LawFlash

COVID-19 Business Interruption Losses: The Potential Keys to Unlocking Insurance Recovery

April 21, 2020

As the coronavirus (COVID-19) pandemic evolves, governmental executive and legislative authorities are taking actions in the form of emergency declarations and proposed legislation that could improve a company’s ability to mitigate business income losses by maximizing its insurance recovery. Keeping an eye on these developments and documenting your losses accordingly could make all the difference.

The typical property insurance policy provides coverage of an insured’s “property” against “all risks of physical loss or damage” except as otherwise excluded. Under the basic insuring agreement of these policies for “business interruption” or “time element” losses, the policies generally provide coverage for loss of earnings or profits and extra expenses for a defined period of time resulting from “physical loss or damage” of the insured’s property. This basic coverage often is the subject of a very high “per occurrence” limit of coverage.

Many of these policies also extend business interruption coverage to situations not involving physical loss or damage to the insured’s property itself. These extensions of coverage are subject to a “period of liability” and/or dollar amount sublimit.

HOW CIVIL AUTHORITY TIME ELEMENT COVERAGE COULD APPLY

One of the above-mentioned coverage extensions is for losses and expenses resulting from civil or military authority orders. This coverage typically is the subject of a time limit of coverage, usually 30 or 60 days of losses and expenses resulting from “an” order issued by a civil or military authority limiting access to “an” insured location where the order is a result of physical loss or damage of property including to such property not at an insured location but rather near it.

An example of civil or military authority coverage language found in certain policies is the following:

This Policy covers the Actual Loss Sustained and EXTRA EXPENSE incurred by the Insured during the PERIOD OF LIABILITY [30 or 60 consecutive days] if an order of civil or military authority limits, restricts or prohibits partial or total access to an insured location provided such order is the direct result of physical damage of the type insured at the insured location or within five statute miles/eight kilometres of it. . . .

The COVID-19-related civil authority orders that have limited, restricted, or prohibited partial or total access to insured locations around the world, often explicitly, have been based on the medical fact that COVID-19 has a high propensity for human-to-human spread and a “proclivity” to attach to surfaces of property for sustained periods of time, furthering the risk of spread with this proclivity resulting in a physical loss or damage to property.

For example, the March 19 (Revised April 1) “Safer At Home” order issued by the Office of the Mayor, City of Los Angeles included a “finding” that the order was being given

because, among other reasons, the COVID-19 virus can spread easily from person to person and it is physically causing property loss or damage due to its tendency to attach to surfaces for prolonged periods of time . . .

Similarly, the April 1 Eighth Supplement to the Mayoral Proclamation Declaring the Existence of a Local Emergency issued by the Office of the Mayor, San Francisco found that

[t]his order and the previous orders issued during this emergency have all been issued because of the propensity of the virus to spread person to person and also because the virus physically is causing property loss or damage due to its proclivity to attach to surfaces for prolonged periods of time . . .

These orders and others, explicitly or implicitly, are making findings that, in the context of COVID-19, the “propensity” of the virus to spread and the “tendency,” “ability,” or “proclivity” of it to attach to property itself (i.e., without any specific “contamination” of the virus on property) constitutes “property loss or damage” that, in turn, is resulting in these orders limiting, restricting, or prohibiting access to properties.

Instructive COVID-19-Related Case Law on Civil Authority Orders

The Pennsylvania Supreme Court’s recent decision in Devito v. Wolf[1] is instructive as to the fact that in these current circumstances, given the nature of the COVID-19 virus, the civil authority orders that have been issued are the result of property loss or damage due to the risk of spread including from the virus’s tendency to attach to surfaces.

The court in that case denied an ex parte application for extraordinary relief challenging statutory authority for, and the constitutionality of, the Pennsylvania governor’s order requiring closure of all non-life-sustaining businesses to reduce the spread of COVID-19.

The court noted that the governor’s executive order, by its terms, compelled the closure of all businesses in the state deemed to be non-life-sustaining “to prevent the spread of COVID-19 by limiting person-to-person interactions through social distancing,” explaining that

[s]ocial distancing is essential to limiting the death toll from COVID-19 because this pandemic spreads primarily through person to person contact, as many as 25% of those infected are asymptomatic, and the virus has an incubation period of up to fourteen days. The virus can remain on surfaces for days and can spread through the air within confined areas and structures.” (emphasis added)

The court in Devito v. Wolf held that COVID-19 qualifies as a “natural disaster” providing the governor statutory authority to issue that order because it, like other natural disasters specified in the statute, involves “substantial damage to property, hardship, suffering or possible loss of life.”

Specifically, the court rejected the petitioners’ argument that “there have been no disasters in the areas in which their businesses are located,” in part, because that argument

ignores the nature of this virus and the manner in which it is transmitted. The virus spreads primarily through person-to-person contact, has an incubation period of up to fourteen days, one in four carriers of the virus are asymptomatic, and the virus can live on surfaces for up to four days. Thus, any location (including the Petitioners’ businesses) where two or more people can congregate is within the disaster area.  (emphasis added)

The court also rejected constitutional challenges to the order, including the petitioners’ claim that “there is no significant risk of the spread of COVID-19 in locations where the disease has not been detected” finding, and noting again that

COVID-19 does not spread because the virus is “at” a particular location. Instead it spreads because of person-to-person contact, as it has an incubation period of up to fourteen days and that one in four carriers of the virus are asymptomatic [and the fact that t]he virus can live on surfaces for up to four days and can remain in the air within confined areas and structures. (emphasis added)

This Pennsylvania Supreme Court decision, the civil authority orders themselves, and the nature of the virus itself, support the fact that the propensity of it to spread and its proclivity to attach to surfaces—regardless of whether it in fact has done so at particular locations (i.e., even in the absence of particular “contamination” of property)—is “property damage.” 

Other Supportive Case Law

Courts have found in analogous circumstances, in the context of the mere presence of asbestos-containing materials in a building—even if asbestos fibers are not airborne—that such a situation “is a health hazard because of the potential for future releases of asbestos fibers” that constitutes “physical injury” to “property” and therefore is “property damage.”[2] 

Such cases could support arguments extended to the current unique circumstances that, in the context of a pandemic outbreak, the “proclivity” of a virus to attach to property and its “propensity” to spread to cause harm to human health similarly constitute—as many civil orders themselves and the Pennsylvania Supreme Court are explicitly finding—physical loss or damage to property.[3]

Civil Authority Coverage Typically Applies on an Order-By-Order Insured Location-By-Location Basis

Cvil authority coverage typically has a “period of liability” limitation for covered losses,[4] with that limit applying on “an” order by “an” insured location basis.

As applied in a typical scenario, under such coverage, if an order is entered in July in Florida restricting access to an insured location for 10 days as a destructive hurricane approaches, the policy would provide coverage for losses and expenses sustained arising out of that order for that property as well as for a different order in another jurisdiction impacting a different insured location in that jurisdiction a month later arising out of another hurricane.

The current situation, with outbreaks of COVID-19 all around the globe, is analogous to hurricanes hitting near insured locations around the world over the course of months, with a resulting series of civil authority orders issued at various times limiting or restricting access to multiple insured locations.

Accordingly, if a company’s civil authority coverage applies on an order-by-order/insured location-by-insured location basis and is potentially responsive to its COVID-19-related losses, it may be important for the company to

  • document its losses arising out of its particular insured locations,
  • collect the civil authority order(s) that have restricted access to those insurance locations, and
  • ensure that its communications with its insurers about its coverage claims and underlying losses and expenses are made in a manner consistent with these facts.

MULTIPLE US STATES PROPOSE COVID-19 BUSINESS INTERRUPTION INSURANCE LEGISLATION

New Jersey

On March 16, New Jersey Assembly members introduced proposed legislation (A-3844) that

provides a mechanism by which certain businesses that suffer losses due to interruption as a result of the coronavirus disease 2019 pandemic may recover those losses from their insurer if they had a policy of business interruption insurance in force on March 9, 2020, the date on which the Governor declared a Public Health Emergency and State of Emergency in Executive Order 103.

The bill would apply to policies issued to “insureds with less than 100 eligible employees, in the State of New Jersey, and in force on the effective date of this act.”

Massachusetts, Ohio, New York, Louisiana, Pennsylvania, and South Carolina

On March 24 and 27, Massachusetts, Ohio, and New York state representatives proposed similar legislation (Massachusetts Senate Docket No. 2888, Ohio House Bill 589, and New York Assembly Bill A10226) that, if enacted, would require insurers to provide business interruption coverage in connection with COVID-19. Similar bills are also being considered in Louisiana (Senate Bill 477, Senate Bill 495, and House Bill 858), Pennsylvania (Senate Bill 1114), and South Carolina (S 1188 General Bill). Louisiana SB 477 and Pennsylvania Senate Bill 1114 would apply to all policies in force in their respective states, not only policies issued to insured with a limited number of employees in their state.[5]

The Massachusetts bill is an example of how legislation is being considered that addresses insurer arguments that exclusions in their policies eliminate coverage. That bill provides further that

no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property. 

If this or similar legislation is passed, policyholders would rely on liberalization and “conformity-to-statute” conditions in their policies to support their claims for coverage, at least with respect to insured locations under the policy located within the jurisdiction(s) where such legislation is passed. A typical liberalization condition provides the following:

If during the period that insurance is in force under this Policy, any filed rules or regulations affecting the same are revised by statute so as to broaden this insurance without additional premium charge, such extended or broadened insurance will inure to the benefit of the Insured within such jurisdiction, effective the date of the change specified in such statute.[6]  

Certain policies similarly or additionally include conformity-to-statute provisions or provisions “applicable to specific jurisdictions” that provide that if the policy’s provisions “conflict” with provisions required to be in policies by statute, the policy is to be read to eliminate such conflict. For example, a typical provision states the following:

If the provisions of this Policy conflict with the laws of any jurisdictions in which this Policy applies, and if certain provisions are required by law to be stated in this Policy, this Policy will be read so as to eliminate such conflict or deemed to include such provisions for insured locations within such jurisdictions.

As discussed above, state legislatures are considering bills that, if passed into law, may “broaden the insurance” to require coverage for business interruption losses relating to COVID-19 with respect to insured properties within their jurisdictions, notwithstanding insurer assertions that coverage does not apply or certain exclusions bar coverage.

While insurers have asserted that such statutes raise federal and state constitutional issues—arguing that they directly violate constitutional contracts’ clauses[7]—certain courts have held that similar liberalization and conformity-to-statute provisions operate as a waiver to such arguments with respect to statutes that plainly broaden coverage and that become effective during the policy period of the policy.[8]

Many of the liberalization and conformity-to-statute provisions apply to changes in law within “any jurisdiction.” Accordingly, if a policyholder is experiencing business interruption losses arising out of an insured property in Louisiana, Louisiana passes Senate Bill 477, and the policyholder has losses arising out of another insured property in a jurisdiction that does not pass a similar bill, it may result in a strengthening of its claims for coverage from losses arising out of its Louisiana insured location as compared to its losses arising out of its other insured locations.

The fact that legislation may strengthen a policyholder’s coverage claims for losses arising out of insured locations within particular jurisdictions as compared to others is another reason that it would be prudent for companies to document, to the extent practicable, their business interruption losses and expenses arising out of their particular insured locations.

FEDERAL LEGISLATION

As we discussed in our recent LawFlash, many industry groups and others have been calling for federal legislation to facilitate the responsiveness of business interruption coverage to the enormous losses being sustained by American businesses.

For example, the General Assembly of Pennsylvania on April 13 referred House Resolution No. 842 to the Committee on Insurance. That resolution urges the US Congress to facilitate payment to insurance companies through federal stimulus funds for the reimbursement of costs associated with the payment of claims made on business interruption insurance policies during COVID-19. It asks, among other things, for legislation that channels reimbursement and aid through insurance companies and provides reimbursement to insurance companies that voluntarily pay claims submitted on business interruption insurance policies.

A number of drafts of a Pandemic Risk Insurance Act (PRIA) have been circulating around Congress that would, among other things, create for pandemics a reinsurance program similar to the Terrorism Risk Insurance Act, providing a partial federally funded backstop for insurance to respond to losses arising from pandemics. Certain of the drafts of the bill apparently would concern not only coverage for losses arising from future pandemics but also the current one.

On April 10, Republican members of the Senate Banking Committee sent a letter to US President Donald Trump stating that PRIA proposals that “promote the idea of retroactively changing business interruption (BI) insurance contracts that do not cover pandemics and viruses, to then require the US insurance industry to fund the relief to . . . small businesses” would be “counterproductive.”[9]

The letter claimed that such legislation would be an “ex post facto rewrite” of insurance contracts and asserted that “BI insurance typically does not cover pandemics absent an explicit rider” and warned of “solvency risks” of the insurance industry if such legislation was passed.[10]

That same day, at the daily White House Coronavirus Task Force press conference, in a possible reference to the content of this letter, the president stated that with respect to business interruption coverage, he “would like to see the insurance companies pay if they need to pay” and that there is “an exclusion” for pandemics “in some cases” but “in a lot of cases, I don’t see it.”[11] 

The president added:

You have people that have never asked for business-interruption insurance, and they’ve been paying a lot of money for a lot of years for the privilege of having it. And then when they finally need it, the insurance company says, “We’re not going to give it.” We can’t let that happen.[12]

At the present moment, the insurance industry and its allies are very much against any federal legislation that would create a systematic way to facilitate the payment of business interruption losses without dispute, with some bearing of losses by businesses, some losses reimbursed from funds from insurers, and some by the federal government. However, the calls for such federal legislation will not go away.

In the meantime, coverage litigation likely will proceed on a scale with some policyholder successes not fully apprehended by the industry, with state legislatures passing laws removing coverage arguments for at least certain losses.

Even in the absence of state legislation concerning the non-applicability of exclusions in policies for COVID-19-related losses, insurance policies generally do not exclude “pandemics,” and the wording of virus or “pollutant or contaminant” exclusions in some insurers’ policy forms are not as strong as others, and may not apply in any event to the factual circumstances presented by many policyholders’ claims.

It is against the backdrop of the enormity of the losses at issue—with solvency risks for insurers, businesses, and governments alike—and potentially scores of states all going their own way in passing legislation that may increase insurers’ exposure to losses arising out of multiple jurisdictions, that may ultimately result in the insurance industry reconsidering whether a federal answer to the massive losses and insurance issue is the prudent path to follow.[13]

HOW WE CAN HELP

Regardless of whether a coherent singular legislative answer will ultimately emerge, it is important for policyholders confronting significant COVID-19-related business interruption losses to confer with experienced coverage counsel that can advise on a wide variety of issues integral to enhancing the prospects of recovering.

We have experience assisting clients in obtaining business interruption insurance recovery in a wide range of scenarios and have consulted with clients on the implications of COVID-19. We stand ready to assist businesses in maximizing their recovery of business losses in this area. For assistance with these or any other issues, contact any of the Morgan Lewis lawyers listed below. 

CORONAVIRUS COVID-19 TASK FORCE

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.

CONTACTS

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:

Los Angeles
Charles Malaret
David Cox
Michel Horton
Christopher Popecki

Washington, DC
Paul Zevnik
Daniel Chefitz
Jay Konkel
Brad Nes
Teri Diaz

Chicago
Scott T. Schutte

New York
Scott Fischer

Philadelphia
Harvey Bartle IV
Gregory T. Parks

San Francisco
Jeffrey Raskin

Boston
Jeffrey Moss
Ariane Baczynski

Houston
Nancy L. Patterson
Lauren A. McCulloch Semlinger

London
Peter Sharp
Paul Mesquitta



[1] 2020 WL 1847100 (Pa. April 13, 2020)

[2] See Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal.App.4th 1, 90-92 (1996).

[3] While certain policies have “virus,” “pollutants or contaminants,” or “contamination” exclusions that insurers contend apply to the present circumstances to eliminate coverage for business interruption losses including with respect to civil authority order coverage, insurers bear the burden of establishing that an exclusion applies to the facts at issue, language varies, and the losses and expenses at issue often here are directly the result of civil orders and not necessarily indirectly involving “contamination” of the virus on property but rather, in the context of the current pandemic, the proclivity of it to attach to property and spread. Additionally, as discussed herein as well as in our recent LawFlash, Regulatory & Legislative Actions May Impact Business Interruption Coverage for COVID-19 Losses, a number of states are considering legislation that, at least for many policies covering insured locations in those states, may effectively override the potential applicability of such exclusions in the policies to COVID-19-related business interruption losses.

[4] Under certain policies, in addition to a period of time sublimit of civil authority coverage, a dollar sublimit may apply. A consideration of the particular factual circumstances and a study of the wordings in a policy including what sublimits apply and for the policy’s per occurrence total limit, how “occurrence” is defined, is important to assessing the potential total amount of potentially responsive coverage, and whether the claim best fits under the policy’s basic time element coverage and/or under a coverage extension such as civil authority coverage.

[5] Louisiana Senate Bill 495 actually would establish a “fund” permitting insurers, in exchange for relief from coverage litigation on the issues, to contribute the greater of $50 million or 80% of the insurers’ limits to a fund that will be used to pay 80% of an insured’s business interruption losses with insurers getting protections from bad faith claims. The participating insurers could challenge whether its policyholders’ claims are fraudulent and the amount of its policyholders’ losses but not liability with arbitration to resolve such disputes with the insurer paying policyholder’s costs and attorney fees if policyholder wins.

[6] Many but not all property insurance policies have liberalization provisions. Certain such provisions state that coverage only is broadened to conform with new law if the insurer issues an endorsement doing so.

[7] See e.g. article I, section 10 of the United States Constitution (“No State shall . . . pass any . . . Law impairing the Obligation of Contracts . . .”).

[8] See e.g. Prudential Property and Cas. Ins. Co. v. Scott, 161 Ill.App.3d 372, 382-83, 514 N.E.2d 595, 601 (1987); see also Wolf v. American Family Mut. Ins. Co., 361 Wis.2d 756, 763-64 (2015).

[9] See April 10, 2020 Senate Banking Committee letter to President Donald J. Trump at 1.

[10] Id. at 1-2.

[11] See Insurers face ‘uh-oh moment’ as Trump says some business-interruption policies should cover coronavirus claims (April 13, 2020) 

[12] Id.

[13] See Proposed Virus Coverage Backstop Leaves Pricing In The Air, Law360 (April 17, 2020) (quoting Morgan Lewis & Bockius LLP partners Scott Fischer and Jay Konkel).