Will insurance cover your coronavirus losses?

The coronavirus pandemic has not only killed and sickened people, but it has essentially shut down much of the world's economy. Not everyone can work from home. Whether ordered by the government or not, some people cannot go to work and, as a result, companies have suspended operations. The crippling question for insurance companies is whether the losses sustained due to the business interruption and the inevitable lawsuits that will arise from the virus are covered. This article addresses these issues.

FIRST-PARTY INSURANCE

"Property" damage

First-party insurance indemnifies the insured for its loss. Some policies, either through the original policy or an addendum, cover businesses against losses due to the interruption of their business. The policies, which are property insurance policies, typically cover "direct physical loss or damage to the property" of the insured property without further defining these terms. And, as always on the most important terms, the case law throughout the country differs on whether business interruptions due to a communicable or infectious disease constitute damage to the "property."

There is an abundance of out-of-state authority finding that "property damage" occurs when the property is unusable even though it is not physically altered. See Mellin v. Northern Sec. Ins. Co., 115 A.3d 799, 805 (N.H. 2015) (holding that "physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell and that exist in the absence of structural damage"); Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294, 296 (La. Ct. App. 2011) (concluding that an intrusion of lead into the insured's house was a "direct physical loss" that rendered the house unusable and uninhabitable, and, thus, was covered by the homeowners' insurance policy); Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1, 17 (W. Va. 1998) (finding coverage where the houses were rendered unsafe for habitation due to potential rockfalls and landslide); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34 (1968) (finding a "direct physical loss" where a church contaminated by gasoline vapors made the building uninhabitable).

Other cases, including California authority, define these terms narrowly. Those cases hold that there must be a tangible change in the property to constitute a covered "loss." See Ward Gen. Ins. Services, Inc. v. Employers Fire Ins. Co., 114 Cal. App. 4th 548, 556 (2003) (holding that the loss of stored computer data not accompanied by the loss or destruction of the tangible storage medium (the disk) was not a covered "physical loss"); MRI Healthcare Ctr. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779-80 (2010) (finding that there was no "direct physical loss" to an MRI machine that failed to ramp back up because "the property itself is unchanged to the naked eye." Rather, the loss was held "intangible or incorporeal," and the failure of the MRI machine to satisfactorily "ramp up" was held to have emanated from "the inherent nature of the machine itself rather than actual physical damage."); Schaefer/Karpf Productions v. CNA Ins. Cos., 64 Cal. App. 4th 1306, 1316 (1998).

The California insured could argue there is covered damage by analogizing to cases finding the insurer liable for the full cost of stabilizing the soil underlying the insured dwelling even when the house itself is not damaged. In Hughes v. Potomac Ins. Co., 199 Cal. App.2d 239, 249 (1962) (abrogated on other grounds in La Bato v. State Farm Fire & Cas. Co., 215 Cal. App. 3d 336 (1989)), the Court of Appeal found coverage where the house was rendered useless because a landslide deprived the house of the support necessary for its stability, despite the lack of visible damage to the house itself. The Court of Appeal noted that a dwelling might be rendered completely useless to its owners even in the absence of physical destruction; it observed that "a 'dwelling' or 'dwelling building' connotes a place fit for occupancy, a safe place in which to dwell or live." Id. at 248-49 (emphasis added). The Hughes court never stated that the entire house was rendered uninhabitable by the slide; it merely states that no "rational persons" would be "content" to reside in the house after the slide. Id. at 249.

The Hughes court rejected Potomac's interpretation that a building which has been overturned or placed in such a position as to overhang a steep cliff has not been "damaged" so long as its paint remains intact and its walls still adhere to one another. "Despite the fact that a 'dwelling building' might be rendered completely useless to its owners, appellant would deny that any loss or damage had occurred unless some tangible injury to the physical structure itself could be detected. Common sense requires that a policy should not be so interpreted in the absence of a provision specifically limiting coverage in this manner." Id. at 248-49.

The rules for interpreting insurance contracts may support the reasoning of Hughes as applied to losses from the coronavirus: (1) apply the plain meaning of the policy; (2) interpret it according to the insured's objectively reasonable expectation; and (3) interpret it against the insurer as the drafter of the policy. Any ambiguity is resolved by interpreting coverage broadly and exclusions narrowly.

The legal dispute suggests that the issue is far from clear and, thus, the plain meaning rule may not apply. The coronavirus can live on counters, doorknobs, bathroom fixtures, tabletops, toilets, and keyboards, all of which would render the physical working environment unusable even though the building itself is not altered. Yet, as in Hughes, no "rational person" would be "content" to work there. Therefore, interpreting coverage broadly (as we are required to do) and applying Hughes, the coronavirus may result in a covered "loss" because it renders the property unusable.

"Suspension" versus "slowdown"

The next issue is whether the business has completely suspended activity or only slowed down or reduced its operations. Some policies require a complete "suspension," while others include both a complete cessation and slowing down business activities. See Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App.4th 434, 448-49 (2002). This is an important distinction for retail establishments, which are shut down, versus companies which are operating, albeit slower than normal, because employees are working from home. The insured needs to review the precise policy language.

Business interruption as a matter of law

Some policies provide coverage for lost business income when a "civil authority" prevents or limits access to the insured's business. This coverage may not require a "physical loss," which would resolve the aforementioned problem.

Exclusions (pandemic and pollution)

Following the SARS outbreak, some insurance companies added exclusions for epidemics. In addition, the insurer may claim that the "loss" falls within a pollution exclusion. Most property policies exclude losses caused by: "Discharge, dispersal, seepage, migration, release or escape of pollutants ... Pollutants is defined as any solid, liquid, gaseous or thermal irritant or contaminant ..." Penn-America Ins. Co. v. Mike's Tailoring, 125 Cal. App. 4th 884, 887-88 (2005). The pollution exclusion applies only to a loss "resulting from events commonly regarded as environmental pollution." Villa Los Alamos Homeowners Ass'n v. State Farm Gen. Ins. Co., 198 Cal. App. 4th 522, 526 (2011). At the very least, it is doubtful that a court would find that a pandemic that has brought the entire world to a halt could constitute a "common event."

THIRD-PARTY INSURANCE

CGL policies provide coverage for bodily injury and property damage sustained by others who claim a loss against the insured. The phrase "property damage" is interpreted in the same manner as under first party insurance and, thus, will encounter the same issues. See Ward Gen. Ins. Services, 114 Cal. App.4th at 558. But, there are likely people stuck on cruise ships or in hotels, retail establishments, or hospitals that will claim "bodily injury" because the insured (i.e., the cruise ship) did not adequately protect them.

Directors and officers' policies may provide additional coverage or fill in gaps for CGL policies where the directors and officers are sued for negligence that resulted in "bodily injury" or "property damage." Similarly, errors and omissions insurance, which covers professionals for alleged errors arising out of their professional services (i.e., medical care), may be necessary here. For example, cruise passengers may sue directors, officers, and doctors on board for "bodily injury" for negligently exposing them to the virus or failing to take adequate protective measures.

Insurers may rely upon a standard bacteria exclusion which was meant to eliminate coverage for toxic mold claims. Importantly, the coronavirus is just that: a virus, not bacteria. This exclusion should not apply.

CONCLUSION

There are no one-size-fits-all answers to whether your insurance will cover a loss due to the coronavirus. It depends on the policy language and the nature of the claim. Given the gravity of the potential losses, the author can only recommend a coverage analysis by a lawyer. 