(April 23, 2020) Many business owners have already heard through the news or seen firsthand — with an insurance company’s claim denial letter — that most insurers are refusing to pay business interruption claims to those affected by the Covid-19 shutdown. Most insurance companies are telling their insured customers that business coverage is triggered only by “direct physical loss or damage” – such as a hurricane or fire – and therefore the business is not covered by business interruption claims in the Covid-19 shutdown. However, there is still hope, a lot of hope, that insurers can be made to honor their customers in this challenging time.
Hope for Covid-19 Business Interruption Claims
It might appear at first blush that most businesses are out of luck filing Covid-19 business interruption claims. We find, however, as we investigate the insurance industry and look specifically at different policies, that there is a path to coverage. We are continuing to investigate and help forge that path.
Why Most Businesses should file a Covid-10 Business Interruption Claim
No matter how this fight turns out, most business owners would probably be wise to file a claim. But we strongly urge business owners to consult an attorney prior to filing a claim to ensure that the wording you use does not inadvertently limit your coverage or trigger a policy exclusion. Those who file a claim and are denied have a chance to appeal. Those who fail to file in timely fashion will lose forever any chance to make their insurer pay for business losses under their policy.
In addition, making a claim and receiving a denial takes very little time. Most importantly, making a claim can reserve your rights for up to 10 years, depending on your business’ jurisdiction. It just makes sense to file a claim. In addition, if business owners earn some early wins in these cases (however unlikely that may seem at this moment), other claimants will more likely have valuable claims to pursue.
What We are Up Against
There is no denying the difficulty of business interruption claims for the Covid-19 shutdown. It is true that under virtually all of the most common insurance policy forms, insurance companies have taken the position that business interruption coverage is only triggered if the interruption results from “direct physical loss or damage” such as a hurricane or fire. They are also claiming that business interruptions caused by contagious or communicable diseases are not generally considered to result from direct physical loss or damage.
In addition, while most policies include coverage extensions for a “civil authority” prohibiting access to a covered location, that coverage is often tied to physical damage to a nearby property. In a word, while every policy is unique in some respects, the general truth is that insurers are denying most Covid-19-related business interruption claims.
Most insurers began to quietly write this language into their policies in 2006 following the SARS scare of 2003:
“We will not pay for loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.”
Legislative Efforts Underway
- New York — Draft Bill A10226 would require property insurers to cover business interruption losses for business with less than 100 full time employees.
- Massachusetts — Senate Docket 2888 stops insurers from denying claims for the loss of use and occupancy and business interruption due to COVID-19, even with no physical damage to the property. It would apply to business with fewer than 150 full-time employees. Insurers would be able to apply to a state fund for reimbursement.
- Ohio, Pennsylvania, Louisiana have proposed similar bills.
Legal Precedents for Covid-19 Property Damage Coverage
Legal precedents exist in which cases were argued successfully by plaintiffs that bad things on a property constitute physical damage or loss to that property.
- General Mills, Inc. v. Gold Medal Ins. Co. (Minn. App. 2001) 622 N.W.2d 147, 152 (“direct physical loss can exist without actual destruction of property or structural damage to property; it is sufficient to show that insured property is injured in some way.” ([losses from contractor’s use of pesticide not approved by FDA on insured’s oats constituted “direct physical loss or damage” to insured’s property], citing Sentinel Mgmt. Co. v. New Hampshire Ins. Co. (Minn. App. 1997) 563 N.W.2d 296 [asbestos contamination constituted “direct physical loss” to property].
- Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America (D.N.J. 2014) 2014 WL 6675934, at *5 [ammonia release inside packaging facilities constituted “direct physical loss or damage to” property]; Western Fire Ins. Co. v. First Presbyterian Church (Colo. 1968) 437 P.2d 52 [church required by fire department to shut down due to infiltration of gas vapors suffered “direct physical loss”].)
- Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. (N.J. Ct. App. 2009) 968 A.2d 724 [four-day electrical blackout causing food spoilage and business interruption to insured supermarkets constituted “direct physical damage”].
- Hughes v. Potomac Ins., (1962) 18 Cal.Rptr. 650 — A policy insuring against all physical loss to the dwelling included damage to the soil beneath the dwelling, which rendered the dwelling uninhabitable.
- Western Fire Ins. Co. v. First Presbyterian Church, (1968) 437 P.2d 52 — A court ruled that gas vapors that had penetrated the foundation of the insured church and accumulated — rendering the building uninhabitable — constituted a direct physical loss.
- Matzner v. SeacoIns.Co., (1998)Mass.Super.LEXIS407 — A court ruled that carbon monoxide at a certain level rendered the business uninhabitable and therefore constituted a direct physical loss.
Courts have also sometimes found buildings rendered uninhabitable by dangerous gases or bacteria suffered direct “physical loss or damage” (which triggers coverage):
- Motorists Mutual Ins. Co. v. Hardinger: The Third Circuit found that the bacteria contamination of a home’s water supply constituted a “direct physical loss” when it rendered the home uninhabitable.
- Essex v. BloomSouth Flooring Corp.: The First Circuit found that an unpleasant odor rendering property unusable constituted physical injury to the property.
- TRAVCO Ins. Co. v. Ward,715 F.Supp.2d 699, 709 (E.D.Va.2010): A federal court in Virginia found “direct physical loss” where a “home was rendered uninhabitable by the toxic gases” released by defective drywall.
Insurance Defense Response
Insurance company defense lawyers, of course, will claim many counter-example precedents should apply, instead. Their arguments will include the notion that the virus hasn’t made business’ buildings uninhabitable, that the virus elsewhere has made the government declare the premises uninhabitable, but that arguments can cut both ways, depending on the fine print in the coverage and other reasonable factors.
Business Interruption Claims Attorneys
There are, of course, more arguments to be made in favor of coverage, as our business interruption law group and others continue to uncover them as we investigate thousands of business interruption claims.
Please note: This publication is not intended as legal advice. It does not constitute legal advice to anyone. It is for general information purposes only. The wise reader should consult with legal professionals to determine how laws or decisions in this discussion apply to the reader’s specific circumstances.