Business Interruption Insurance

As businesses, states, and lawmakers attempt to navigate through the health and economic repercussions of COVID-19, many are looking to their insurance policies, namely business interruption insurance policies, in a hope to mitigate losses.

As a general matter, business interruption insurance compensates businesses for losses incurred when a business is forced to shut its doors for a period of time. While the terms of these policies vary, many define a covered loss as one caused by physical damage to the property (i.e. losses caused by fires, earthquake, storms, etc.). That said, businesses with these policies in place are now asking whether losses caused by COVID-19 are entitled to coverage. In many cases, insurers are taking the position that losses due to pandemics like COVID-19 are not insured either because (i) the losses do not, many argue, result in physical damage or (ii) the losses are expressly excluded from coverage. The second provision often, but not always, arise from an increasingly common insurance policy exclusion titled “Exclusion of Loss Due to Virus and Bacteria” that was adopted by a number of carriers after the SARs outbreak in 2002 and 2003.[1]

Courts are already seeing litigation resulting from these coverage disputes arising from COVID-19 orders mandating that businesses shut down. Here are a few examples:

On March 16, 2020, owners of Oceana Grill in New Orleans filed a complaint seeking a declaration that their commercial insurance policy extends coverage from direct physical loss and/or from a civil authority shut-down due to a global pandemic. Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558, complaint filed (La. Dist. Ct., Orleans Parish Mar. 16, 2020). There, the policy provides that a covered loss means a direct physical loss unless the loss is specifically excluded or limited. Plaintiffs ask the court to affirm that because the policy under dispute does not contain an exclusion for a viral pandemic, the policy provides coverage for a civil authority shutdown of the restaurants due to physical loss from COVID-19 contamination. In support of its position, the complaint states that those businesses affected by COVID-19 recognize the virus as a cause of physical loss and damage—citing the fact that the virus physically infects and stays on the surface of objects or materials.

On April 2, 2020, Prime Time Sports Grill, Inc. (“Prime Time”) also filed a complaint against Certain Underwriters at Lloyd’s London after Prime Time’s claim was denied and the insurance company refused to pay benefits under the policy. Prime Time Sports Grill Inc. v. Certain Underwriters at Lloyd’s London et al., No. 8:20-cv-00771, complaint filed (M.D. Fla. Apr. 2, 2020). The complaint arose after Florida’s Governor ordered all bars and restaurants in the state to close for 30 days in response to COVID-19—this in addition to a “stay at home” mandate in effect for an additional 30 days. While the policy at issue specifically covers loss of business income and operating expenses, it does not directly address or exclude losses because of a governmental suspension as a result of COVID-19. That said, Prime Time requested a declaration that the policy provides coverage for losses stemming from the COVID-19 governmental suspension of business operations for business income, extra expense, and all other coverage extensions up to the limits of the policy.

To address this issue, states such as New Jersey, Ohio, Massachusetts, New York, Louisiana, Pennsylvania and South Carolina are proposing legislation to broaden business interruption coverage—many requiring insurers to cover losses sustained because of COVID-19 regardless of whether the language in the policy mentions or expressly excludes pandemics. However, some of the states with legislation pending have limited application to businesses with less than a certain number of eligible employees. While most of the pending legislation would apply to policies in effect at the time it becomes law, some even allow coverage to apply retroactively. Although not yet law, and although the language varies among each, states addressing business interruption insurance in light of COVID-19 all have the intent to assist businesses handle the virus’ effects.

At the federal level, there is additional support for efforts to force coverage. There are reports that House Democrats are preparing legislation that would require insurers to cover business interruption losses generated by the pandemic[2]. On April 14, 2020, President Trump indicated that he supports coverage in such circumstances, during a daily briefing, by stating ““You have people that have never asked for business-interruption insurance and they have been paying a lot of money for a lot of years for the privilege of having it and then when they finally need it, the insurance company says ‘We’re not going to give it,’” Trump said. “We can’t let that happen.”

As states and businesses continue to address COVID-19 concerns, answers to the above-mentioned questions are likely to become clearer in the day and weeks to come. Conversely, as tensions rise between insurance companies and the insured, it is also likely that additional lawsuits will be filed and additional states will propose their own legislation to address business interruption insurance concerns. To determine if a particular policy provides coverage, it is important for legal counsel to review the wording of each particular policy to see what is covered, what is excluded and any potential sub-limits on this particular coverage.  Additionally, it is important for businesses to obtain advice on prior rulings in the relevant jurisdiction on terms at issue in the respective insurance policy. The jurisdiction in which a lawsuit challenging or seeking a declaration of coverage could potentially affect the outcome because of different interpretations of such terms as “physical damage” or “loss.”  For example, a New Jersey federal court determined that the release of ammonia in a facility resulting in unsafe levels of the chemical that make it unfit for occupancy constituted “direct physical loss or damage” such that coverage applied to business interruption losses. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418 WHW, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014). Other courts have interpreted policies in a manner that could suggest no coverage with COVID-19 occurrences.  See Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008) (homeowners did not have a “physical loss” from presence of mold that could be cleaned when it did not affect structural integrity of the building’s siding); Mama Jo’s, Inc. v. Sparta Ins. Co., 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. Jun 11, 2018) (holding that restaurant did not sustain direct physical loss when dust and debris from nearby roadwork could be remediated by cleaning).

In the meantime, if you have any further questions or inquiries, we recommend that you contact us for further guidance.