Beyond the terrible human and social cost of the coronavirus pandemic, Covid-19 is causing enormous business losses from disrupted workforces and supply chains, social distancing practices, travel restrictions, cancelled events and, more recently, government ordered shelter-in-place/stay-home orders. Some business owners may be wondering whether they can blunt the effect of Covid-19 related losses by filing claims under their insurance policies – perhaps their business interruption coverage. We highly advise business owners to do a quick review of the fine print in their insurance coverage to prepare for what might come next.
Business Interruption Insurance
Many business owners have “business interruption” insurance to guard against unexpected events that could threaten their business income. These policies are generally designed to insure a business against a loss of revenue (as distinguished from the cost of repair or replacement) resulting from an occurrence of an insured (i.e., covered) “peril” (fire, flood, earthquake, or other casualty) at or near the insured’s property. Business interruption coverage, like all insurance, comes with exclusions and pre-requisites. While many policies expressly exclude epidemic or virus-related losses -- a practice that began after the SARS, MERS and EBOLA events several years ago -- not all do. Many policies require that a claim for a business interruption loss satisfy a three part test: (1) the claim arose from the occurrence of an insured peril at or near the insured’s property; (2) the peril caused physical damage to the insured’s property; and (3) the loss arose from that damage.
Coverage is unlikely under policies with express epidemic or virus exclusions, but the exact language should be closely reviewed and challenged where appropriate. Satisfying the three-part test above will be difficult for many policy holders. For example: a merchant that suffers a marked decline in consumer sales may be able to readily show that its recent revenue losses result from Covid-19 induced social distancing practices by its customers, but it will unlikely be able to match that loss to any sort of casualty loss on its own property or “physical damage” to its property caused by that casualty. Conversely, a cruise line’s significant decline in bookings can obviously be attributed to adverse coronavirus publicity, but a decline by itself is not covered. However, and assuming both the absence of an express virus exclusion and broad peril coverage, a cruise line stands a chance of recovery if it can show the contamination of its ship amounted to “physical damage” and its claim is limited to the loss of revenue claim from that ship while it is being de-contaminated.
All hope is not lost for an insured wondering whether the coverage was worth paying for in the first place. Some courts have stretched the definition of “physical damage” in favor of policyholders, finding that the presence of odors or noxious gasses on insured property could constitute physical damage. Keep in mind that the link (nexus) between the loss sustained and physical damage is very fact specific and subject to interpretation. Just in case, we advise keeping good records and making a claim where there appears a potential link between the loss and damage to property. Your insurance broker (who, unlike an insurance agent, is independent from the insurer) and your lawyer can provide valuable insight into finding coverage even if the insurer initially denies coverage. As noted below, if there is a chance of coverage then we advise you present a claim and be ready to advocate for it later if and when it is denied.
Civil Authority Coverage
Businesses might also be able to seek coverage of coronavirus-related losses under traditional property and casualty insurance policies if the losses come within the scope of “civil authority” coverage. This coverage arises if a public authority (e.g., a city or state) blocks access to the insured’s property. While this coverage is typically focused on situations where a denial of access is based on public safety reasons (e.g., risk of collapse or explosion), state and municipal efforts to slow the spread of Covid-19 by issuing “lockdown” or “stay-away” orders may trigger coverage. Here again, keep good records of what caused the loss and exactly what the costs were. If there is any possibility of coverage, then we advise making a claim which you can push later if coverage is denied and things have settled a bit allowing you to look more closely at your coverage.
Global losses from the coronavirus will be massive. We expect that insurance companies will aggressively resist coronavirus claims. Keep in mind that the denial of a claim is not necessarily the end of the matter. Insurance policies are complex, carefully worded, and often subject to interpretation - despite the insurance company’s initial stated position. Coverage fights between policy holders and insurance companies are routine. In fact, there is an industry of advisors who focus on representing policy holders on a contingent fee basis to enforce coverage on insurance companies. It helps that policy holders have the benefit of state laws that punish insurance companies which unfairly deny, underpay or delay evaluation of claims by awarding the policy holder, in appropriate cases, double or triple damages and the right to recover legal fees. Several state legislatures are also considering legislation to make it easier to bring claims for coronavirus-related losses under business interruption policies.
What matters most now is the precise language of your insurance policy read in light of applicable judicial decisions. When assessing your Covid-19 related losses, seek out qualified insurance and legal experts to determine, precisely, what is covered, excluded, and/or relevant to the losses at issue. You paid for the coverage – realize you may need to push a little to get the benefit of it.
This update was prepared by William Rodgers, Esq. for general circulation. This website presents general information and is not intended to provide legal advice and it should not be considered or relied upon as such. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as lawyer advertising.