Insurance Coverage for Business Interruption – COVID-19 Claims

Many business owners and operators are concerned over revenue losses resulting from the effects of the COVID-19 virus and efforts to prevent its spread. Business interruption has resulted from the general slowing of business associated with the general public’s changing of their habits, from event cancellations, and mandated closures dictated by states and local municipalities. Most property and casualty insurance policies contain some form of business interruption coverage. This coverage is designed to compensate the business for unexpected revenue losses suffered during the policy period. In the face of these COVID-19 revenue losses, companies should consider whether any coverage for business interruption is available to them under their commercial policies.

To start with, policies often contain coverage exclusions for losses arising from viruses. ISO – the Insurance Services Organization that drafts much of the standard policy language for the insurance industry – drafted a “Virus or Bacteria” exclusion in 2006 that has been largely implemented by insurers. (This was prepared and submitted for approval to regulators in response to the SARS outbreak and specifically applies to business interruption coverage.) If such an exclusion is present in a business’s policy, it may preclude coverage entirely. However, companies in New Jersey should note that a Bill is being introduced in the state legislature, which could force insurers to cover COVID-19 losses, in spite of such exclusionary language.

If there is no virus exclusion in the policy, the policy will still need to be reviewed to determine whether all of the conditions of coverage are met so as to trigger coverage for COVID-19 losses. Typical commercial insurance policy language requires that any interruption to business arise from a covered cause of loss, such as fire, in order for coverage to be triggered. This is generally also the case for coverage for claims arising from disruptions with a supplier or customer. In addition, most commercial policies will require “direct physical loss” to the insured property from the event. The requirements for a covered cause of loss and for direct physical loss to property can create obvious questions about whether the coverage could apply to coronavirus-related losses.

Generally, purely economic losses do not constitute “direct physical loss.”  Policies will typically require actual physical damage to the property to meet this requirement. However, if a business location or property has become contaminated and uninhabitable due to the virus, there may be a basis to claim a direct physical loss. This analysis is likely to be fact-intensive and is likely to evolve in response to this unique situation.  Declarations of states of emergency, with associated orders restricting business operations, will certainly affect this analysis.

Many insurers began offering a separate insurance product related to a health crisis or pandemic in recent years. In response to the Ebola outbreak, many insurers offered specialized coverages for a business interruption for facilities forced to shutter or limit operations as a result of civil authority orders. Such specialized coverages would likely be in the form of an endorsement to the commercial policy. These endorsements remove the direct physical loss requirement for the coverage.  Similarly, stand-alone coverage products are frequently issued for event cancellations. The availability of these types of endorsements and policies should be explored by business owners looking for coverage for business interruption losses. To the extent there is a concern that these types of pandemic responses may become the “new normal,” business owners should consider revising and updating their coverages going forward.