States Look to Business Interruption Insurance Coverage to Save Small Businesses from COVID-19As COVID-19 halts commercial activity throughout the United States, states have jumped into action to preserve insurance coverage for small businesses. New Jersey led the way by proposing legislation requiring property policies to cover business interruption losses resulting from COVID-19:

“[n]otwithstanding 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, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”

The bill applies to policies in effect on March 9, 2020, and covers insureds with less than 100 eligible employees who work 25 hours or more each week (see Bill A-3844).  The New Jersey law is currently on hold after resistance from the insurance industry; whether the assembly will eventually vote on the law remains to be seen.

Lawmakers in Ohio, New York, and Massachusetts have taken similar steps. Ohio House Bill 589 requires business interruption coverage to include losses caused by COVID-19 for insureds with less than 100 eligible employees who work 25 hours or more each week (see H.B. No. 589). New York Assembly Bill 10226 includes similar terms.

A Massachusetts bill, S.D. 2888, expands its scope to insureds with 150 or fewer full-time employees and expressly eliminates an expected insurer defense – that COVID-19 does not cause physical damage: An insurer cannot “deny a claim for the loss of use and occupancy and business interruption on account of […] there being no physical damage to the property of the insured or to any other relevant property” (see S.D. 2888). Other states may follow Massachusetts’ lead in responding to insurers’ contentions that COVID-19 does not cause physical damage to property even though the coronavirus’ presence renders property uninhabitable and requires removal through careful cleaning before a property can be safely used.

The federal government is also tackling business interruption losses. On March 18, 2020, a bipartisan group of members of the United States Congress wrote to insurance industry leaders imploring insurance companies to provide coverage for business interruption losses caused by COVID-19. The letter references several of the shelter-in-place orders imposed by states and the devastating impact of the virus on small businesses, which has only grown since the letter was written.  Not surprisingly, on the same day, the American Property Casualty Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents & Brokers of America, and the National Association of Mutual Insurance Companies wrote a letter in response stating that many business interruption policies “do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”

As COVID-19 continues to take a toll on business operations, expect more legislative activity at the federal and state level. If legislation becomes law, expect insurers to challenge their constitutionality under state constitutions, as well as the U.S. Constitution.

Watch this blog for legislation and other developments, as well as the litigation that will surely arise.

Beware of Insurers’ Attempts to Use Fear of COVID-19 to Deny CoverageAs COVID-19 leads to event cancellations worldwide, the insurance market is scrambling to minimize its financial exposure to event cancellation claims. Although we have seen event policies with COVID-19 exclusions and others with contamination exclusions that insurers will cite to deny coverage, many event cancellation policies lack these problematic exclusions. But insurers are turning to another defense by contending that cancellation based on attendees’ fear of COVID-19 does not trigger coverage and are doing so by relying on a line of property damage cases. Insureds should not be fooled by this strategy. Event cancellation policies do not require property damage to trigger coverage and thus do not raise the question of whether fear suffices for that coverage.

Insurers are racing towards a line of cases interpreting United Air Lines, Inc. v. Insurance Co. of State of Pennsylvania. These cases do not support the insurers’ position. In United, the airline sought coverage under its property policy for losses related to the government shutdown of air travel due to the terrorist attacks on 9/11.  The court said the shutdown was based on fears of future attacks, not on actual property damage, as required under the policy. Similarly, in S. Texas Medical  Clinics, P.A. v. CNA Financial Corp., in which the plaintiff sought coverage for losses caused by a hurricane evacuation order, the threat of damage was not enough:  “[b]ecause the mandatory evacuation order for Wharton County was issued due to the anticipated threat of damage to the county and not due to property damage that had occurred in Florida and the Gulf of Mexico, [plaintiff’s] business interruption losses are not covered by its policy with Valley Forge.”

For events cancelled before governmental orders precluding gatherings, insurers may cite this line of cases to deny coverage. But these cases are irrelevant to event cancellation policies. Not surprisingly, almost no published cases interpret event cancellation policies. And none address the issues raised by the COVID-19 pandemic. This is novel ground, and insureds should not accept coverage denials without close examination of their policies.

Bottom line: Don’t be fooled by insurers importing property damage cases into your organization’s event cancellation claim. Review the policy’s terms and insist on the coverage that you purchased.

The “Physical Loss” Requirement for Business Interruption Claims Amid the CoronavirusThe massive economic disruption caused by the novel coronavirus pandemic raises questions about insurance coverage for business interruption losses from communicable disease. Does viral contamination constitute the “physical loss” required to trigger this type of coverage? Although courts have not yet provided guidance specific to COVID-19, past rulings suggest that coronavirus contamination may constitute physical loss or damage triggering coverage for business interruption losses.

Business interruption (BI) insurance, also known as business income or time element insurance, generally provides coverage for lost income and continuing expenses while an organization’s operations are shut down or limited following physical damage from a covered cause of loss. A business that has been damaged by fire, for example, may utilize BI insurance to replace its lost income while repairs are made. Contingent business interruption (CBI) insurance covers lost income and continuing expenses following damage to another organization on which the policyholder’s business depends, such as a key supplier or customer. Although BI and CBI insurance exists in other contexts, such as cyber insurance, this coverage is typically obtained in conjunction with a commercial property policy.

To trigger coverage, the policyholder must establish physical loss to property from a covered cause of loss. Standard business income coverage forms generally require that the suspension of the insured’s operations must “be caused by direct physical loss of or damage” to the insured premises.  The location where the damage must occur varies depending on the type of coverage. For business interruption, the physical loss must occur to the policyholder’s property, whereas for contingent business interruption, the loss must occur to the supplier, customer, or other organization for which coverage has been obtained.

Case law suggests that the presence of contaminants may constitute “physical loss,” particularly where the insured’s property is rendered unusable. In Motorists Mutual Ins. Co. v. Hardinger, for example, a 2005 homeowner insurance case, the Third Circuit addressed allegations that the contamination of the insureds’ well by E. coli bacteria had rendered their home uninhabitable. The court found that E. coli bacteria contamination could constitute physical loss if the “functionality of the [ ] property was nearly eliminated or destroyed,” or if “their property was made useless or uninhabitable.”

While the novel coronavirus may present practical challenges in establishing the presence of contaminants, preliminary scientific evidence indicates that COVID-19 is highly contagious and can live on surfaces for days or even weeks.  The mere presence of individuals diagnosed with the coronavirus may be strong circumstantial evidence of contamination of the premises.

Even if contamination constitutes physical loss, communicable disease exclusions, such as ISO’s Exclusion of Loss Due to Virus or Bacteria, may eradicate coverage.

Given the extent of the impact from COVID-19 and the uncertainty of future developments in case law, policyholders should take all necessary steps to preserve the possibility of coverage, including closely monitoring potential impacts, tracking potential economic losses, and putting their carriers on notice of loss.