By John Feeley
Smith Smith & Feeley LLP
Commercial property insurers have been deluged with economic loss claims stemming from the COVID-19 pandemic. Numerous insureds have submitted claims under the business income and/or civil authority coverage. Yet, due to the minimal case law regarding insurance coverage arising from a viral pandemic there are, as expected, significant coverage issues, as discussed below.
1. Business Income Coverage
One of the most common claims in this COVID-19 crisis is under the business income coverage. This coverage was intended to compensate an insured for its lost profits and expenses that continue during the period of restoration. However, the insured has the burden of proving that its business had to close or had a reduction in sales due to a direct physical loss to property at the insured’s premises caused by a covered cause of loss.[1] Below is an overview of the central coverage issues in a COVID-19 business income claim.
a. The Direct Physical Loss Requirement
A typical business income insuring agreement requires proof that the insured sustained direct physical loss or damage to property on its premises.[2] Published California case law regarding what constitutes a “direct physical loss” generally holds there must be some type of “distinct, demonstrable, physical alteration” or change to the property.[3]
Consequently, there is an initial factual issue whether there was any COVID-19 virus present on the surfaces on the insured’s property. In other words, even if an infected person entered the insured’s premises, this does not automatically mean that an active virus is present at the premises. This would have to be confirmed by appropriate expert testing.
Second, even if the virus was detected on the surface of an insured’s property, there is a legal issue as to whether the COVID-19 virus (which has no color or odor, which may not survive on a building surface for more than a few hours or days and which may not cause any structural or tangible damage) qualifies as a “distinct, demonstrable, physical alteration” of property on the insured premises.
While some courts outside of California have broadly found that an insured’s inability to occupy its property due to the presence or release of contaminants at the property essentially qualifies as a constructive “direct physical loss,”[4] it is questionable whether these cases apply to a COVID-19 virus that has no odor or color and may not cause any tangible alteration or change to the insured property.
b. The Covered Cause of Loss Requirement
Another standard business income insuring requirement is that the loss must be caused by a covered cause of loss. Many commercial property insurance policies also include the “direct physical loss” requirement in the prefatory language under the “covered cause of loss” provision.[5] Moreover, some property insurance policies contain “virus” or other exclusions, which may eliminate the business income coverage for a COVID-19 loss.[6]
2. Civil Authority Coverage
In conjunction with their business income claims, many insureds have also submitted claims under the civil authority coverage. Depending on the wording of the policy, this coverage protects against an actual loss of business income or necessary extra expenses incurred by an insured when its property becomes inaccessible caused by the action of civil authority that prohibits access to the insured’s premises due to direct physical loss to property near the insured’s premises caused by a covered cause of loss.[7] Presently, many states, counties and cities have issued some type of “stay at home” and/or “shelter in place” order (“COVID-19 order”) which has prohibited or restricted access to an insured’s business premises. There are several legal issues that should be considered when evaluating a COVID-19 order loss under the civil authority coverage.
First, and foremost, the scope and limitations of the civil authority coverage vary dramatically depending on the wording of a particular policy. In other words, there is no one-size-fits-all interpretation of the civil authority coverage and it should be interpreted according to the plain meaning of the contract language.
Second, it is important to examine the language of the specific COVID-19 order that affects the insured’s business. It is possible that the insured’s business is exempt from the order and therefore can remain open (an “essential activities exemption”) or at least partially open, but the insured decided to voluntarily close its business due to a fear of the COVID-19 virus. This could defeat coverage for a civil authority claim.[8]
Third, the COVID-19 order should be scrutinized to determine whether it was issued to prevent the spread of the COVID-19 virus or whether it was issued because there was some type of physical damage to property near the insured’s premises. In other words, if the COVID-19 order says it was issued to prevent the spread of the COVID-19 virus, then an insured may not be able to establish the necessary causal connection between the COVID-19 order and any type of direct physical loss or damage to property.
Fourth, as with the business income coverage, to comply with many civil authority insuring agreements, the insured must prove that there was direct physical loss or damage to property other than property at the insured premises. Notably, some courts have held that for the civil authority coverage to apply, the property that sustained the direct physical damage must be adjacent or relatively close to the insured premises, not merely some type of theoretical or actual property damage to a location far away from the insured premises.[9]
Finally, the insured must also prove the direct physical loss to the property near the insured’s premises was damaged by a covered cause of loss. Again, just as with the business income coverage, if the cause of the damage is excluded by a “virus” or other exclusion, the civil authority coverage will not apply.
3. Conclusion
In sum, there is no simple answer as to whether a business income or civil authority claim arising from the COVID-19 pandemic is a covered loss. Rather, the answer to these coverage issues will generally depend on the specific policy language at issue, the law of the jurisdiction where the loss occurs, the wording of the COVID-19 order and the facts developed during claim investigation.
If you have any questions regarding this article or insurance coverage for COVID-19 claims please feel free to contact John Feeley, who has been providing coverage advice on COVID-19 claims.
The opinions discussed in this article are those of the author and do not necessarily reflect the views of the author’s law firm or its clients. This article is not intended to be and should not be taken as legal advice.
[1] See, ISO Businessowners form BP 00 03 07 13 at p. 6.
[2] Id.
[3] Doyle v. Fireman’s Fund Ins. Co., 21 Cal.App.5th 33 (2018).
[4] Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34 (Colo. 1968); Motorist Mutual Ins. Co. v. Hardinger, 131 Fed.Appx. 823, 825-827 (3rd Cir. 2005).
[5] See, ISO Businessowners form BP 00 03 07 13 at p. 2.
[6] Id. at p. 20.
[7] Id. at p. 9.
[8] See, Syufy Enterprises v. Home Ins. Co. of Indiana, 1995 WL 129229 (N.D. Cal. 1995) (not reported).
[9] United Airlines, Inc. v. Ins. Co. of State of Pa., 385 F.Supp.2d 343, 345 (S.D. N.Y. 2005), aff’d sub Nom. United Airlines, Inc. v. Ins. Co. of State of Pa., 439 F.3d 128 (2nd Cir. 2006).