Is virus property damage? Insurers ask

For insurance companies, the COVID-19 pandemic could be an industry disaster.

"The industry is terrified that there will be a ruling that they will have to respond to the shelter-in-place ordinance. This is so much bigger than 9/11 because this is countrywide," said Philip L. Pillsbury Jr., founding partner of Pillsbury & Coleman LLP.

The legal battle facing many businesses and their lawyers right now comes from insurance companies not wanting to pay out interruption of business claims. COVID-19 and other communicable diseases do not trigger that sort of coverage, insurers say. The virus is not causing physical loss or damages to businesses, they say.

"The carriers are going to be fighting this very hard," Pillsbury said. "There are lots of really smart coverage lawyers looking at this for their clients right now, and there are many leverage points that we have. When [insurance companies] were writing comprehensive general liability policies ... back in the 1960s and '70s and even '80s, they had no idea what mesothelioma was. Physical damage to an individual is physical damage. Look at all the asbestos cases."

This issue was brought to light on March 18 by the House Committee on Small Business, which sent a letter to four insurance industry associations -- American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, Independent Insurance Agents & Brokers of America and the Council of Insurance Agents and Brokers -- asking insurers to pay policyholders for the interruption of business caused by the virus.

"In many commercial property insurance policies, business interruption coverage is triggered when the policyholder sustains direct physical loss or damage to insured property. In addition, many commercial property insurance policies provide coverage for business income losses sustained when a civil authority prohibits or impairs access to the policyholder's premises," the letter states.

By recognizing income losses due to COVID-19, insurers will "help sustain America's businesses through these turbulent times, keep their doors open, and retain employees on the payroll," the letter states.

The four associations fired back to the committee the same day with a letter of their own.

"Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19," they wrote to Rep. Nydia M. Velazquez (D-NY), chair of the House committee.

But several lawyers cautioned the situation is more complicated.

"Overly broad statements that say 'there is no' or that 'there are no' -- yeah those don't work," said Kirk Pasich of Pasich LLP in Los Angeles. "Every insurance policy is a contract. You have to look at your contract to know what your rights are."

Pillsbury noted that in 2006 the Insurance Services Offices, an industry organization that writes standard industry policies, wrote an exclusion for injuries caused by virus or pathogen.

"It doesn't exist in every policy, but it is an example of the kinds of exclusions coverage lawyers will be looking for," Pillsbury said.

"You can have a policy that excludes the disease but not the virus," Pasich agreed. "Some policies exclude the virus, the disease, or the virus and the disease. Unless there's a virus-disease exclusion then you're covered."

"I'm not going to sugar-coat this," Coleman said. "Some of these folks are going to be out of luck."

Isaac Larian, founder and CEO of MGA Entertainment, a multi-billion-dollar privately owned toy manufacturer based in Chatsworth, said he is expecting a legal battle based on his past interactions with insurers.

"My experience with the insurance companies, unfortunately, is that they love to collect your premium but when it comes to paying claims -- they don't like to do that," he said.

During the height of the COVID-19 crisis in China, Larian said he shut down 90% of his factories for up to two months.

"Retailers are understanding, but as they say: 'Christmas is always on the 25th.' If they get an order canceled on them, they aren't going to buy because they needed it now and not in six months," he said.

Shannon M. O'Malley, partner at Zelle LLP in Dallas, authored a white paper that appears on the American Property Casualty Insurance Association's website. In it, she argues insurers shouldn't have to pay interruption of business coverage for COVID-19. She agreed with Pasich on the importance of how policy language is interpreted and said coverage lawyers and policyholders will focus on how the contract language is interpreted.

"Insurance companies never intended to cover communicable diseases unless there's a specific provision in place in their policy, and they don't intend to cover instances where there wasn't any loss or damage to a property," O'Malley said. "I think it depends on the policy language and it depends on the jurisdiction that you kind of are in. I think the issue is that the language typically says 'physical loss or damage' -- the word physical has to mean something,"

Michael J. Bidart, managing partner at Shernoff Bidart Echeverria LLP in Claremont, disagrees that a virus isn't likely to be considered physical loss or damage to a property, citing Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968).

"In that case, a church requested damages be paid by their insurer after gasoline had accumulated around and under the church building, rendering the church building uninhabitable and dangerous," Bidart said, "While there was no physical alteration to the structure, there was a loss."

O'Malley said Bidart is misinterpreting this case.

"There absolutely was a tangible change in the church," she said, "You had the smell of gasoline, which was a physical change to the property. With a virus, there is no overt evidence of physical damage. You don't smell it. You don't see it. It's not distinct and demonstrable. There is no clear indication that there is a physical loss or damage to property."

The shelter-in-place order is unlikely to trigger coverage either, O'Malley said.

"In the civil authority case context, evacuation orders are issued in advance of hurricanes. They are prospective and are not reactive to actual property damage. Is that enough to trigger coverage? Generally, as policies are written, no," she said. "Civil authority orders are being issued now to avoid person-to-person contamination and to reduce or prevent the spread of the virus. It's to prevent people from being next to each other and getting sick, rather than reactive to property damage."