Will business interruption insurance cover COVID-19 losses?

The coronavirus pandemic has forced American businesses to a skidding halt. With nationwide quarantines and closures, COVID-19 has jeopardized the very existence of many businesses. In California, Gov. Gavin Newsom has implemented aggressive social distancing measures, including a "stay-at-home" order, which prohibits all public and private gatherings of any number of people occurring outside a household. The impact this is having on most businesses is disastrous.

With businesses struggling to stay afloat, many are turning to their property insurance policies, perhaps optimistically. Property insurance policies often provide coverage for business interruption. Policies are worded differently and coverage varies. However, there are a few predominant features that merit discussion. Although it may be reasonable for businessowners to expect coverage for the COVID-19 pandemic, they will certainly encounter challenges. Business interruption insurance is technical and complex. The policies are riddled with ambiguous terms and vague promises. Calculating business losses can be complicated and entail a variety of limits. Naturally, the claims are often underpaid or denied. In light of the COVID-19 pandemic, there is bound to be a surge of lawsuits.

One of the more predictable legal arguments we will see from property insurers is that the insured's business was not interrupted by a "covered cause of loss." For example, let's use the following boiler plate language from a hypothetical policy: "We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your operations resulting from a Covered Cause of Loss."

What constitutes a covered cause of loss? In many policies, it means "direct, physical loss of property, or property damage." A term like that is bound to create problems with COVID-19 claims. Is the current suspension of business activities really caused by property damage? When you think of property damage, you might envision a broken window, or a fire. But surely property damage can also be intangible. That is why some policies define "property damage" not just as "physical injury to tangible property, but also "loss of use of tangible property." This broadens the scope of coverage. It may be the key to success for a large number of COVID-19 claims.

It is undeniable that COVID-19 spreads through physical contact with contaminated surfaces. People are disinfecting everything around them from doorknobs to shopping carts. Some things are so likely to be contaminated that people simply are not using them anymore. One example is airplanes. People are avoid flying like it is the plague, in large part because they believe coronavirus is on the tray table, on the seats and in the lavatories. Although it remains unseen, it is undeniable that the virus contaminates physical property and causes loss of use. The unanswered question is whether insureds bear the burden of proving that COVID-19 has in fact contaminated the property in question, or whether it is sufficient to merely experience loss of use due to contamination fears.

It may be difficult to prevail on this theory of property damage argument if you cannot prove that your property was actually contaminated. However, some policies provide coverage for government mandated closures. These are known as civil authority provisions. A typical clause might say, "We will pay for the actual loss of business income you sustain caused by action of civil authority that prohibits access to the described premises." What this means is that if a civil authority (government agency) prohibits access to your business, your resulting business losses are covered.

Clearly, stay-at-home orders have prohibited access to businesses. And this is causing actual loss of business income. But insurers have denied similar claims in the past. In 730 Bienville Partners v. Assurance Company of America, (E.D. Louisiana 2002), the plaintiff hotel filed a claim for loss of business income after 9/11 prompted the Federal Aviation Administration to close all U.S. airports, preventing many guests from traveling to the plaintiff's hotels. The plaintiff argued that the loss of customers triggered coverage. The court held, "While the FAA's closure of the airports and cancellation of flights may have prevented many guests from getting to New Orleans and ultimately to Plaintiff's hotels, the FAA hardly 'prohibited' access to the hotels." The court essentially required a narrow prohibition of access to the insured premise.

Insurers are likely to deny coverage for civil authority coverage during the COVID-19 pandemic for the same reason. The court in Southern Hospitality, Inc. v. Zurich American Insurance Company, 393 F.3d 1137 (10th Cir. 2004) addressed a similar situation. The FAA's 9/11 mandate did not necessarily bar access to the plaintiff's hotel. Indeed, the hotel remained open and operational during the shutdown. Therefore, the court found no coverage under the civil authority provision.

Bienville Partners and Southern Hospitality may appear similar to the COVID-19 closures, but they are actually distinguishable. Like the COVID-19 pandemic, those cases involved government-mandated travel bans. However, this did not prohibit hotel operations. Though they lost customers, their employees were not prohibited from working. COVID-19 stay-at-home orders not only prohibit customers from accessing many businesses, they force business owners and employees from working. They are required to shelter in place, too.

Some civil authority provisions feature additional requirements and create more challenges. In Syufy Enterprises v. The Home Insurance Company, 1995 U.S. Dist. (N.D. California) LEXIS 3771, the court addressed a civil authority provision that not only required a civil authority prohibition, but also an element of physical damage. The court in Syufy interpreted the following policy language to reach its holding.

"This policy is extended to include the actual loss sustained by the Insured, resulting directly from an interruption of business as covered hereunder ... when as a direct result of damage to or destruction of property adjacent to the premises herein described by the perils insured against, access to such described premises is specifically prohibited by order of civil authority."

The plaintiff had closed its movie theaters in response to the Rodney King riots and city-mandated dawn-to-dusk curfews. The court held there was no coverage under the civil authority provision because according to the "ordinary and popular" meaning of the term "adjacent," the court found there was no damage to "adjacent" property, as required by the policy. The plaintiff had sought a broad interpretation of the term "adjacent," arguing it was ambiguous. But the court disagreed. "Adjacent" is unambiguous, therefore, city-wide damage from rioting and looting would essentially have to be next door to the business. As discussed earlier, with COVID-19 the topic of physical property damage is a slippery issue.

It is impossible to say whether COVID-19 has contaminated your property. You cannot tell if it is on the table, the register, the door, or the ATM. What we do know is that COVID-19 can be transmitted by touching a contaminated surface. Because it is highly contagious and practically invisible, civil authorities have essentially asked people to assume it may be present anywhere. Best practices are to wash your hands frequently, especially after touching common surfaces. It might be fair to assume that common areas, like workplaces, are contaminated. At least that is how civil authorities see it.

Another issue in Syufy was that the court did not find a causal link between the purported property damage and a prohibition of access by order of civil authority. The curfew was not imposed because of property damage, rather it was imposed due to crime and safety concerns. In order for a COVID-19 claim to survive this sort of challenge, a court would need to find that this pandemic has caused property damage. It would need to acknowledge that stay-at-home orders are not merely designed to restrict human interaction. It also seeks to prevent the spread of disease in contaminated areas.

Business interruption coverage varies greatly. Policies are worded differently, and this article merely examines a few examples of common coverage provisions. In spite of diverse policies, a common phenomenon exists. Due to the massive scale of business closures, insurance companies will soon be inundated with business interruption claims. For some insurers, this may be the most significant test they have ever faced.

An influx of insurance claims will create an overwhelming administrative burden. Insurers are going to experience an enormous backlog of claims and be forced to expand their workforce. This, of course, will be expensive. They will need to hire and train new claims adjusters, some of whom will have no experience with insurance. This alone will create efficiency problems, not to mention the productivity issues that abound anyway due to COVID-19. Insurance companies are being impacted by COVID-19 just like everyone else. Their employees are working from home or not working at all. Operations have been disrupted and stalled. Ironically, insurers themselves could use a good business interruption policy right about now.

In addition to the added administrative costs from COVID-19, insurers may have problems with the macroeconomic consequences of this pandemic. According to the National Association of Insurance Commissioners and the Center for Insurance Policy and Research, the insurance industry tends to invest by matching assets to liabilities in terms of maturity and interest rate risk. Depending on the type of insurance company at issue (property, life, health, etc.), the investment makeup of their portfolios varies based on liability duration and risk. For example, life insurance companies have longer-term liabilities than property insurance companies. Accordingly, they invest more heavily in long-term assets, like 30-year bonds than property insurers.

Critics may find the investment strategies of property insurers were too risky to sustain a global pandemic like this. If thousands of businesses submit legitimate claims for business interruption coverage during the COVID-19 crisis, their insurers and perhaps re-insurers will be facing substantial problems. Those problems will only get worse if insurers respond by denying valid claims.

Insurance companies are going to get sued for bad faith for denying business interruption claims. Business owners are having their lives ruined by COVID-19. They are pouring their savings into their businesses. They will be selling their stocks at rock bottom. They will be taking desperate measures to ensure the survival of their business and it may not be enough. Insurance benefits may be their only chance. The consequences of denials are going to be devastating. 