Finding COVERAGE for COVID-19

The full extent of the business interruption caused by the novel coronavirus is unknown, but the losses are already catastrophically high. The stock market's recent plunge over coronavirus fears was the largest since the financial crisis in 2008. Businesses should be considering whether any of these coronavirus-related losses are covered under their policies.

Coverage for any insurance claim begins with the policy language. In many cases, commercial property policies contain coverage for business income and business interruption losses. Commercial property policies also frequently provide coverage for losses caused by civil or governmental authority. There are also policies that specifically provide coverage for losses associated with contagious diseases. Depending on a business's exposure to the coronavirus, all of these coverages could potentially be implicated. Ultimately, obtaining coverage for losses will depend on the type of loss, and the interpretation of the policy's coverage language.

Typical policies that provide coverage for "business income" or "business interruption" losses usually state that the loss must be caused by "direct physical loss of or damage to" the property identified in the policy. While this may be obvious in situations where there was direct exposure to the contagion such that cleaning or decontamination was required, in many cases, establishing the connection between the losses suffered and the insured property may not be straightforward. For many business-interruption loss claims, the coverage inquiry is likely to focus on the type of loss and whether it is construed as a "direct physical loss of or damage to" property. The distinction between "physical loss" and "damage" may be critical in evaluating coverage.

Not to be overlooked as a potential coverage is coverage for actions of civil or governmental authority which is often included in property policies. This coverage typically covers losses resulting from the interruption of business due to an order from a governmental authority. This coverage could extend to business closures, cancellations, and an inability to conduct normal business due to actions taken by the authorities. Again, in some circumstances this may be easily identifiable, but in numerous cases, the connection may not be as clear.

For losses resulting from the coronavirus, many businesses are suffering from an inability to conduct normal business operations due to governmental orders that restrict their business -- whether from an inability to obtain necessary parts, cancellations of events, or orders that shutdown business operations. Depending on the specific circumstances, there could be coverage for these losses.

Analogous issues have been addressed by the courts. For example, in American Alternative Ins. Corp. v. Superior Court, 135 Cal. App. 4th 1239 (2006), the insured's airplane was seized by a county sheriff in Florida. After the Florida circuit court held the seizure was without probable cause, the airplane was released seven weeks later. The insureds sought coverage under their policy for the attorney fees incurred in the recovery of the airplane. The insurer claimed there was no "direct and accidental physical loss" of the airplane during the time of the governmental seizure and denied the insured's claim on the basis that it was not within the grant of coverage.

The Court of Appeal in American Alternative held that the government seizure, constituted a "direct physical loss." The basic policy form specifically excluded losses for seizure or detention of property by the government, but the insured purchased an endorsement that deleted the exclusion in the basic form. As a result, the Court of Appeal held that coverage could reasonably extend to a governmental seizure or confiscation.

Similarly, the California Supreme Court in E.M.M.I Inc. v. Zurich American, 32 Cal. 4th 465 (2004), interpreted whether stolen property was a direct physical loss. In E.M.M.I Inc., the insured was a jeweler who had property stolen from his vehicle after he exited his vehicle. The insuring provision provided coverage for "risks of direct physical loss to the covered [jewelry]." With regard to the jeweler's insurance the court explained that "the coverage language in this type of insurance is quite broad, generally insuring against all losses not expressly excluded."

While not all losses stemming from the coronavirus may be covered, there are a variety of losses that could potentially be covered, and therefore, the interpretation of the various policy provisions will be paramount in determining the coverage available.

In California, the interpretation of the respective policy language is governed by a three-step process with the primary aim of giving effect to the mutual intent of the parties. AIU Ins. Co. v. Superior Ct., 51 Cal. 3d 807, 821-23 (1990).

First, the court determines whether the policy is capable of two or more reasonable constructions, to determine if it is ambiguous. Bay Cities Paving & Grading v. Lawyers' Mut. Ins. Co., 5 Cal. 4th 854, 867 (1993). To determine whether an ambiguity exists, the court only needs to determine whether it is susceptible to two or more reasonable interpretations, and does not determine which interpretation is better. If a court decides the policy language is fairly susceptible of either of the two interpretations argued by the parties, there is an ambiguity. Lockheed Corp. v. Continental Ins. Co., 134 Cal. App. 4th 187, 197 (2005).

Second, if a policy is found to be ambiguous after undertaking the first step of the analysis, the court then proceeds "by looking to the expectations of a reasonable insured." Bank of the West v. Superior Court, 2 Cal. 4th 1254, 1264-65 (1992); see also AIU, Ins., 51 Cal. 3d at 822. The court is required to review the policy "through the eyes of a reasonable lay person and not those of a lawyer or an insurance specialist or an expert." Jordan v. Allstate Ins. Co., 116 Cal. App. 4th 1206, 1218 (2004).

Third, if the ambiguity still remains, then it is construed against the party who caused the ambiguity to exist. AIU Ins. Co., 51 Cal. 3d at 822. It is well established that any ambiguous terms are resolved in the insured's favor, consistent with the insured's reasonable expectations. Safeco Ins. Co. of America v. Robert S., 26 Cal. 4th 758, 763 (2001). "In the insurance context, we generally resolve ambiguities in the favor of the insured." AIU Ins., 51 Cal. 3d at 822.

Depending on the losses suffered, and the policy interpretation advanced on the claim, businesses may be able to find coverage for coronavirus losses. Accordingly, although coverage for losses stemming from the coronavirus may not always be obvious, insureds should carefully consider whether any of their losses are covered under existing insurance policies. 