Confronting Business Interruption Claims Resulting from COVID-19

As the country continues to absorb the shock of the COVID-19 pandemic, commercial property insurers are already experiencing an influx of claims, mostly for business interruption.

There is likely little to no coverage available under most standard commercial property policies for these types of claims. Most commercial property policies provide coverage for lost income or business interruption when “direct physical damage” caused by a “covered cause of loss” at the insured location results in a suspension of business operations.

It is the insured’s burden, in the first instance, to demonstrate that the location sustained physical damage as a result of a “covered cause of loss.” Many of the initial claims we have seen do not allege any physical loss – only that business income is down significantly due to the pandemic or that an insured location has closed due to a directive from the public authorities, resulting in a significant loss of income. Also, many policies contain an exclusion for losses caused by, or resulting from, a virus or bacterium. That exclusion provides, in part, that the insurer “…will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

The requirement that insureds demonstrate “direct physical damage,” coupled with the policy exclusion for losses caused by or resulting from bacteria or viruses, will make it difficult for business owners to recover. Recognizing these hurdles, the plaintiff’s bar and lawmakers are already laying the groundwork in an effort to get coverage.

This week, a lawsuit was brought by a restaurant in New Orleans against Certain Underwriters at Lloyd’s London seeking coverage under a business policy for losses due to a shutdown mandated by state and local authorities. This lawsuit, styled Cajun Conti LLC, et al., v. Certain Underwriters at Lloyd’s London, et al., was filed in the Civil District Court for Orleans Parish. The suit alleges, in very general terms, that “…the virus is physically impacting public and private property and physical spaces in cities around the world.” The suit goes on to allege that “…the global pandemic is exacerbated by the fact that the deadly virus physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to 28 days, particularly in humid areas below 84 degrees.” The suit further alleges that the Lloyd’s policy does not contain the bacterium and virus exclusion. The insurance community will be watching this case closely.

We have also seen an attempt by the New Jersey State Legislature to remove the bacterium and virus exclusion from commercial policies written in that state (New Jersey Draft Bill A-3844). The bill appears to be stalled, for now, as lawmakers consider the potential impact on the insurance industry, as well as the constitutional implications of effectively rewriting a private insurance contract.

In virtually all cases, and especially those involving policies that do not contain the bacterium and virus exclusion, the court’s interpretation of what constitutes “direct physical damage” will be the determining factor regarding coverage. Whether or not coverage will be afforded in those situations will depend largely on the jurisdiction, as courts have struggled with this concept over the past several years.

A number of courts have considered the issue and held that “physical loss” occurs when property becomes “uninhabitable,” or suffers a distinct, demonstrable and physical alteration of its structure.

For example, in Mama Jo’s, Inc. v. Sparta Ins. Co., No. 17-CV-23362, 2018 WL 3412974, at *8 (S.D. Fla. June 11, 2018), a federal district court in Florida held that the insured restaurant did not sustain a direct physical loss to covered property when dust and debris from nearby roadwork could be remediated by cleaning. The Court explained that if “[t]he structure continues to function – it has not lost its utility … routine maintenance does not bring the expense within first-party coverage.” Id.

Likewise, in Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass’n., No. 90–35654, 1992 WL 16749, *1 (9th Cir. Jan. 31, 1992), the Ninth Circuit opined that asbestos contamination represented an economic loss and not a physical loss, inasmuch as the building remained physically unchanged.

And in Universal Image Prods. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010), a Michigan federal court held that pervasive odor, mold and bacterial contamination inside a building’s ductwork did not constitute physical loss or damage because the insured did not suffer any structural or other tangible damage to the insured property, and the odor was not so pervasive as to render the premises uninhabitable.

Similarly, in Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008), an Ohio appeals court affirmed the trial court’s ruling that dark staining from mold did not constitute “physical loss” because it could be removed by cleaning and treating the affected areas and did not alter or otherwise affect the structural integrity of the building.

But courts have found coverage for claims where the property’s function was seriously impaired or destroyed and therefore rendered useless by the presence of contaminants.

For example, in Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418, 2014 WL 6675934, at *1 (D.N.J. Nov. 25, 2014) – a case often relied on by policyholders – a federal court in New Jersey found that the release of ammonia from a refrigeration system at the insured’s packaging facility constituted physical loss or damage. The court determined that the ammonia release rendered the insured’s facility “physically unfit for normal human occupancy and continued use until the ammonia was sufficiently dissipated.” Id. at * 17. The court concluded that “[w]hile structural alteration provides the most obvious sign of physical damage . . . . property can sustain physical loss or damage without experiencing structural alteration.” Id. at * 13.

As concerns and litigation about the novel coronavirus continue to grow, these questions and others will be at the forefront in determining if there is coverage for these claims.

The first-party property team in Rivkin Radler’s Insurance Coverage Practice Group has decades of experience in analyzing and litigating these types of claims. Please feel free to call on us with questions or concerns. And, most important, stay safe during this difficult time.