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The shutdown of non-essential businesses in Ohio and other states, as well as the economic impacts caused by the coronavirus, are forcing businesses to evaluate all options to keep their doors open and their staff employed. Many businesses are asking whether their insurance policies provide for the recovery of lost business income and expenses due to the coronavirus.

Insurance coverage questions are fact specific and will depend upon the circumstances of the event and the language of the policy. Even in situations where coverage is not clear from the language of the policy, insurance policies are construed in favor of coverage when appropriate, and construed against insurance companies when the language of the policy is ambiguous. Therefore, it is recommended that businesses consult with their insurance brokers and their attorneys to determine whether these and other coverages are included within the policy and whether they provide relief from losses or damages related to coronavirus. 

What coverages (potentially) apply?

Most, if not all, businesses have insurance coverage for property damage. Lost business income is generally recoverable under the property coverage where the lost business income arises from the direct loss, damage, or destruction of the insured property by a covered risk. This is commonly referred to as business interruption coverage. Contingent business interruption coverage may also be available when the lost business income arises from direct loss, damage, or destruction of a customer, supplier, or distributor’s property, which impacts the insured’s business.

Similarly, coverage for business income loss may be available under a policy’s civil authority coverage, which is triggered when access to an insured’s property is prevented or prohibited by an order of civil authority due to physical damage to other property within the proximity of the insured’s property. Finally, coverage may be available under a crisis event policy, site pollution policy, and/or infectious disease policy. However, these coverages may subject to a small sublimit and be related to clean up and related expenses, only.

What are the hurdles to coverage?

Business interruption, contingent business interruption, and civil authority coverages are most often triggered by the occurrence of a natural disaster, which forces the closure of an insured business due to damage to the insured property and/or neighboring properties. The applicability of these coverages to coronavirus claims will depend upon whether physical damage to the property occurred due to a covered loss. The physical damage issue will be hotly contested by insurers because the virus does not cause physical damage like a hurricane or earthquake. However, there are cases in which physical damage was found to occur even though the property did not suffer structural damage.

For example, in Gregory Packaging, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 6675934 (Nov. 25, 2014), the District Court ruled that the release of ammonia within plaintiff’s facility constituted direct physical loss or damage to the plaintiff’s property. The District Court agreed with the plaintiff that the ammonia release resulted in the loss of property and the interruption of its business, which was covered under the property policy. The District Court rejected the defendant-insurance company’s argument that physical damage requires physical change or alteration to the insured property, requiring repair or replacement. Further, the District Court rejected the defendant-insurance company’s argument that plaintiff’s inability to use its facility due to the ammonia release does not constitute physical loss or damage.

Because coronavirus survives on surfaces for extended periods of time, there is an argument that its presence would cause physical damage to the property, akin to an ammonia release. Insurance companies will certainly argue that physical, structural harm is required to satisfy the property damage requirement. Absent express language in the policy differentiating between structural and non-structural damage to the property, however, a good-faith argument can be made that the presence of coronavirus at a property and/or the government’s closure of business property due to the transmission of coronavirus causes physical damage.

The biggest challenge to coverage will be exclusions in the policy that preclude overage for viral outbreaks. Following the SARS outbreak in 2003, many insurance companies, especially those utilizing the forms promulgated by the Insurance Services Office (ISO), included exclusions in their forms against damages or loss caused by or resulting from “any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” (ISO Form, CP01040). The District Court in Gregory Packaging, supra, recognized that coverage for the ammonia release, even though it was a physical damage, was still dependent upon whether any policy exclusions applied. Therefore, obtaining coverage for coronavirus losses will require a two-step process of demonstrating physical damage and that no exclusions apply.

Are there any new insurance developments?

Recently, legislators in Ohio (Ohio H.B. 589) and New Jersey (New Jersey Bill A-3844) have proposed legislation, which, if passed, will require insurers in those states to cover business interruption losses for businesses with less than 100 employees under their respective property coverages. The insurance industry, naturally, will push back on these legislative attempts to rewrite insurance policies to provide coverage. These legislation attempts may also be unconstitutional under Article I, Section 10 of the U.S. Constitution.  

ISO has recently proposed two business income endorsements to respond to the coronavirus. These are advisory forms that may be adopted by member insurance companies to offer their customers options in the future for responding to viral outbreaks. The premiums, coverage limits, and other key details have yet to be developed. However, it will be important for businesses renewing their policies during this crisis or after to consider these additional coverages and whether their carrier has made them available. 

There are also efforts nationally to develop a federal reinsurance program for pandemic events similar to the Terrorism Risk Insurance Act that was passed after 9/11. Any federal legislation would not apply retroactively, however. A federal reinsurance program would give insurance companies the ability to write coverage for future pandemic events because there would be reinsurance protection against significant losses.

What should you do next?

All businesses should examine their insurance policies and consult with their attorney and their insurance brokers about potential coverage for coronavirus related losses. Businesses should also begin tracking all damages and expenses with appropriate backup documentation so that claims can be properly presented and preserved. Businesses should also consider making claims to their insurers where appropriate, to preserve their rights under the policy. Finally, businesses should examine other options including SBA loans that may provide immediate relief.

BMD will continue to update our clients and our friends as these issues develop. You can read all of our coronavirus updates here. For questions, please contact Kyle Johnson or your primary attorney at BMD regarding your insurance questions and needs.