As city and state leaders in Florida and across the country shut down or limit business operations to fight the spread of COVID-19, business owners will experience significant slowdowns and even involuntary closings, if they have not already. Insurance coverage has been among the many issues arising out of the COVID-19 pandemic. Policyholders faced with COVID19 related losses should take a closer look at their property insurance policies as they may provide coverage for business interruption losses to help alleviate some of these losses.
The key issue arising out of COVID-19 related business interruptions is whether the policyholder’s lost business income is the direct result of physical loss or damage to the insured property, in order to trigger business interruption coverage under the policy.
Generally, most property insurance policies that offer business interruption coverage require a causal connection between direct physical loss or damage and the loss of income. For example, the ISO commercial property business income form generally states:
“We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations…”
Insurance carriers will undoubtedly argue that coverage applies only where there is physical loss or damage to property and that COVID-19 will not trigger coverage. However, courts have come to different conclusions with respect to what the policy term “physical loss or damage” means. Many courts have found that the “physical loss or damage” requirement is met when a property becomes uninhabitable or unfit for use. In addition, courts have found direct physical loss due to noxious odors, mold, and gas leaks, triggering business income coverage.
1 In Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am. , 2014 WL 6675934, at *3 (D.N.J. Nov. 25, 2014), the United States District Court for the District of New Jersey acknowledged that “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage” and, accordingly, determined that ammonia gas discharge which rendered packaging facility “unfit for occupancy” and “unusable” constituted “physical loss” under the commercial property insurance policy at issue.
Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993) (court deemed subject property to have been physically damaged by noxious odors emanating from methamphetamine laboratory in neighboring apartment unit); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (finding, under Massachusetts law, an odor rendering the property unusable constituted physical injury to the property); Sullivan v. Standard Fire Ins. Co., 956 A.2d 643 (Del. 2008) (mold contamination was “physical loss” because mold spores “undoubtedly have a ‘material existence,’ even though they are not tangible or perceptible by the naked eye”); Matzner v. Seaco Ins. Co., No. 96- 0498-B, 1998 WL 566658, *3 (Mass. Super. Aug. 12, 1998) (carbon monoxide contamination constitutes direct physical loss even though it did not produce tangible damage to the structure of the insured property).
Further, in Motorists Mutual Insurance Co. v. Hardinger , 131 F. App’x 823, 826-27 (3d Cir. 2005), the United States Court of Appeals for the Third Circuit determined that the presence of E. Coli bacteria could amount to “physical loss” to a home and that this determination would depend on “whether the functionality of the  property was nearly eliminated or destroyed, or whether the  property was made useless or uninhabitable.”
There are some courts that interpret “physical loss” narrowly to mean damage causing apparent and obvious physical alteration to the property. 2 However, this should not discourage policyholders from pursuing a claim for business interruption. When confronted with ambiguities in interpreting the scope of coverage provided by a policy, many courts will look to resolve such ambiguities in favor of coverage.
Although there is no caselaw yet determining whether a virus or pandemic constitutes direct physical loss, it could be argued that even if there has not been a tangible change to the insured property, the presence of a life a threatening virus is sufficient to cause physical loss or damage to the property and trigger coverage for business interruption losses under the policy.
However, other policy terms and conditions may limit or exclude coverage, even if the physical loss or damage to the property is a result of the COVID-19 virus. Policyholders should review their policies for specific exclusions regarding bacteria, viruses, or communicable disease, and whether these exclusions define those terms. Policies may define these terms or include language in the exclusions in a way that may provide coverage for COVID-19 related losses.
Additionally, some property insurance policies provide business interruption coverage where lost business income is the result of governmental orders that impact the operation of a business and prohibit access to the insured property. The “direct physical loss or damage” requirement may also affect this additional business interruption coverage. Review of the policy terms is critical.
In order to recover under civil authority provisions, policyholders will have to demonstrate that the order of civil authority requiring the closure of business was directly due to property damage. If an order from a government to stop business refers to property damage from COVID-19, a company may be covered under the Policy’s civil authority provision, if not specifically excluded otherwise.For instance, many jurisdictions across Florida have issued Civil Authority orders finding that COVID-19 has the propensity to attach to surfaces for prolonged periods of time and physically causes property damage. These jurisdictions include North Miami, Oakland Park, Pensacola, Key West, and Panama City, as well as Orange, Broward and Hillsborough counties.
Mama Jo’s, Inc. v. Sparta Ins. Co., 17-CV-23362-KMM, 2018 WL 3412974, at *9 (S.D. Fla. June 11, 2018) (“A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.’”); see also Universal Image Productions, Inc. v. Chubb Corp., 703 F.Supp.2d 705, 710 (E.D. Mich. 2010) (holding that even though mold and bacteria permeated a floor, because the entire premises did not need to be vacated, and the insured could not meet its burden to show it suffered any structural or any other tangible damage to the property, there was no direct physical loss to property).
Along with the policy, the order of civil authority in question must be closely examined. Orders that impede or regulate access in reduced numbers must be distinguished from orders that clearly prohibit access. The latter may provide a basis for coverage, but the former will likely not. An order of civil authority that is aimed at preventing the spread of COVID-19, rather than any physical loss or damage to property, may be insufficient to trigger the civil authority provision under the policy.
Businesses have already begun to call upon the courts to decide these issues. The first lawsuit in Florida was filed by a sports bar in Tampa after the insurer denied coverage for its statemandated closure in response to the COVID-19 pandemic. In the suit, Prime Time Sports Grill Inc. v Certain Underwriters at Lloyd’s London , which was filed in U.S. District Court in Tampa, Prime Time is seeking a declaratory judgment as to “Underwriter’s obligations to provide coverage for the losses stemming from the governmental suspension as a result of the COVID-19 pandemic relating from the losses of income, business interruption, extra expense, contingent business interruption, ingress/egress, civil authority, all risk coverage, and other coverage extensions under the policy of insurance.”
The suit follows a growing number of lawsuits filed across the country by businesses who are looking to their insurance carriers to cover their costs as a result of government-mandated closing orders. Earlier this week, a group of movie theater and restaurant owners in Chicago filed a similar suit seeking coverage against Society Insurance Inc. The week before that, Lloyd’s was hit with a separate suit over the COVID-19 shut down by a restaurant in New Orleans, while a pair of Napa Valley-based French restaurants sued Hartford Fire Insurance Co. with similar claims.
Most recently, a theater in Texas filed suit against its insurer for refusing to provide coverage under a “Pandemic Event Endorsement” clearly applicable to the COVID-19 pandemic. The complaint alleges that at a time when many insurance carriers made specific exclusions for communicable diseases and viruses as a result of the 2014 Ebola crisis, Lloyd’s promoted the Pandemic Event Endorsement to provide coverage that other carriers exclude in the event of future pandemics, in exchange for a significant premium. When the insured reported its losses due to COVID-19 under this endorsement, it was practically hit with an immediate denial from Lloyd’s in response. This adds to what appears to be a growing trend of instant and general denials from carriers, indicating an inadequate claims investigation, relating to coverage for COVID-19 related losses.
Recognizing the growing dispute on these issues, lawmakers are expressing concerns about insurers avoiding coverage for business interruption losses. On March 18, 2020, members of the United States House of Representatives urged insurance trade groups that their members should acknowledge financial losses due to COVID-19 as part of their policyholders’ business interruption coverage. The members of Congress advised that business interruption insurance is intended to protect businesses against income loss in the event of disruption to their operations, and affording coverage for losses resulting from COVID-19 would, “help sustain America’s businesses through these turbulent times, keep their doors open, and retain employees on the payroll.”
New Jersey has taken steps to directly alter the terms of insurance contracts issued to insureds in New Jersey, requiring insurers to cover COVID-19-related losses, even if the policies have specific verbiage excluding losses related to viruses. Lawmakers in Ohio and Massachusetts have followed in New Jersey’s footsteps and proposed bills that would expand business interruption coverage to cover losses resulting from the coronavirus outbreak. In addition, New York has also introduced legislation that would require every insurance policy insuring against loss or damage to property, to include coverage for business interruption during a period of a declared state emergency due to COVID-19. Each of the bills would apply retroactively from the date the state’s governor issued an emergency declaration to business interruption policies purchased by companies of a specific size.
Each of the state legislative proposals also provide a means for insurers to obtain reimbursement of payments for business interruption claims. These reimbursements would be paid by that state’s regulatory agency out of a fund financed by special assessments imposed on insurers that sell business interruption coverage. Unfortunately, these measures will likely face significant legal challenges from insurers if passed into law. Insurance companies could file suit challenging the constitutionality of the measures as states’ interfering with private contracts in violation of the contracts clause of the U.S. Constitution.
There is no precedent yet for the circumstances in which many businesses now find themselves, and it is clear that the application of business interruption coverage related to COVID19 will be fervently debated. The efforts by policyholders, the attorneys who represent them, and both federal and state lawmakers establish that insurance policies should provide coverage for business interruption losses due to COVID-19. Ultimately, the specific policy language at issue, in conjunction with the facts, along with the applicable case law, will determine whether business interruption coverage is triggered by COVID-19.
As always, should you have any questions, need any additional information, or wish to discuss these issues in further detail, please do not hesitate to contact our office.
Allison L. Cucinotta, Esquire Stockham Law Group, P.A.