Business Interruption Coverage for COVID-19 Losses: You Can Satisfy the “Physical Loss or Damage” Requirement in Your Commercial Property Policy

Although your insurance company undoubtedly will try to convince you that you have no coverage for your business interruption losses from COVID-19, do not be so quick to accept the insurer’s position. In its simplest terms, the business interruption coverage in most commercial property policies provides coverage for a covered cause of loss if (1) a suspension of operations has occurred for a certain period of time; and (2) the suspension is caused by direct physical loss or damage to property. In light of states’ business-shutdown orders due to COVID-19, policyholders have met the first requirement – a suspension of its operations.

The central question becomes whether businesses and organizations can meet the “direct physical loss or damage” requirement typically found in property policies. We discussed in a previous blog that numerous court decisions in which microscopic and non-visible property damage, including permeated odors, E. coli bacteria, and similar contaminants, constituted “physical loss or damage.” But courts have gone even further than simply holding that non-visible and molecular-level property damage satisfied the “physical loss” requirement for business interruption coverage.

Courts have held that the key consideration is not whether property damage exists, however microscopic that damage may be, but rather whether property has become unsafe or uninhabitable for use. The Supreme Court of Colorado equated the loss of use of property to physical loss or damage in the 1968 decision Western Fire Insurance Company v. First Presbyterian Church. The church sustained physical loss of its property when gasoline accumulation around the church building made its premises uninhabitable and its continued use dangerous. Numerous courts have followed and held that physical loss or damage does not necessitate physical alteration (see Dundee Mutual Insurance Co. v. Martifer, 587 N.W.2d 191, 194 (N.D. 1998) (“Clearly, without qualification, the term “damage” encompasses more than physical or tangible damage.”); American Guarantee & Liability Insurance Co. v. Ingram Micro, Inc., 2000 WL 726789 (D. Ariz. 2000) (finding that “physical damage” includes “loss of access, loss of use, and loss of functionality”); Matzner v. Seaco Insurance Co., 1998 WL 566658 (Mass. Super. Ct. 1998) (adopting the interpretation of “direct physical loss or damage” to include “more than tangible damage to the structure of insured property”)).

Temporary loss of use and loss of functionality alone may satisfy the physical loss or damage requirement in a property policy. For example, when problems with the North American electrical grid caused a four-day electrical blackout to the Northeastern United States and parts of Canada, which closed the plaintiff’s supermarkets, a New Jersey court reversed the trial court’s grant of summary judgment to the insurer (see Wakefern Food Corporation v. Liberty Mutual Fire Insurance Co., 406 N.J. Super. 524 (2009)). The Wakefern court rejected the trial court’s conclusion that “the definition of ‘physical damage’ cannot be extended in this case to include the temporary loss of use due to a power interruption, because the property resumed its former use or function as soon as the power was restored, and its value was not diminished.”

Likewise, property owners who were required to leave their homes due to large boulders and rocks that had fallen on nearby property sustained a physical loss under their homeowners’ policy even though the boulders had not damaged their property (see Murray v. State Farm Fire & Casualty Co., 509 S.E.2d 1 (W. Va. 1998)). Although they had sustained no structural damage to their homes, the plaintiffs’ homes had become “unsafe for habitation, and therefore suffered real damage,” covered by the policy because the boulders could come crashing down at any time.

The law in various jurisdictions may vary, as will particular policy language, but do not be persuaded that your COVID-19 losses are not covered under your property policy without first seeking a legal opinion on your specific policy language and the applicable law for potential recovery.