During this pandemic, many business owners believed that valuable coverage they had purchased for the businesses would provide a source of some financial security. Prudent business entities purchased business interruption coverage to "indemnify the insured against losses arising from the inability to continue the normal operation and functions of the business, industry, or other commercial establishment insured." Annotation, William H. Danne Jr., Business Interruption Insurance, 37 A.L.R. 5th 41 (1996 & Westlaw 2020). A typical event that has triggered this kind of coverage would be a fire or a hurricane, or some other natural disaster that caused damage to the business premises and closure of the business.
Today, more and more businesses have discovered that the claim to recover this valuable coverage is being denied by insurers. The need by the insurance industry to stop an anticipated onslaught of claims arising out of the pandemic is evidenced by the fact that "[i]n mid-March 2020, in response to inquiries from members of the United States House of Representatives, the CEOs of four leading insurance industry trade organization[s] jointly signed a letter stating, 'Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.'" 32 No. 5, Cal. Ins. L. & Reg. R. NL 1 n.3 (June 2020). In response to this testimony and the growing demands by insureds to obtain coverage, several state legislatures, including Louisiana, South Carolina, Illinois, Ohio, Pennsylvania, New Jersey, New York, Massachusetts, and Rhode Island, have proposed new legislation that would mandate retroactive coverage for business interruption claims arising out of the response to COVID-19.
While the precise issue for establishing coverage under a business interruption policy is always dependent upon the terms of the contract involved, several issues have already arisen between insurers and insureds.
- Physical Damage
The first issue to establish coverage is for the claim to fall within the meaning of direct physical loss. A typical policy extends coverage when the suspension of the business is caused by "direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss." To date, most insurers have asserted that since the physical structure of the business premises has not been damaged, this coverage is not available. In Cooper v. Travelers Indemnity Co. of Illinois, No. C-01-2400-VRW, 2002 WL 32775680, at *1 (N.D. Cal. Nov. 4, 2002), aff'd, 113 F. App'x 198 (9th Cir. 2004), a case Travelers litigated, the court held that the presence of E. coli constituted "direct physical loss or damage" to property even when the E. coli did not cause actual structural alteration or damage to the business owner's business property. "Loss of use" of the premises may amount to "a direct physical loss of or damage to property." Total Intermodal Servs. Inc. v. Travelers Prop. Cas. Co. of Am., No. CV 17-04908 AB (KSx), 2018 WL 3829767, at *4 (C.D. Cal. July 11, 2018).
- Civil Authority
The next provision asserted by insurers to defeat coverage for a business interruption claim is based on the civil authority clause of the policy, which extends coverage when a business is closed by a civil authority. Here again, the policies typically require that the action of a civil authority be based on direct physical loss of or damage to the insured premises. The parties then revisit the arguments concerning whether the closure of the business was caused by direct physical loss. Some civil authority provisions expressly require that there be a "temporary, but complete, cessation of activity." This requirement works a hardship on those entities that have suffered a significant decrease in revenues but have managed to operate on a greatly reduced basis.
- Virus Exclusion
Another provision in some, but not all, business interruption policies is the virus exclusion. This provision was generally added after the H1N1 outbreak as an attempt by insurers to exclude claims for business losses brought about by the closure of businesses. The enforceability of this exclusion raises many issues, including application of the "efficient proximate cause doctrine," contract construction, and the actions of the insurance industry in presenting this exclusion to insurance regulators.
Litigation surrounding coverage for business interruption has commenced in multiple jurisdictions, and at least one request for class certification has been filed to allow for some consistency in the resolution of this complex insurance matter. A thorough analysis of the policy provisions and the pending legislation is a must for any claim implicating this coverage.