Covid-19 Coronavirus: Can You Claim Business Income Loss Under Your Insurance Policy?
Is your business suffering due to the Covid-19 Coronavirus Pandemic? Request your free insurance coverage review for losses due to the coronavirus pandemic.
On March 23, 2020, Massachusetts Governor Charlie Baker ordered all non-essential businesses in the Commonwealth to close their physical offices and imposed other limitations on businesses deemed essential, such as restaurants, which are limited to offering take out or delivery service. The order went into effect at noon on March 24, 2020 and is effective through noon on April 7, 2020. It may well be extended. The impact on businesses in the Commonwealth is obvious. Whether businesses can look to their insurance coverage for help is much less obvious.
Many, but not all, policies contain an express exclusion of viruses that can cause illness as a covered cause of loss, which will make invoking coverage challenging. Here is a quick primer on issues arising around invoking insurance coverage for lost business income from the Covid-19 coronavirus pandemic. Please take this to heart: Every situation and every policy is unique. You should consult legal counsel and review your specific situation and policy.
Business Income Coverage
Commercial Property Insurance often includes coverage for business income, which will pay for lost income sustained as a result of a direct physical loss caused by a covered peril. If you can invoke coverage, you may be able to recover not only lost net income but also normal operating expenses such as payroll.
Here is a sample policy provision for Business Income coverage:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration.” The suspension must be caused by direct physical loss of or damage to property at the described premises. The loss or damage must be caused by or result from a Covered Cause of Loss.
Direct Physical Loss Cause by Covered Cause of Loss
At least two issues immediately arise for a business seeking coverage for lost business income resulting from the Covid-19 Coronavirus pandemic: (1) Is contamination with a virus a “direct physical loss?” (2) Is contamination a “covered cause of loss?”
There are a number of prior court decisions to support the contention that contamination by coronavirus may constitute a direct physical loss. For example, the United States Court of Appeals for the Third Circuit has held that contamination with e. coli bacteria could constitute a direct physical loss where the property is rendered uninhabitable. Motorists Mutual Insurance Co. v. Hardinger, 2005 U.S. App. LEXIS 9030 (3d Cir. May 18, 2005). The United States District Court for the District of New Jersey has held that an ammonia release that rendered a facility uninhabitable until the ammonia dissipated caused physical loss or damage under the policy. Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of America, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014). The New Hampshire Supreme Court has held that the pervasive odor of cat urine could cause a direct physical loss because “[e]vidence that a change rendered the insured property temporarily or permanently unusable or uninhabitable may support a finding that the loss was a physical loss to the insured property.” Mellin v. Northern Sec. Ins. Co., 115 A.3d 799, 805 (N.H. 2015).
Whether contamination is a covered cause of loss depends first on the type of policy you have. Commercial property policies come with several different cause of loss forms. The “Basic” form covers only certain specifically listed perils. The “Broad” form expands the enumerated covered causes of loss. The “Special” form offers the best coverage and covers any cause of direct physical loss that is not explicitly excluded (“all risks” coverage). On occasion, a business may also have a “manuscript policy,” which is specifically tailored to that business. An all risks policy may cover coronavirus as a covered loss if the policy does not contain an exclusion eliminating it.
Exclusion for Loss Due to Virus Or Bacteria
In any coverage analysis, you must look not only at the insuring provisions under the policy, but also the exclusions. For example, many, but not all, policies have a provision expressly excluding coverage for viruses that cause disease. The Insurance Services Office, Inc. (“ISO”) developed a boilerplate provision back in 2006 in response to claims made against commercial policies after prior epidemics.
ISO form CP 01 40 07 06 is titled “Exclusion for Loss Due To Virus Or Bacteria” and provides:
We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.
As its name makes clear, Covid-19 coronavirus is a “virus” and so policies containing this exclusion will be problematic for the policyholder seeking coverage. This provision is particularly problematic when combined with an anti-concurrent cause provision, which excludes coverage when a covered cause of loss and excluded cause of loss combine.
Here is a sample anti-concurrent loss provision: “We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Even if your policy contains a virus exclusion, you may have an endorsement adding coverage back to your policy. Again, the core message here is that careful review of the entire policy is critical.
Contingent Business Interruption Coverage
Contingent Business Interruption Coverage, sometimes called “Dependent Property Coverage,” applies when a business suffers lost income due to direct physical loss by a business upon which the insured business depends.
Here is a sample provision:
We will pay for the actual loss of Business Income you sustain due to physical loss or damage at the premises of a dependent property caused by or resulting from any Covered Cause of Loss.
Dependent property means property owned by others whom you depend on to: (a) Deliver materials or services to you, or to others for your account. But services does not mean water, communication or power supply services; (b) Accept your products or services; (c) Manufacture your products for delivery to your customers under contract for sale; or (d) Attract customers to your business.
Contingent Business Interruption Coverage may also help the policyholder whose business suffers from the Coronavirus pandemic. Covid-19 has disrupted supply chains and sales. If your business is suffering because your suppliers, manufacturers or customers have suffered physical loss due to the pandemic, you may have coverage.
Civil Authority Coverage
As of this writing, numerous state and local authorities are issuing orders to shut down businesses and in some cases to individual citizens to “shelter in place.” Governor Baker’s order is a good example. Another common commercial property term, the “Civil Authority” coverage, may offer help to businesses shut down by such government orders.
Here is a sample Civil Authority provision:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply: (1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described 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.
If your business has suffered or is suffering lost business income due to the Covid-19 Coronavirus pandemic, the question whether you have a claim for coverage under your insurance policy is a complex question that requires a careful analysis of both the terms of your policy and the precise cause of your loss. The sooner you undertake that analysis, the better. Insurers will routinely assert that commercial policies do not cover these losses. You should not accept such a denial without undertaking your own analysis with legal counsel to test the basis for it.