As the spread of COVID-19 Virus increases in the United States and throughout the world, the related negative effect on the economy will be substantial. Many industries will be detrimentally affected for months, whether the result of an order by a public authority, independent elections by business owners to shut down operations, the common sense of our citizens to self-quarantine, or other actions that are a consequence of the coronavirus pandemic.
The businesses that will be seriously impacted include but will not be limited to retailers, manufacturers, sports, entertainment, hospitality, etc. This will be consistent for small business and big business. In fact, all sectors of the economy will be impacted by this far-reaching pandemic. Affected companies will undoubtedly be turning to their property and business interruption insurers, expecting their policies to provide coverage responsive to this event.
The focus of this discussion will be on various coverage components that are usually included in business interruption policies. We will also address certain coverage provisions and endorsements that are available in the industry. Finally, we will address some hurdles to establishing coverage in the unique setting where the underlying damage arises from a virus outbreak.
The insurance programs designed and issued for businesses are intended to pay for the business income losses resulting from a covered cause of loss insured under the subject policies. While there are insurance policies and endorsements available in the industry that would unquestionably cover the business interruption losses that will be experienced as a result of COVID-19, it is unfortunately likely that insurers may initially deny many claims insured under standard ISO (Insurance Services Organization) forms or manuscript forms that are prevalent in the market.
These insurance provisions included in the ISO form offer coverage on an “all-risk” basis, insuring direct physical losses for all perils except those which are specifically excluded or limited in the policy. If it is determined by the insurer that the cause of loss is one of the numerous excluded perils under the policy, a claim of property damage or a claim for business income loss would be, rightfully or wrongfully, denied by that insurer. This holds true as well for potential losses insured under the additional coverage of Civil Authority contained in the business income policy, which will pay for loss of business caused by action of civil authority “due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”
These analyses will initially turn on whether the COVID-19 is in fact excluded under the policy provisions. One of the excluded perils in the ISO form is titled “Fungus, Wet Rot, Dry Rot, and Bacteria,” which insurers will likely rely on in determining coverage. Virus is not included or identified in this exclusion, though virus may appear in other endorsements and forms available in the industry. In certain cases, virus may be added to this exclusion in manuscript forms. Those endorsements excluding losses resulting from virus, such as the endorsement titled “NEW YORK – EXCLUSION FOR LOSS DUE TO VIRUS OR BACTERIA,” would absolutely be unnecessary if the policy it attaches to otherwise excluded losses from the peril of virus.
Another threshold issue in claims from COVID-19 will relate to the requirement in most business income, contingent business income and civil authority claims that loss was caused by some “direct physical damage.” Specific policy language from individual policies will be critical in determining if the existence of the virus at an insured location qualifies as physical damage. Undoubtedly there will be litigation over this issue, much of which may turn on the science of virus contamination. There are credible arguments that can be raised to support an insured's claim for coverage. The fact that “virus” is considered a peril that has specific provisions and/or endorsements designed to exclude it as a covered cause of loss, for property and business income exposures, confirms that insurers recognize that a “virus” can cause physical damage to property; otherwise there would be no need to exclude it as a covered peril. In addition, the virus presence can affect the functionality of certain workplaces, which some courts recognize as rising to the level of physical damage. Finally, it is interesting to note that in the Emergency Order issued by the City of New York, the Mayor stated that the virus is physically causing property loss and damage.
In general, any insured that has a policy that does not exclude “virus” as a covered peril should expect its insurance company to agree to accept a claim for resulting lost business income. Even so, the insured may then bear the burden of establishing whether the claim is the result of physical damage to the described premises of the insured as the trigger to the business income policy, or whether the claim is the result of an order by civil authority resulting from physical damage at property other than the described premises.
Presently there have been a few orders at the federal level that would qualify as a public order by civil authority, prohibiting access to the insured property, including the travel bans for China, Europe and Canada. These bans restricting travel to the United States would certainly affect the revenue streams of the hospitality industry, including but not limited to Hotels, Airlines, Cruise Lines, Food and Beverage, and Entertainment.
Other local city and state bans, such as the ones in New Rochelle NY, California, New York, and the various bans on gathering of mass gatherings of a certain amount of people, or a ban such as closing casinos in Maryland, would all qualify as Civil Authority. Insurers will most likely not argue that these qualify as orders of Civil Authority, but may debate whether the order is the result of physical damage to property.
There is no question regarding the substantial negative downturn on revenue streams of businesses in the United States related to COVID-19. The business income losses associated with this most disastrous event will be massive and, over time, immeasurable. The countless number of businesses that have transferred risks to their insurance companies, in exchange for payment of significant premiums, will now engage in discussions with the many carriers who have issued policies to these businesses. The coverage applications and acceptance or denial of claims by the insurers will vary depending the specific provisions of each policy. While the issues highlighted above will certainly be material to the determination of covered claims, a careful and detailed analysis of each policy needs to be completed and fully understood by each business before engaging in meaningful discussions with their individual insurers.