Commercial property insurance policies frequently include business interruption or loss of business income coverage when a covered “cause of loss” creates a slowdown or reduction in business income. Companies suspending operations due to the COVID-19 pandemic should assess the availability of insurance coverage for those losses, particularly under business interruption policies. Even if that coverage appears unavailable now, state legislation may provide relief to some insureds. Because coverage could become statutorily available, insureds should comply with notice provisions to preserve any available coverage.
A standard commercial property policy typically provides coverage for “direct physical damage or loss to covered property.” Income loss suffered by the insured because of direct physical damage may be covered by a business interruption provision of the property policy. Thus, while a coverage analysis necessarily requires consideration of the applicable insurance policies, a threshold question is whether COVID-19 has caused physical damage or loss. Even if so, coverage for COVID-19 losses may be precluded by a virus exclusion.
In 2006, largely in response to Ebola and SARS outbreaks, the Insurance Services Office prepared an Exclusion of Loss Due to Virus or Bacteria Endorsement (CP 01 40 07 06) that excludes coverage for loss or damage resulting from “any virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness, or disease.” Insurers may also use a similar exclusion issued by the American Association of Insurance Services (FO 0675 10 06), which excludes coverage for “loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.”
New Jersey Bill A3844 would require property insurers to provide coverage to certain small businesses for COVID-19 business interruption losses even if the policy at issue contains a specific virus exclusion. The draft bill provides:
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 transmission or pandemic . . . concerning the coronavirus disease 2019 pandemic.
The proposed statute would apply to property policies “issued to insureds with less than 100 eligible employees, in the State of New Jersey, and in force on the effective date of this act.” The term “Eligible employee” is defined by the bill as any “full-time employee who works a normal work week of 25 or more hours.” Upon enactment, the statute would be retroactive to March 9, 2020, when the New Jersey governor declared a Public Health Emergency and State of Emergency.
Bill 3844 was reported out of the New Jersey Assembly Homeland Security and State Preparedness Committee on March 16, 2020. We will continue to provide updates on the status of this and similar legislation related to insurance coverage for COVID-19 losses. In the meantime, all businesses with business interruption coverage should take steps now to protect the possibility of coverage for such claims, including documentation of lost profits and other costs incurred, as they address this rapidly evolving situation.