Business Interruption Coverage for Coronavirus Losses
March 20, 2020
Many of the firm’s clients will experience significant business interruption losses as a result of the Coronavirus. Those clients with commercial insurance policies with business interruption insurance coverage will look to those policies for coverage. However, depending on the language of the policy, these are two significant policy provisions which insurers may rely upon to deny coverage.
First, many policies include an exclusion of loss due to virus. In 2006 the Insurance Service Organization (“ISO”) submitted a form of exclusion titled, “Exclusion for Loss Due to Virus or Bacteria.” This form was approved by the New Jersey insurance regulators. The exclusion bars first-party property coverage for “loss or damage caused by or resulting from any virus…that induces or is capable of inducing physical distress, illness or disease.” The form of endorsement specifically applies to all coverages under the commercial insurance policy, including but not limited to business income, extra expense, rental value or action of civil authority. Insurers are already denying business interruption claims under policies which contain the loss resulting from virus endorsement.
Second, while policy language differs from policy to policy, many policies provide business income coverage “for the actual loss of Business Income you sustain due to the necessary ‘suspension’ [which can be a slowdown or cessation] of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss of or damage to [insured property]. The loss or damage must be caused by or result from a Covered Cause of Loss.”
There are generally two types of Covered Causes of Loss. In a named perils policy, there is coverage for only specified perils named in the policy. In an all risk policy, there is generally coverage for all causes of loss subject to specific policy exclusions. In an all risk policy, Covered Causes of Loss is frequently defined to mean “direct physical loss unless the loss is excluded or limited in this policy.”
Because of the need to show loss caused by direct physical loss of or damage to the insured premises, insurers may attempt to deny claims for business interruption coverage caused by the Coronavirus. While there are cases from other jurisdictions upon which insurers may rely, policyholders will rely upon the case of Gregory Packaging v. Traveler’s Property Casualty Co. of America, Civ. No. 2:12-cv-04418 (WHW) (CLW) 2014 U.S. Dist. LEXIS 165232, in which the New Jersey federal district court found that an ammonia release in the insured’s facilities constituted “direct physical loss of or damage to” insured property because the ammonia release rendered the facilities uninhabitable. The federal district court in Gregory Packaging relied upon the decision by the New Jersey Appellate Division in Wakefern Food Corp. v. Liberty Mut. Ins. Co., 400 N.J. Super. 524 (App. Div. 2009) for the proposition that property can sustain physical loss or damage without experiencing structural alteration, when it loses its essential functionality. In Wakefern, the insured suffered a loss as a result of a blackout. The court found there was coverage under Wakefern’s policy, which covered damage caused by a power interruption which resulted from physical damage, because although the electrical grid may not have experienced structural damage, there was a “loss of function of the system as a whole.” Id. at *14.
All may not be lost for policyholders however. According to the State of New Jersey’s website, the Legislature is considering New Jersey Bill A-3844 (the “Bill”) which presently provides in draft form:
Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmissions or pandemic…concerning the Coronavirus disease 2019 pandemic.
The Bill would apply to insureds with less than 100 eligible employees in New Jersey and defines “eligible employee” as a full-time employee who works a normal work week of “25 or more hours.” The bill “is intended to hold harmless a certain portion of the business sector, which had the foresight to purchase business interruption insurance, for losses sustained as a result of the current health emergency, but for which no such coverage is currently offered.”
The Bill was voted out of the Assembly/Homeland Security and State Preparedness Committee on Monday, March 16, 2019 and was sent to the Assembly. On Monday afternoon, the Assembly voted to give emergency consideration to the Bill. However, the Philadelphia Inquirer recently reposted that later that day, the Bill’s sponsor, Assemblyman Roy Friedman, agreed to hold the Bill from a floor vote in the General Assembly, but demanded a good faith effort from insurers to help their insured’s. The Bill is not presently scheduled for a vote.
For those firm clients which have business interruption coverage, and who have sustained a business interruption loss, a notice of claim and demand for coverage should be immediately sent to their insurers in order to trigger whatever coverage may be available under their policies. In the notice letter the insured should advise the insurer when its operations were suspended. The insured should request that the insurer send required proof of loss forms which the insured should complete and return to the insurer as soon as practicable.
For clients whose businesses include the sale of products, and whose business has been interrupted as a result of product supply shortages caused by the pandemic, notice of claim and demand for coverage should be promptly provided to their insurers as many commercial insurance policies may cover this type of contingency loss.
Also clients whose operations have been shut down by governmental directive may have coverage under the Additional Coverage for losses caused by civil authority which is provided in many policies. This Additional Coverage covers actual loss of Business Income caused by action of civil authority that prohibits access to the insured premises when a Covered Cause of Loss causes damage to property other than to the insured property. Some policies provide language which requires that: (1) access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage and the insured premises are within that area but are not more than one mile from the damaged property; and (2) the action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Clients who face claims against them by third parties relating to the Coronavirus, such as negligently failing to protect third persons from contracting the virus at their property, should immediately provide notice of such claims and make a demand for coverage under their business liability or comprehensive general liability policies. These liability policies typically protect an insured for claims of bodily injury or property caused by an occurrence.