Insurance Coverage for Business Interruptions

Mar 31, 2020

Charles P. Werner

Attorney At Law

3077 Samantha Drive

Santa Ynez, California 93460

Telephone: (310) 867-3938

Facsimile: (805) 697-7138

E-mail: [email protected]

Insurance Coverage for Business Interruptions

In the wake of the COVID-19 pandemic, every company should review the business interruption coverage contained in its commercial property insurance policy. All insurance policies require that claims be filed in a timely manner, so it is paramount that this review be conducted now.

Property policies usually contain “civil authority” or “civil order” coverage, which encompasses losses caused by the actions of local, state, or federal authorities. This includes the loss of income that results when a government entity restricts access to a “location” covered by the policy or significantly impairs the company’s operations at that “location.”

This “civil authority” coverage often requires that the government action result from “direct physical damage” or “direct physical loss,” but this raises two important points.  First, these terms are broadly construed in California to include a location that is contaminated with a virus or disease and/or is unfit for its intended use. Second, under many policies the contamination need not occur at the property where the company is located. Instead, these policies provide that the contamination may exist anywhere within a defined radius around the company’s property.

Finally, if the company’s own property is impacted by the coronavirus, then the policy may cover business interruption even in the absence of government action. The bottom line is that the scope of business interruption coverage will depend on the language in your particular property policy and the specifics of the disruption to your business.

Lawsuits Regarding Coverage

At least three lawsuits relating to insurance coverage for business interruption losses due to COVID-19 have already been filed. In the first such lawsuit, the plaintiffs, who own the Oceana Grill in New Orleans, sought a declaration from the court that their insurer must cover business interruption losses and the costs of cleaning. According to the complaint, the insurer, a Lloyd’s syndicate, issued an all-risks policy to the plaintiffs that did not contain an exclusion applying to a viral pandemic and which covered business losses due to a shutdown by civil authorities.  

The second lawsuit was filed by Thomas Keller, a well-known California restaurateur, who owns the French Laundry and the Bouchon Bistro in Yountville, California. Keller’s lawsuit also claimed that his policy with the Hartford Fire Insurance Company did not have an exclusion for a viral pandemic. In fact, a “Property Choice Deluxe Form” in the policy extended coverage for a loss or damage due to viruses. The suit said Keller shut down the restaurants due to an order issued by the Napa County public health officer on March 18 allowing only take-outs and deliveries.

The third lawsuit has been filed by a Native American tribe, the Chickasaw Nation in Oklahoma, suing a group of insurance companies, asking the court to declare that the losses it is incurring from shutting down its casinos during the coronavirus pandemic are covered by insurance.

Government Actions to Expand Coverage

Government authorities may take action impacting insurers’ obligations to provide coverage for business interruption losses resulting from COVID-19. 

In New Jersey, a bill has been introduced providing that every policy of insurance which includes business interruption insurance will be construed to include coverage for business interruption due to the COVID-19 pandemic.

Two other states, Massachusetts and Ohio, have introduced bills to rewrite existing insurance policies to cover businesses’ economic losses arising from COVID-19 work stoppages. Both the Massachusetts and Ohio bills would require existing business interruption coverage to include coverage for business interruption due to the COVID-19 pandemic.

On March 10, 2020, the New York Department of Financial Services mandated property casualty insurers provide to the Department, “(D)etails on the business interruption coverage provided and the types of policies for which it has ongoing exposure.” Insurers must also provide the same information to policyholders. Several observers have noted this move could be a precursor to a bill being introduced in New York to expand business interruption insurance coverage.

In a March 26, 2020 press release, California Insurance Commissioner Ricardo Lara directed all California insurance companies to submit data to the California Department of Insurance regarding coverage for commercial business interruption related to COVID-19. Insurance company responses to the data call are due by April 9, 2020. Again, this move could be a precursor to a bill being introduced in California to expand business interruption insurance coverage.

Challenges Faced by Insureds

Every insurance claim must overcome two hurdles – it must be a covered loss and must not be subject to an exclusion, both of which are delineated by specific language in each policy. Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to an insured property.  Insurance carriers are disputing whether the physical loss requirement has been satisfied in business interruption claims related to COVID-19. Many, but not all, policies also now contain exclusions designed to preclude coverage for viral outbreaks.  

The property/casualty insurance industry has been united behind the defenses that most business interruption policies require physical damage to occur on the site and exclude coverage for pandemics (unlike the two restaurant policies discussed above).  Insureds who are filing claims are being told that there is no coverage.

However, this should not dissuade you from filing a claim. If you do not file a claim, the insurance carrier will have the added defense of failure to file a timely claim and you will not be able to recover.  As outlined above, there is also pressure being applied in various state legislatures to require insurance carriers to cover such claims in spite of language in the policy to the contrary.

It is best to get the advice of an attorney who is familiar with insurance law and who has successfully dealt with insurance companies regarding coverage issues. Legal counsel can help you assess what is covered under your insurance policy and can craft a claim pursuant to the language in your particular policy. Anything you discuss with an attorney is protected under the attorney-client privilege.  This is an important benefit since you need to be very meticulous with regard to filing a claim with your insurance carrier.

Posted in COVID-19 Resource.