In order to slow the spread of the COVID-19 pandemic, state, county and city governments have issued various orders requiring the closing of “nonessential” businesses. These closures have had a substantive, negative effect upon businesses throughout the country. While the closures have affected companies of all sizes, smaller businesses have been especially hard hit by these government-mandated closures.
Many of the affected businesses purchased commercial property insurance and many of those policies include business interruption coverage. Business owners throughout the country are seeking reimbursement for their business losses resulting from the government-mandated shutdowns through this insurance coverage.
Assuming that your business possesses such coverage, the question then becomes “will my insurer reimburse the losses resulting from the interruption caused by the government-mandated closure?” Unfortunately, as with most of what is occurring with regard to the COVID-19 pandemic, we are in “uncharted waters” with regards to the viability and scope of business interruption coverage. Below is a short synopsis of the factual and legal issues which will affect whether your company can successfully recover “business interruption” losses from your insurance carrier.
Commercial Property Insurance
The first condition for potentially recovering business interruption damages is possessing a commercial property insurance policy – sometimes referred to as a “Commercial Lines Policy” – which includes coverage for business interruption. Such coverage is typically afforded as part of a “Business or Rental Income Coverage Form”, but insurers may vary the name of the coverage form.
Business interruption coverage contained in a commercial property insurance policy is typically intended to provide coverage for losses associated property damage to an insured’s business property. The prototypical loss would be a business interruption resulting from a fire at the business property. Typical commercial property coverage policies require “the direct physical loss of or damage to” covered property, which includes the business’ physical premises as well as certain personal property such as fixtures. When a policy contains business interruption coverage, that policy typically requires that the interruption result from that “direct physical loss of or damage.” As you can see, our prototypical scenario fits easily into the definition of a “covered loss” under such a policy – the fire damages the business premises, causing the business to close and resulting in business interruption losses.
While the prototypical factual scenario fits easily into the policy’s terms, the scenario facing businesses forced to shut down due to the government-mandated closures presents a more complex fact scenario. Following a flood of business interruption claims, insurers appear to be denying those claims based upon two (2) rationales: (1) the government-mandated closures have not resulted in “direct physical loss of or damage to” the business’ covered property; and/or, (2) the policy contains a “Virus Exclusion” which precludes coverage for business losses resulting from exposure to a virus.
Direct Physical Loss of or Damage to Covered Property
Unlike our prototypical scenario, the government-mandated closures may not have burned or flooded your business, but that does not necessarily mean that commercial property coverage is unavailable to cover the loss. Court’s throughout the country have determined that the “direct loss of or damage to” requirement does not require a structural alteration or destruction of the premises, but could result from the premises becoming uninhabitable or unsafe. In fact, many commercial property policies include what is known as a “Civil Authority” provision which provides coverage when, as a result of “direct loss of or damage to” the business, a civil authority denies access to the business premises.
Following the SARS outbreak in 2002-2004, the insurance industry formulated the “Virus Exclusion.” The intent of the “Virus Exclusion” was to eliminate disputes as to whether contamination of business premises by a virus (or bacteria) resulted in “direct loss of or damage to” those premises by simply excluding claims associated with that contamination. Not all commercial property policies contain the “Virus Exclusion”, but if yours does, all is not lost. The government-mandated closures were the cause of a vast majority of business closures (and the resulting business interruption losses), not a contamination by a virus. In fact, COVID-19 is not a virus, but a communicable disease. While this may sound like splitting hairs, most states interpret insurance policies against the insurer (who obviously wrote them) and any inconsistencies or vague language will be interpreted in favor of the insured.
The business closures required by governments throughout the country, including the March 19 2020, Executive Order N-33-20 of the Governor of the State of California, the March 20, 2020 Declaration of Emergency for COVID-19 – Directive 003 from the Governor of the State of Nevada and the March 31, 2020 Executive Order GA-14 from the Governor of the State of Texas, arguably amount to the actions of a civil authority which denied access to most business premises thereby resulting in significant (and continuing) business interruption losses. Insurers throughout the country have been inundated with business interruption claims and have been quick in issuing denials based upon the alleged lack of actual physical damage and/or the Virus Exclusion.
Nevertheless, a denial of coverage by an insurer does not necessarily mean that coverage should not have been afforded. Arguments can be made that: (1) the government-mandated closures amount to a covered loss, especially if the policy contains a “Civil Authority” provision; and, (2) the “Virus Exclusion” does not apply because the business interruption losses are not the result of contamination by a virus. Several lawsuits have already been filed in jurisdictions throughout the country (Louisiana, New Jersey, Florida and Indiana to name a few) and we anticipate that these will be the tip of the iceberg. Some state legislatures (New Jersey, Ohio and Massachusetts) have also introduced legislation which would provide businesses a means to recover business interruption losses if the business had business interruption coverage irrespective of the policy language and/or exclusions. While the viability of this legislation may be questionable, we may see similar legislation in other states.
Regardless of the outcome of the existing lawsuits or the actions of the states’ legislatures, TALG recommends that, if your company has been forced to close as a result of a government-mandated closure or COVID-19 related contamination, you review your commercial property insurance policy and make a claim against that policy. You dutifully paid the premiums for that policy and should expect that your insurer will fulfill its obligations. Should you require any assistance with regards to analyzing your coverage or making a claim, TALG stands ready to assist you.