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Does Your Business Interruption Insurance Cover COVID-19 Related Losses?

Legal Insights, a Buckley King Advisory

April 17, 2020

YES, it may?!

Your property insurance policy may provide coverage for economic losses due to the complete or partial suspension of your business operations. There are many forms of business interruption and extra expense coverage parts that may be triggered by COVID-19 related business losses. But in light of the Ohio Stay at Home Order (the "Order"), you will want to review your policy to see if it includes a form of Civil Authority Insurance.

Civil Authority Insurance covers certain economic losses incurred over a specified time frame when an order of a civil authority prevents access to your property due to physical loss of or damage to other property. This coverage will have a waiting period, typically 72 hours, and a limited time frame, such as four weeks or thirty days.

At this time there is a great deal of uncertainty whether the Order will trigger Civil Authority Insurance. There are three key questions which can govern your ability to access this coverage.

1.  Does the presence of COVID-19 on business premises constitute physical loss of or damage to property?

The CDC has reported that persons can contract COVID-19 by touching a surface or object that has the virus on it. Policyholders will point to studies finding that COVID-19 can survive and remain infectious from several hours to multiple days depending on the surface and temperature conditions.

Insurers likely will argue that the presence of coronavirus does not cause “physical” loss of or damage to property sufficient to trigger coverage. This is because the presence of the coronavirus is a temporal condition which does not alter the structural integrity of contaminated business property. Contaminated business property can be remediated and restored to full use by appropriate sanitization. In addition, this restoration process typically can be accomplished within any 72 hour or other specified waiting period before the business interruption coverage to apply.

The advantages for policyholders are: (1) because most insurance policies do not define “[direct] physical loss of or damage to property,” this lack of a definition gives courts greater leeway in deciding this question; and, (2) this question is not well-settled in many jurisdictions, and has no definitive answer under Ohio law.

No CoverageFor example, courts in other jurisdictions have held that this requirement is not satisfied by the following occurrences:

  • Contamination of a restaurant caused by dust and debris from nearby roadwork (Florida).
  • Odors or the presence of mold and bacteria in an HVAC system (Michigan).

Coverage Found. Courts applying the law of other states have found that this requirement may be satisfied under the following circumstances:

  • Property contaminated by an unsafe release of ammonia (New Jersey/Georgia) 
  • High pressure sprays of hydraulic oil at a plant caused physical damage to the building roof (necessitating cleaning) and required the plant be shut down multiple times over almost a week-long period (Utah)
  • When authorities ordered a church building closed after gasoline fumes seeped into a building's structure and made its use unsafe (Colorado)
  • Odor from a methamphetamine lab in the lower level of a rental house, and smoke from a local wildfire reaches outdoor theater each rendered property temporarily unsuitable for its intended use (Oregon)
  • Toxic gases released by Chinese Drywall rendered home uninhabitable and damage constituted a direct physical loss (Virginia)
  • Carbon monoxide contamination constituted a “direct physical loss or damage to property" (Massachusetts)
  • Brown Recluse Spider infestation rendered house unsuitable for its intended use (Indiana)
  • E. coli bacteria contamination of well on insured property supported claim for Business Income and Extra Expense loss (California)
  • Threat of falling rocks which rendered dangerous the continued occupancy of insured home constituted physical loss to property (West Virginia)
  • Property contaminated by asbestos but only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, or if there exists an imminent threat of the release of a quantity of asbestos fibers that would cause such loss of utility (Pennsylvania)

Ohio Decision. For policies governed by Ohio law, insurers may rely, in part, upon a decision of the Cuyahoga County Court of Appeals in Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App. 3d 23, 2008-Ohio-311, 884 N.E.2d 1130, ¶ 61 (8th Dist.). This decision involved a claim for damage to exterior siding under a homeowner’s policy wherein the Court held that mold which could be removed by physical cleaning was not physical damage because the mold did not alter or otherwise affect the structural integrity of the building’s siding. Id. at ¶ 68.

The Court explained that:

The term "physical injury" is undefined by the policy, so we give that term its usual meaning. Nationwide Mut. Fire Ins. Co. v. Guman Bros. Farm, 73 Ohio St.3d 107, 108, 1995 Ohio 214, 652 N.E.2d 684. Read in context with the other terms used in the definition of "property damage," we construe the term "physical injury" to mean a harm to the property that adversely affects the structural integrity of the house. This interpretation is consistent with authorities on insurance law. See, e.g., 10A Couch on Insurance (3d Ed. 1998), Section 148:46: "The requirement that the loss be 'physical,' given the ordinary definition of that term, is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property"; Comment, Why Fear the Fungus: Why Toxic Mold Is and Is Not the Next Big Toxic Tort (2004), 52 Buff.L.Rev. 257, 276 homeowners must show "distinct and demonstrable" damage to property as a result of mold growth, such as "clear physical damage to the structure of the home" to recover under a homeowner policy.

A key distinction, however, is that, unlike property damage coverage under a homeowner’s policy, business interruption coverage is provided to cover detrimental economic impacts. This distinction can be argued to weigh in favor of a broader definition of “physical loss of or damage to property” under business interruption coverages.

Policyholders may argue that because the presence of COVID-19 prevents the insured property from being used for its intended purpose, the “physical loss of or damage to property” requirement for business interruption coverages is satisfied. Indeed, policyholders can cite to the history of the ISO virus exclusion discussed below to support the proposition that insurers recognized that COVID-19 contamination can lead to physical loss or damage to property.

The uncertainty surrounding this question should not deter you from claiming business interruption coverage.

2. Is access to an insured’s covered property and related economic losses due to physical loss of or damage to “other property”?

Civil Authority Insurance focuses on business losses and extra expenses incurred as the result of access to insured premises being prohibited or impaired by order of a civil authority due to a covered physical loss of or damage to other property in the immediate area of the insured premises. But policy requirements for this coverage do vary.

The stated purpose of Ohio's Order is “to avoid an imminent threat with a high probability of widespread exposure to COVID-19 with a significant risk of substantial harm to a large number of people in the general population, including the elderly and people with weakened immune systems and chronic medical conditions.” Insurers likely will argue that the purpose of the Order is to prevent the spread of COVID-19 by promoting social distancing, and not due to the presence of coronavirus on business premises and any associated loss of or physical damage to property.

A policyholder argument may be that coverage is triggered because the Order prohibits or impairs access to your premises as a direct result of direct physical loss of or direct physical damage not only to your premises, but also to multiple business properties in your immediate area. This argument focuses on the ability of coronavirus to physically infect and stay on surfaces of objects or materials up to 28 days.

In French Laundry Partners, LP, et al. v. Hartford Fire Ins. Co., et al., a declaratory judgment action filed in the Superior Court for the State of California, County of Napa, the owners of two highly rated restaurants seek entitlement to recover their business income losses due to a Napa County Stay at Home Order under the Civil Authority coverage afforded under a Hartford Property Choice Deluxe Form policy. The insureds assert that the physical damage to other property requirement is satisfied based on allegations that:

  • COVID-19 has physically impacted “public and private property, and physical spaces in cities around the world and in the United States;”
  • The coronavirus “physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days;”
  • “China, Italy, France and Spain have implemented the cleaning and fumigating of areas” before allowing those areas to re-opened to the public;” and,
  • The County Stay at Home Order states that it is being “issued based on evidence of physical damage to property.”

The outcome of this declaratory judgment action bears monitoring.

3.  If your policy has a virus exclusion endorsement, does that exclusion apply to bar your Civil Authority Insurance coverage?

In 2006, the Insurance Services Office (ISO) developed a standard Endorsement for Exclusion of Loss Due to Virus or Bacteria. This exclusion in significant part was in response to the 2003 SARS outbreak. Severe acute respiratory syndrome (SARS) is a viral respiratory illness caused by a coronavirus called SARS-associated coronavirus (SARS-CoV). SARS was first reported in Asia in February 2003, and then spread globally to more than two dozen countries in North America, South America, Europe, and Asia before this SARS outbreak was contained.

While your property damage coverage part may have a virus exclusion endorsement, you should not assume that this exclusion automatically applies to any Civil Authority coverage. Rather, you should have your policy reviewed by an insurance coverage professional to determine whether any virus exclusion applies to any Civil Authority coverage.

What Should You Do?

Civil Authority Insurance is just one form of business interruption insurance which may be available to cover your COVID-19 economic losses. Policy provisions, language, and exclusions will vary from insurer-to-insurer and policy-to-policy. You also need to recognize that even if your policy includes a virus exclusion endorsement, this exclusion may not apply to all business interruption coverage parts. In light of the current uncertainty surrounding coverage for COVID-19 business losses (as ensuing litigation or legislation may lead to coverage inroads for coronavirus claims for business losses), you should consider undertaking the following steps:

  • Policy Review. You should ask a legal and/or insurance coverage professional to assist with the review of your insurance policies.
  • Notify Your Insurer. Identify and carefully review the policy requirements to provide notice of a claim to your insurer. The failure to provide timely notice may be a basis for the insurer to deny your claim. Your insurance broker can assist with providing notice of your claim.
  • Document Claimed Losses. Property insurance policies have proof of claim or loss provisions, which need to be followed. Maintain a detailed record of all economic losses and supporting documentation needed to establish and calculate your business losses.

If you provide notice of a business interruption claim to your commercial property insurer and your claim is denied, do not assume that the denial is appropriate. You should consult a lawyer to evaluate the denial and review your options.

n addition, there are legislative initiatives designed to extend business interruption coverage despite any virus exclusions. On March 24, 2020, the Ohio legislature introduced H.B. No. 589, “[t]o require insurers offering business interruption insurance to cover losses attributable to viruses and pandemics” for “the state of emergency declared under Executive Order 2020-01D, issued on March 9, 2020, to protect the well-being of Ohio citizens from the dangerous effects of COVID-19.” If enacted, insurers are likely to challenge any such legislation on constitutional grounds.