging from mom-and-pop restaurants to multi-billion-dollar industry leaders. The forced closing and limitation of operations is likely to lead businesses to turn to every possible source of economic relief – one of the most likely being business interruption insurance. A recent suit filed in Louisiana[1], is the first of what is expected to be a flood of insurance coverage lawsuits pertaining to the COVID-19 outbreak.

Business interruption insurance is insurance coverage that replaces all or part of a business’s income for the “period of restoration” and sometimes for an additional set period of time following a covered loss that results in a necessary suspension of operations. The essential question the courts will decide is whether COVID-19 – for the specific business insured – has resulted in a covered cause of loss necessitating the suspension of operations. The most common trigger of coverage for business interruption insurance is the “suspension” of operations caused by “direct physical loss or damage to Covered Property.” This threshold is met in all states by losses caused by physical disasters such as hurricanes, tornadoes, floods, fires, and the like.

Additionally, most property policies provide for a defined period of time business interruption insurance for the insured’s actual loss of income caused by civil authority order prohibiting access to the insured’s business if that civil authority order is due to direct a covered cause of physical loss or damage to other property within a prescribed geographic distance from the insured location. Policies can have vastly different “Civil Authority” terms and “Contingent Business Interruption” terms. Importantly, and this is the key takeaway, all insurance, even maritime insurance, is governed by the law of each state. Thus, the construction of business interruption coverage terms, limitations and exclusions relevant to the COVID-19 pandemic will be subject to the jurisprudence of fifty (50) different state appellate courts.

We now see political rhetoric that perhaps implementing laws forcing insurers to cover all business for business interruption insurance is one solution to the crisis. To the lay person, that may sound reasonable, but the Constitution significantly prevents Congress from passing laws altering parties’ contractual rights and obligations lawfully entered into. Politics and the general welfare of the public may also create a silent bias in judges to rule in a fashion that favors coverage for the insured businesses suffering clear and indisputable loss of operations and income during the pandemic. Yet, every trial judge and the appellate courts will have to construe the wording of the at-issue policy and the facts of each case, both of which will vary substantially case-to-case, when deciding under that state’s law, likely with limited or no prior precedent, whether business interruption insurance is triggered by COVID-19.

Several critical coverage issues are easily predicted concerning this pandemic. States have ordered businesses to close or greatly limit their operation in an effort to slow the spread of the virus. However, the vast majority of businesses will have no evidence that any employee of the business has COVID-19, no evidence to show COVID-19 is in or on the “Covered Property,” and no evidence to show that COVID-19 is in or on similar property within the policy’s prescribed distance from the insured location necessary for even an initial consideration of Civil Authority or Contingent BI coverage. These fact issues will play out differently in densely populated cities as contrasted to smaller towns and rural areas. For the business that can show evidence of COVID-19 being in or on Covered Property or the nature of property referenced by the Civil Authority or Contingent Business Interruption coverage, each state’s judiciary will then have to consider under its judicial precedent whether the virus, admittedly harmful to humans, causes “direct physical loss of or damage to” to covered physical property.

Around the country, courts have reached diametrically different conclusions on what constitutes “direct physical loss.” Some find that the emission of intolerable odors can constitute “property damage,” as the property was altered to be temporarily or permanently uninhabitable.[2]  Additionally, courts have found “property damage” when an event released fumes inside a building causing the air to be temporarily toxic to humans.[3] These cases may be distinguishable from claims involving Covid-19 as odors and fumes may actually imbed into physical property causing damage to property. Will these courts find that their precedent does not apply to a virus that does not change the molecular structure of property and that dies within days or hours of landing on physical property? Certainly courts with more conservative precedent will be less likely to find a basis for coverage. All courts will also face numerous exclusions (pollutant/toxic substance exclusions, virus/bacteria exclusions, etc.) even if “direct physical damage” is judicially deemed to have occurred.

The stark reality is that the appellate courts of most of the states have never addressed this nature of coverage question.  As only the first-party policies with open policy periods during the pandemic are subject to consideration, some of these policies may contain fairly recent ISO or manuscript form endorsements related to “Pandemic Disease” or “viruses and/or epidemics.” However, many of the policies may lack these more specific relevant endorsements.

We can say with confidence there will not be a universally applicable approach to COVID-19 and business interruption coverage. Each insured, each policy, each insured business, each factual predicate and each state’s applicable law will have to be considered. Expect conflict of law battles as parties seek to gain judicial resolution in favorable venues. Businesses making every effort to continue operations to the extent they safely can and limiting their business interruption loss even subject to insurance coverage consideration is always the wisest course.

As the impact of COVID-19 continues to spread, there is no doubt every state will be dealing with voluminous coverage litigation regarding COVID-19. Many states, and potentially the federal government, may take action seeking to regulate, if not now at least in the future, how insurance coverage may apply to pandemic conditions and governmentally imposed restrictions on the movement of people and the operation of this nation’s businesses.

[1]  Cajun Conti, LLC, et. al. v. Certain Underwriters at Lloyd’s London, Civil District for the Parish of Orleans (involves the Oceana Grill a New Orleans restaurant in the French Quarter).

[2] Mellin v. Northern Security Insurance Company, Inc. 115 A.3d 799 (N.H.)(cat urine odor).

[3] Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 6675934 (D. N.J.)(release of ammonia), TRAVCO Ins. co. v. Ward, 715 F. Supp.2d 699, 709-10 (E.D. Va. 2010)(toxic gases from drywall, but these gases also damage physical property); Western Fire Ins. co. v. First Presbyterian Church, 165 Colo. 34 (1968)(gasoline fumes).