Senior Partner, David M. Dubin Comments on Filing Claims Under Business Interruption Policies as a Result of Losses Caused by Coronavirus.
BUSINESSES SHOULD TENDER THEIR COVID-19 BUSINESS INTERRUPTION CLAIMS NOW
Generally, under the most common commercial property policy forms, business interruption coverage requires a causal connection between the insured’s physical loss or damage and the insured’s loss of income. For example, the ISO commercial property business income form provides: “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 …”
Many business interruption policies exclude coverage for contamination and pollution by excluding coverage for losses caused directly or indirectly by “bacteria” or “virus”. Damages arising from coronavirus will be very difficult to recover if the underlying policy expressly excludes “viruses”. Therefore, the insured should review with a professional whether their business interruption coverage contains virus or bacteria exclusions.
There is no doubt that among the issues that will be litigated throughout our country resulting from the coronavirus is whether the insured’s lost business income is the direct result of physical loss or damage to the insured’s property. In fact, on March 16, 2020, a policyholder law firm filed suit against Lloyd’s of London in federal district court in New Orleans seeking a declaratory judgment as to whether Lloyd’s business income coverage in its property policy covers a government mandated shutdown due to the coronavirus, arguing that the Lloyd’s policy provides coverage for a civil authority shutdown and does not contain a specific exclusion for a virus pandemic. While there have been many courts that have required tangible changes resulting in material damage to property to constitute “physical loss or damage,” other jurisdictions have construed “physical loss” more liberally in finding such loss even when it cannot be seen, as long as there is a demonstrated change of the insured’s property, such as the release of asbestos that resulted in the loss of utility of a building (Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226 (3d Cir. 2002)(under NY and NJ law); bacteria contamination of a home’s water supply (Motorists Mutual Insurance Co. v. Hardinger, 131 F.App’x 823 (3d Cir. 2005)), noxious odors resulting from sulfide gases and other toxic chemicals from “Chinese Drywall” (In re Chinese Manufactured Drywall Prods. Liab. Litig., 759 F. Supp. 822 (E.D. La. 2010)); and smoke and noxious gases from a nearby fire (Oregon Shakespeare Festival v. Great American Insurance Co., 2016 2016 U.S. Dist. LEXIS 74450 (D. Or. 2016)).
Companies unable to prove a direct claim for damage to their property arising out of coronavirus are likely to look to other coverages in their business interruption policies, the most obvious of which is civil authority coverage. This coverage is based on an interruption to the insured’s business resulting from an order from a civil or military authority which impairs access to the insured’s property due to insured physical damage. However, the courts have often construed this coverage narrowly and required proof of actual physical damage, and unless the insured can prove that the order was directly due to property damage at or near the insured’s premises, they have upheld the declination of coverage. See United Airlines, Inc. v. Insurance Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006); Jones, Walker, Waechter, Poitevent, Carrere & Denegre, LLP v. Chubb Corp., 2010 WL 4026375 (E.D. La. 2010).
Without much precedent to cite in support of coverage for COVID-19 claims, why should businesses file claims at this time for business interruption coverage with their carriers? Three principal reasons. First, if an insured fails to file a claim timely, it cannot raise the claim at a later date. It’s lost. So, by tendering a claim and receiving a denial, the insured’s claim is preserved. And it does not require a lot of time or funds to file a claim. As such, the cost of filing is clearly outweighed by the potential benefit of a successful claim. Secondly, there certainly will be a plethora of lawsuits filed based on the catastrophic losses resulting from the coronavirus and government mandated shutdowns. As with most litigation, there is no certainty as to how the courts will decide these cases. Thirdly, lawmakers in a number of states have introduced bills over the past few weeks to obligate insurance carriers to cover business interruption claims resulting from COVID-19, regardless of any law or precedent to the contrary. Thus far, lawmakers in New York, New Jersey, Massachusetts and Ohio have introduced such bills.
New York’s bill (A. 10226), introduced on March 27, 2020 by Assembly Member Patricia Fahy, provides in pertinent part: “Notwithstanding any provisions of law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state of emergency due to the coronavirus disease 2019 (COVID-19) pandemic.” (Section 1(a)). This bill expressly applies to “insureds with less than 100 eligible employees,” who are defined as full-time employees who work at least 25 hours per week (Section 1(c)), and would apply to insurance policies in place form the date Governor Cuomo declared a state of emergency due to COVID-19 (March 7, 2020) (Section 1(b)). As of this writing, the bill has been referred to the Assembly Committee on Insurance.
New York’s bill, if passed, as with similar bills in other states, will likely be litigated by insurers because among other things they override the standard policy provisions and established precedent requiring “physical loss of or damage” to property for business interruption coverage to apply. However, unless such challenges are upheld by the courts, there again is no harm for a business to file its COVID-19 claim at this time.
Absent governing legislation, whether a COVID-19 claim is covered under an insured’s business interruption policy will depend on the specific terms of the policy and the facts surrounding the loss. Therefore, it is recommended that the insured have its policy reviewed by a professional, and give serious consideration to tendering a claim at this time.
Please contact Mr. Dubin with any questions at 631-727-2180 Ext. 230 or firstname.lastname@example.org