The coronavirus (COVID-19) pandemic is historic, fast-moving, and constantly evolving. While the most immediate concerns involve the public health and restoring business operations to normalcy, certain steps may be necessary in the near term to protect your insurance assets, which may help mitigate financial losses.
Business interruption coverage in first-party commercial property insurance policies may respond to the COVID-19 pandemic. In general, business interruption coverage provides a policyholder with protection against lost profits when a business suffers physical loss or damage to property from an insured peril that interrupts the operation of the business. This coverage also includes operating expenses that must be paid even if the business is not operational. Under standard form policies, business interruption typically provides coverage where there is (1) loss, (2) resulting from interruption of business, whether total or partial, (3) caused by direct physical loss or damage to covered property or loss of use of covered property, (4) caused by a covered peril.
Contingent business interruption and civil authority coverages found in many first-party insurance policies may also provide coverage for COVID-19 losses. Contingent business interruption coverage protects against economic losses caused by a supplier’s inability to deliver goods to the policyholder as a result of damage to the supplier’s property. It also protects against economic losses caused by damage to a customer’s property that prevents the customer from accepting the policyholder’s products. Civil authority coverage protects the policyholder from losses caused by the inability to access its property when a civil authority, such as a local, state, or federal government, denies or restricts such access because of covered damage to property belonging to third parties.
Because business interruption coverages are typically a component of first-party property insurance, physical loss or damage is usually required to trigger the coverage. Thus, the critical issue policyholders will have to confront is whether the lost income resulted from physical loss or damage to property. Contagious diseases, like COVID-19, may constitute physical loss or damage that triggers insurance coverage in some circumstances. Respiratory droplets produced when an infected person coughs or sneezes on property, including its surfaces, may constitute physical loss or damage. For example, the Centers for Disease Control and Prevention (CDC) notes on its website that “[i]t may be possible that a person can get COVID-19 by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes. . . .” Moreover, a recent study by the National Institutes of Health and other scientists analyzed the stability of COVID-19 on surfaces and found that “viable virus could be detected . . . up to 4 hours on copper, up to 24 hours on cardboard and up to 2-3 days on plastic and stainless steel.” Finally, courts have also found the physical loss or damage requirement satisfied in other contexts where the property’s use, functionality, or reliability has been impaired. Accordingly, if physical loss or damage forces your business to shut down facilities and causes losses, then business interruption coverage may respond.
However, there are important challenges with respect to business interruption coverages and the COVID-19 pandemic to keep in mind in addition to the “physical loss or damage” requirement. For example, certain policies contain exclusions that purport to exclude loss resulting from a “virus”. Wording in these exclusions vary and how such exclusions may apply to exclude or limit coverage for a policyholder’s losses will also vary. Other policies may expressly provide coverage for losses arising out of a defined list of diseases. Since the precise terms contained in any particular insurance policy can vary, each business interruption claim presents its own unique set of challenges. Whether or not there will be business interruption coverage for a financial loss resulting from the COVID-19 pandemic will depend on the underlying facts, the specific provisions and endorsements, and the applicable law of the state or country.
If your company has been impacted by COVID-19, and you have a potential claim for coverage, then it is important to protect your insurance assets by taking immediate steps. Careful review of your insurance policies and providing timely notice and tender of covered loss to your carriers are important first steps in preserving your rights to coverage. Our lawyers are available 24/7 to assist in your asset preservation and recovery efforts, including reviewing the relevant insurance policies and providing guidance concerning the potential responsiveness of coverage with respect to business interruption losses.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Harvey Bartle IV
Lauren A. McCulloch Semlinger