As widespread governmental ‘shelter in place’ orders become commonplace due to COVID-19 (Coronavirus Disease), many businesses are experiencing a complete shutdown of operations and loss of income. These businesses are turning to their insurance policies to determine whether business interruption (aka business income loss) insurance may provide coverage losses incurred due to government ordered shutdowns. Whether such coverage exists remains uncertain, but as set forth below, viable arguments for coverage may exist depending upon applicable policy language.
What is Business Interruption Coverage and What Does it Cover?
Business interruption insurance is a commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of operations under specific circumstances. Relevant to ‘shelter in place’ orders, business interruption insurance routinely includes coverage for a suspension of operations “caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property.”
At first glance, such coverage appears applicable. However, to trigger coverage, the order prohibiting access to the business must be “due to direct physical loss of or damage to the property.” Insurers assert shutdowns implemented to limit the spread of coronavirus are not the result of direct physical loss or damage and are therefore not covered events (for example, see a letter from Travelers Indemnity Company to its New York Policyholders here). This issue will be the focus of coverage litigation seeking coverage for coronavirus related shutdowns.
Additionally, in the wake of the SARS epidemic in 2002-2003, many insurers introduced exclusions in their business interruption policies for damages arising out of “any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Policies containing the virus/bacteria exclusion will face another hurdle to obtaining coverage under their business interruption insurance policies for coronavirus related shutdowns.
Legal Challenges to Denials of Coverage under Business Interruption Policies
As of the drafting of this post, at least two lawsuits relating to insurance coverage for business interruption losses due to coronavirus have already been filed. In Cajun Conti LLC e al. v. Certain Underwriters at Lloyd’s, London, et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, March 16, 2020), the owners of the Oceana Grill restaurant in New Orleans, seek a declaration that their insurer must cover business interruption losses as a result of coronavirus. Notably, the owners of the Oceana Grill contend their business interruption policy does not contain an exclusion for virus/bacteria related damage.
On March 25, 2020, the famous Tom Keller filed a lawsuit in Napa County, California. In French Laundry Partners, LP dba The French Laundry, et al. v. Hartford Fire Insurance Company, et al., (a copy of the complaint is available here), Tom Keller likewise seeks a declaration that the insurer must cover business interruption losses because his restaurants have been shutdown by civil authorities. Specifically, Keller argues coronavirus “physically infects and stays on surfaces of objects or materials” “for up to 28 days,” and therefore satisfies the ‘physical damage’ requirement under the policies. It is unclear whether the policies in The French Laundry contain the virus/bacteria exclusion.
These coverage arguments may gain some traction. In fact, a New Jersey court has previously held the release of ammonia which rendered a manufacturing facility temporarily unfit for occupancy caused “physical loss of or damage to” the facility, satisfying the physical loss requirement of a business interruption coverage claim. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2:12-CV-04418 WHW, 2014 WL 6675934, at *8 (D.N.J. Nov. 25, 2014). However, not all courts have reached the same conclusion. See, e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710 (E.D. Mich. 2010) (shutdown caused by strong odors, bacteria, and mold which permeated through building as a result of HVAC system not physical damage under business interruption policy).
Separate from court challenges, some states are introducing legislation which seeks to require retroactive coverage for losses arising from coronavirus related shutdowns. For example, On March 16, 2020, New Jersey introduced Bill A-3844. If enacted, the bill would provide that:
Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.
The bill includes certain limitations, including that coverage would be limited to New Jersey insureds with fewer than 100-full time employees. The text of the proposed legislation can be found here. On March 24, 2020, Massachusetts introduced a nearly identical bill (Bill SD.2888), which can be found here. Other states may soon introduce similar legislation. In fact, the New York Department of Financial Services required property casualty insurers provide information regarding commercial property insurance written in New York, including details on business interruption coverage. Some believe this could be a precursor to a bill similar to Bill A-3844 and Bill SD.2888 being introduced in New York. Whether such legislation will be enacted, and whether retroactive revision of insurance policies will be upheld by the courts remains to be seen.
Conclusion
Coronavirus has created substantial uncertainty in all areas of life and business interruption coverage is no exception. There may be good arguments in favor of coverage, but tendering claims based on losses due to coronavirus will have the highest likelihood of success following careful review of applicable policy language and strategic coverage planning. As such, businesses should be proactive and seek insurance expertise to determine whether a shutdown order caused by coronavirus has triggered a coverage event under their business interruption policy. Please contact one of MPBA’s skilled insurance coverage attorneys, including Scott Easter (sbe@mpba.com) and Chris Reed (creed@mpba.com) with questions concerning whether your business may have coverage for coronavirus related shutdowns.