COVID-19 and Business Interruption Insurance

May 12, 2020

Throughout the United States and the world, businesses are suffering the effects of the coronavirus (COVID-19). Among the impacts of COVID-19 are significant losses of income to businesses due to closures and additional disruptions. As a result of this crisis, businesses may look to their first party property insurance policies for potential business interruption coverage.

The general purpose of business interruption insurance is to make the insured party whole from the damaging effect of the interruption. Most first party business property insurance policies include coverage not only for physical property damage but also for lost income resulting from that damage. Coverage for lost income may involve many different scenarios including:

  1. Damage to the insured’s own property (business interruption)
  2. Damage to property belonging to a customer, supplier or a supplier’s supplier (contingent business interruption)
  3. Damage caused by government action such as evacuation orders (order of civil authority), and;
  4. Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers business interruption coverage is property damage without which there will be no coverage for lost income under a first party property policy. The fundamental question with respect to every COVID-19 related loss is whether the mere presence of the virus can cause or constitute property damage to enable the insured business to pursue a claim for loss of income. While COVID-19 does not cause physical damage to the property such as a broken water pipe or a fire, the virus can create a dangerous risk inside a building by contaminating surfaces or affecting the overall air quality.

Although no court decisions have directly answered this question as it pertains to a loss of income from COVID-19, courts have found that the presence of harmful substances inside a building can constitute property damage that triggers first party property coverage.  For example, a New Jersey court found that a covered property loss occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned. Similar decisions in Oregon and New Hampshire have also found property damage in the absence of structural damage. Based upon this theory, cases are being filed around the country seeking coverage for loss of income from COVID-19 and more suits are likely to follow to address this question.

Additionally, the various state and local COVID-19 emergency orders closing public gathering places and nonessential business activity may trigger coverage as an order of civil or military authority.  Those same orders may also trigger leader property coverage which covers the policyholder’s lost earnings resulting from the closure of a nearby property that attracts customers to the policyholder’s business. For example, an order closing a beach resulting in loss of earnings to business which rents beach umbrellas or nearby retail stores which sell swimwear.

Unfortunately, a wide range of defenses may allow insurers to avoid or limit payment for losses arising from COVID-19. For example, some policies contain broad exclusions for damage caused by biological agents, pollution, or contamination.  Even if the property policy provides coverage for damage resulting from disease, bacteria and viruses, such coverage may limit the amount of lost income which may be recovered to only those losses incurred for the time period reasonably necessary to clean and sanitize the structure. Accordingly, insurers will argue that the virus exists for only a very short period in the air or on surfaces, and a quick cleaning is all that is required to eliminate the risk. However, if the virus persists in a particular locale, this occurrence could support the argument that the property has been subject to re-contamination whereby resulting in a longer period of coverage.

As COVID-19 continues to impact businesses, it is important for policyholders to fully understand the property coverage they have or potentially have, keep proper records of all lost income, and promptly notify their insurers of any potential claim. If you have questions whether your business has a potential business interruption claim, please do not hesitate to contact us as we are here to help at this very challenging time.