Is Coronavirus (COVID-19) covered by business interruption insurance?
In March, 2019, The World Health Organization declared COVID-19 a global health emergency (pandemic). Due to the continued global spread of coronavirus, business interruption and other losses are staggering.
As businesses suffer, insurance claims will exponentially increase. A fundamental question is whether these claims will be covered. Business owners are rightfully concerned. For many businesses, the virus threatens to disrupt supply chains, production, and revenue. Many look to business disruption insurance to cushion the blow. But the safety net they thought they’d purchased may not be there.
While many policies do have business interruption coverage, a significant number of these policies exclude compensation for communicable disease outbreaks, a change many insurers made after the Severe Acute Respiratory Syndrome (SARS) outbreak of 2003.
What is business disruption insurance?
Most small and medium-sized businesses carry some form of business disruption insurance. This includes coverage in the event of a natural disaster or fire.
Business disruption insurance is typically not a standalone policy, but part of an overall comprehensive insurance or property/casualty policy. Depending on your policy type, coverage is limited to certain types of disruptions and exclusions.
How communicable diseases changed business interruption insurance
The 2003 SARS outbreak put insurance companies on notice. After Hong Kong-based hotel group Mandarin Oriental International Ltd. received $16 million from its insurers to pay for business interruption losses due to SARS, policies were quickly updated to exclude certain types of disasters — specifically communicable diseases.
In another SARS-related case, the Hong Kong Court of Final Appeal ruled the insurance company’s liability was limited to the amount of disruption caused after the contagious disease was “required by law to be notified to an authority.”
This “trigger date” limits the amount of payment a carrier must pay to the insured, even if the disruption began before the official reporting date.
On January 8, 2020, COVID-19 was included in the Prevention and Control of Disease Regulation 2020 and the Prevention and Control of Disease Ordinance, making it a notifiable disease.
After SARS, the insurance industry began excluding losses incurred by communicable disease in most policies. The only coverage that pays for such losses are specifically pre-negotiated, which may preclude or limit most business owners’ coverage.
How business disruption insurance could recover losses
One restaurant, Oceana Grill in New Orleans, along with its parent company, Cajun Conti, filed a lawsuit seeking a judgment for its insurer to cover losses incurred while most restaurants are closed down in Louisiana. The restaurant seeks relief based on the fact that their insurance company covers “direct physical loss” from outside forces including “the event of the businesses closure by order of Civil Authority.”
For businesses which have interruption insurance, the threshold for recovery generally depends on several factors:
• Did the property sustain physical damage (e.g., a lightning strike)?
• Is the property be insured (renters might not be covered)?
• Is the peril itself insured (not specifically excluded)?
• Is the loss must be quantifiable?
If all of these conditions exist, coverage may pay out for the entire period of time it takes to restore the damaged property and put the company back in business.
But many existing business disruption coverages pay only for quantifiable physical losses, like repairing and replacement of damaged property and inventory.
If the coronavirus disrupts business, there may be no physical damage to the organization. Companies may see business slowdown, incur a loss of revenue, experience disruptions in the supply chain, or completely close due to the need to disinfect. But none of these would be the result of physical damage, and none would trigger payout from a typical business disruption policy.
Communicable disease coverage
Some industries remember the SARS losses and negotiated communicable disease coverage. This specific rider must have been negotiated and accepted at the time the policy went into effect. Even for these, there may be limitations on the amount of recovery. A “trigger event” may be described in the policy and may be required from a qualified agency.
Disruption could include closing a business’s warehouse, office, restaurant, retail location, etc., to sanitize facilities or protect employees or consumers.
Even businesses impacted by coronavirus or other pathogens — and which carry communicable disease coverage — may still have to wait for an appropriate authority to inspect and certify their facility.
A second order from that authority may be needed to lift the closure — but even then, some policies predetermine a maximum amount of days that are reimbursable.
Even with communicable disease coverage, many policies limit the amount of recovery to physical costs (cleanup) and exclude loss of revenue inflicted by the outbreak in the policy.
Specific, pre-negotiated terms that cover customer or supply chain losses would be needed, but may be cost-prohibitive to most businesses.
Policyholders should keep in mind, however, that courts across the country have not settled upon a uniform rule for when insured property has suffered a “physical loss.” In numerous jurisdictions courts have determined that contamination and other incidents that render property uninhabitable or otherwise unfit for its intended use constitutes a “physical loss” sufficient to trigger business interruption coverage. The determination of whether “physical loss” has occurred will therefore continue to require a close examination of the particular facts of each case.
While the coronavirus is not reported to have resulted in any permanent physical damage to property, it is transmitted either through the air or from touching infected surfaces.
Thus, the virus can be present in buildings, airplanes, trains, watercraft and other enclosed spaces and on surfaces outdoors.
In analogous circumstances, courts have found that the presence of harmful substances at or on a property can constitute “property damage” which triggers first party property coverage.
In Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am. (Civ. No. 2:12-cv-04418 (WHW) (CLW) (D.N.J. Nov. 25, 2014)), a New Jersey federal court found that covered property damage occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned. In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.”
From this case, a strong argument can be made that property damage has occurred in places where the virus is present.
New property damage can be introduced into an area by the same or additional infected people over time, which could strengthen the argument that places where large numbers of people congregate suffer ongoing property damage, no matter how long a single spore survives there.
Contingent business interruption coverage
For a business to get full coverage for business disruption due to a communicable disease, they will need to purchase “contingent business interruption coverage” (CBI) which specifically includes loss of commerce caused by disease as well as other disasters.
CBI could include loss of revenue due to disruptions from customers, the cost to repair or replace facilities or equipment, and costs to clean and sanitize.
A second area may be disruption in the supply chain. Your company may be ready to manufacture, but if vendors or distributors are having issues, third-party CBI coverage could help business keep afloat until things improve.
Unlike general business disruption coverage, this special clause or rider to a policy would cover the lost revenue an organization experiences during the disruption.
A third area of CBI coverage may be losses due to “proximity”. Your business may be located close to a nearby attraction or business, driving revenue because that secondary location is your primary source of customers.
Foot traffic near a museum or a restaurant located near a busy factory could be a major source of revenue. Many retailers in shopping centers select their store location to be proximate to an “anchor tenant”. For these businesses, a shutdown of the proximal location could create a major disruption in revenue. CBI could cover these losses until the situation has returned to normal.
Supply chain and contingent business loss
A large portion of the losses suffered by American businesses will fall within the category of contingent business loss (i.e., caused by damage to a supplier or customer). Many U.S. businesses have reported the loss of overseas suppliers and customers. Such supply chain losses are likely to increase as the disease spreads in the U.S. and affects domestic customers and suppliers.
Importantly, the “supplier” whose property damage triggers contingent business interruption coverage may not be limited to the manufacturers or distributors of goods.
It could be the airline, cruise ship or subway that brings customers to your business. To qualify as a “supplier” it is not necessary that the policyholder have a supply contract with the third party.
For example, in Archer-Daniels-Midland Company v. Phoenix Assurance Co. (975 F. Supp. 1137 (S.D. Ill. 1997)), the court held that the policyholder, a food processor, was entitled to contingent business interruption coverage because of property damage sustained by the Army Corps of Engineers, which operated the flooded Mississippi River boat channels, and farmers who lost crops that would have indirectly been sold to the plaintiff through intermediaries.
Insurance companies face political pressure to pay what could be a crippling sum of coronavirus-related claims — even though many of them say their policies don’t cover pandemics.
Anger in Washington, D.C. is growing over moves by insurers to deny claims filed by restaurants, retailers and other businesses who believe they have coverage to financially protect themselves from a major disruption like the one they’re now enduring. The insurance industry is so alarmed at the prospect of a massive payout that it’s rushing to put together a plan to get Washington off its back.
There’s a growing outcry in Washington, and lawmakers are eager to intervene. Insurance lobbyists have already been fighting off attempts at legislation that would have made policies retroactively cover the pandemic.
To stave off a government mandate to pay insurance claims, an early proposal that circulated among insurance lobbyists envisioned a “Federal Business Interruption and Workers’ Protection Recovery Fund” — patterned after the September 11th Victim Compensation Fund — that would make assistance available to all businesses. Insurance industry sources said the plan was being revised. See Insurers scramble to avoid 9/11-style coronavirus backlash in Politico, by Zachary Warmbrodt (March 26, 2020).
Review your insurance policy
As the coronavirus continues to spread, individuals, business, governments, and healthcare providers will see its impact and fallout. For businesses, loss of orders, employees, traffic and revenue can have significant, long-term effects, but many won’t be able to get assistance with their existing insurance coverage.
Contact your insurance advisor to carefully review existing policies to see what coverage, if any, you have today, and what coverage you may want to purchase for the future. Review your insurance policies now and be sure to document coronavirus-related business impacts.
Is Your Business Affected by COVID-19? We Can Help
If your business suffers due to coronavirus’s devastating impacts, don’t delay. Relentless demands, late deliveries, missed payments, and non-performance present overwhelming and confusing issues. Trust the experienced, caring professionals at Chidatma Lex Group.
Conveniently located in New York City, your experienced business lawyer, Dwight Yellen, will make you our priority and put your mind at ease. We are seasoned professionals and know business! We will answer your questions, evaluate your circumstances, and discuss your options. Call us right away (212-903-4546), or contact us confidentially online.