Some Key Coverage Provisions
While coverage will be dictated by the specific language of each policy, most commercial property policies have a general business interruption coverage provision to which the full policy limits apply. These general provisions may be accompanied by “Extensions” and “Endorsements” with lower “per occurrence” and annual aggregate limits.
The typical business interruption general insuring provision, with defined terms in bold, provides:
“We will pay for the actual loss of business income and necessary extra expense you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business income Limit of Insurance is shown in the Declarations. . . . ”
In the COVID-19 context, the key issues will be showing that (1) the virus effects a “direct physical loss or damage” at the insured premises and (2) that the business income losses being claimed are the direct result of such “physical loss or damage.” While the phrase “direct physical loss or damage” generally is not defined by the policies, California cases arising from other kinds of contamination such as asbestos or e coli generally have required that the insured premises be physically affected.
Several factors can strengthen the claim for coverage. First, showing an actual physical effect on the premises is strengthened if persons routinely present on the insured premises have tested positive for the COVID-19 virus. Therefore, all property managers should be consistently monitoring their own employees’ health status and contacting their tenants to obtain this information. If there are positive tests, this information should be included in claims for coverage.
Second, analogizing to cases of mold and asbestos, insureds are relying on the documented ability of the virus to survive in contagious form on surfaces for up to nine days and then be spread by touching such surfaces and then touching the face. Although current medical guidance seems to indicate that this is a less common means of transmission than person-to-person transmission by sneezing or coughing, the argument may gain traction as medical knowledge and guidance evolve. Significantly, in his most recent order extending and updating the “stay at home” order for the City of Los Angeles, issued on April 1, 2020, Mayor Eric Garcetti sought to enhance claims for business interruption coverage by stating that the order was necessary “because, among other reason, the COVID-19 virus can be spread easily from person to person and it is physically causing property loss or damage due to its tendency to attach to surfaces for prolonged periods of time.”
Once “direct physical effect” is established, the insured must also show that this effect has caused the loss of business income. In the context of COVID-19, insurers will argue that the claimed losses are being caused not by the physical virus itself but by the various government “stay at home” orders which have forced the closure of businesses or dramatically reduced the demand for their goods and services. Insureds, in turn, will argue that this is disingenuous because the orders themselves are directly caused by the spread of the pandemic and the pressing need to contain it.
Some commercial property policies may contain separate extensions or endorsements covering business income losses which may be applicable during the COVID-19 crisis. These include a Civil Authority Extension for orders which impair access to the insured’s property; a Communicable Disease Extension for lost income sustained during cleanup or restoration of the insured premises; a Crisis Event Endorsement for lost income sustained due to closures arising from injuries or death caused by communicable diseases; and a Contingent Business Interruption Extension for losses in the event the insured's customers or supplier chain sustain physical loss or damage at their property.
However, these extensions of coverage typically are subject to per occurrence or annual aggregate limits far below the general policy limits. Moreover, most of these extensions, like the general business interruption provisions, require proof of a direct physical loss or damage to property. Commercial property policies may also contain exclusions for pollution or contamination that preclude coverage entirely. For example, following the SARS epidemic, some companies expressly excluded coverage for losses arising directly or indirectly from any virus or bacteria.
Litigation over business interruption coverage has already been filed, both in California and around the country. While no court has yet ruled on these issues, we will continue to monitor this litigation.
If business interruption coverage arguably exists and there is no specific exclusion for virus related loss or damage, an insured should make its claim as soon as possible. The insured does not need to gather all loss documentation before making its claim; further detail can be provided after the claim is made. Nor is the insured is required to detail all of its arguments for coverage, and it should not do so. The claim only needs to include the inception date of loss, the specific COVID-19 related cause of loss, and the locations of the insured premises. Prompt submission of the claim is important because it triggers the insurer’s statutory and common law obligations to conduct a prompt, reasonable and objective investigation for coverage and place its coverage position in writing for the insured.
Legislative and Administrative Developments
Aware of the potential hurdles to a successful claim for business interruption coverage, both state and federal officials have begun addressing the situation. Lawmakers in other states have introduced bills to modify insurance policies to cover businesses’ economic losses arising from COVID-19 related closures and losses of income.
While California legislators have not yet taken such steps, the California Department of Insurance (“CDI”) recently wrote to House Speaker Nancy Pelosi and the rest of California’s congressional delegation “alerting them to the scale of the business interruption crisis and calling on them to take immediate action now to protect these businesses and their workers” with grants and interest- free loans in the stimulus package. To “define the size of the problem” and find creative solutions to the business interruption crisis, the CDI issued a Business Interruption Survey Notice to all admitted and non-admitted insurance companies requesting certain information relating to business interruption, civil authority, contingent business interruption, and supply chain coverage provided by commercial insurance policies. Responses to this survey are due on April 9, 2020.
Federal officials are also applying pressure to insurers on this issue. On March 18, 2020, 18 members of the House of Representatives, including 3 from California, sent a letter to the leaders of the American Property Casualty Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents & Brokers of America, and the National Association of Mutual Insurance Companies, urging insurers to provide business interruption coverage for losses resulting from COVID-19. In response, the associations stated the U.S. insurance industry is committed to consumers and will ensure prompt payments where coverage exists but noted that “business interruption policies do not, and were not, designed to provide coverage against communicable diseases such as COVID-19.” In view of the ever-expanding scope of the coronavirus crisis, and its economic dislocation, however, this is clearly a dynamic and fluid area.
For further information related to business interruption coverage, or to further explore the impact of the coronavirus on your business, please contact your main Glaser Weil partner, or contact Glaser Weil’s COVID-19 Taskforce at firstname.lastname@example.org.
This article has been prepared by Glaser Weil LLP and is intended for informational purposes only. It is not legal advice and its transmission is not intended to create, and receipt by you shall not constitute, the creation of an attorney-client relationship. While we have attempted to provide information as accurately and timely as possible, it is not intended to be a full discussion of all aspects of the subject matter and applicable in all jurisdictions. It is not a substitute for legal advice from a qualified attorney licensed in the appropriate jurisdiction and with knowledge of your particular facts and objectives. Glaser Weil LLP expressly disclaims all liability with respect to actions taken or not taken based on the contents of this article and urges you to contact us or any other qualified attorney to discuss in greater detail your legal situation.