By Michael Menapace, Esq.
The COVID-19 pandemic is unprecedented in many ways. The human toll is first and foremost on our minds (as it should be), but as an insurance professional, I’ll stay in my lane and address one of the economic impacts – business interruption.
Businesses Looking to Mitigate Losses
Among the ways in which we are in uncharted territory is the scale of how businesses are impacted. Unsurprisingly, in reaction to slow-downs and shut-downs in many business sectors, businesses are looking for ways to mitigate their losses or recover lost revenue. One avenue that businesses are exploring is the availability of business interruption coverage under their property insurance policies. Other potential claims include communicable disease coverage found in some policies purchased by hotels or event cancellation insurance, but those claims are beyond the scope of this article.
Property insurance was designed originally to cover fire losses and similar losses of physical property following the Great London Fire of 1666. Of course, property policies have evolved since then to cover additional risks including, in many instances, business interruption losses caused by physical damage to property. A property policy may, for example, pay to repair the damage caused by a fire and may cover the loss of business during the reconstruction period. But here’s the rub. Are the business interruptions related to COVID-19 caused by physical damage to property?
Policy Language Will Control
The language of an insured’s policy will control whether COVID-19 interruptions are covered. Unfortunately, much of the media commentary on business interruption claims related to COVID-19 has inappropriately treated all insurance policies as though they are identical. Policyholders have a wide array of different policies they can purchase. For example, some policyholders have purchased an ISO Businessowners Policy (BOP) with standard terms and exclusions, others have purchased all-risk policies, and others have purchased a variation of these types.
This commentary does not try to provide sweeping pronouncements or give the impression that a single outcome will apply equally to all situations. Instead, the following is a starting point for a more detailed analysis under individual circumstances. Details matter and the analysis for a particular claim must start with the policy terms and facts specific to that policyholder.
Is Coverage Triggered?
There have already been a handful of lawsuits filed related to business interruption claims, some of which suits were filed before the insurers even denied a claim. For example, the Oceana suit filed by a restaurant in NOLA and a suit filed by chef Thomas Keller, owner of The French Laundry in California. Also, a group of tribal nations that own casinos filed a lawsuit in Oklahoma and the owner of a restaurant/movie chain filed suit in Illinois. Policyholders in these lawsuits are seeking a ruling that they are entitled to coverage for losses sustained during their current shutdowns. A review of the policies at issues underscores the point made above – the outcomes in these suits and others may not all be the same because different policies are at issue.
Nonetheless, there are some overall issues to consider. While the scope of business shutdowns is unprecedented, we do have similar experiences as a guide, albeit on a smaller scale, that may indicate how the current COVID-19 business interruption claims may play out.
The threshold issue will be whether the insureds can prove that their business losses are caused by “physical damage to property,” which is the standard language in many business interruption policies. While the concept of causation focuses on assigning blame for an accident in some legal contexts, it is important to realize that in the insurance context the issue of causation is different.
In insurance, the concept of causation addresses whether a particular loss triggers coverage, not who is responsible for causing the loss. In this regard, we can replace the word “causation” with “trigger.” So, the question with the COVID-19 losses becomes, can these policyholders prove that their business interruption losses were triggered by physical damage to property akin to the fire loss damage mentioned above?
A series of cases from Minnesota demonstrates how the COVID-19 business interruption claims might be resolved.
Where there is direct physical loss to property, such as contaminated oats that could not be sold or a building rendered useless because of asbestos contamination, the courts have found that business interruption coverage was triggered. That is, these losses fit the definition of direct physical loss to property. General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W. 2d 147 (Minn. Ct. App. 2001); Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W. 2d 296, 300 (Minn. Ct. App. 1997).
But, where an earthquake caused a power loss in two Taiwanese factories, and as a result, those factories could not supply products to the Minnesota insured, the court found that the outages caused no injury to the Taiwanese factories other than a shutdown of manufacturing operations, and that this did not constitute “direct physical loss or damage.” Pentair, Inc. v. Am. Guar. & Liab. Ins. Co., 400. F.3d 613 (8th Cir. 2005).
More recently, a federal appellate court considered a claim related to mad cow disease. Source Food was a company that sold products containing beef tallow. The USDA prohibited the importation of the tallow from Canada in 2003 after a cow in Canada tested positive for mad cow disease. The border was closed to Source Food’s sole supplier of beef product in Canada. There was no evidence that the beef product specifically destined for Source Foods was contaminated by mad cow disease, but after the border was closed to the importation of beef products, Source Food was unable to fill orders and lost business as a result. Source Food submitted a business interruption claim. It argued that the closing of the border caused direct physical loss to its beef product because the beef product was treated as though it were physically contaminated by mad cow disease and lost its function. But, the court held that to characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word “physical” meaningless. Additionally, the policy’s use of the word “to” in the term “direct physical loss to property” was significant. The court explained that the policy did not cover loss “of” property, it covered loss “to” property. As a result, the cause of Source Food’s business interruption was the government shutdown of the border, not direct physical loss to its property. Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006).
What About the Current Claims?
Here, are the business interruptions related to COVID-19 the direct result of the government restrictions on businesses or are they due to the physical loss to their property? Under the reasoning of the Source Food case, much of the current business interruption claims would seem not to trigger the standard business interruption coverage in a commercial business interruption policy or BOP. As cautioned above, this is not a universal outcome under all policies. For example, an all-risk policy would generally not distinguish between business interruption losses due to government action or direct physical loss because all-risk policies cover all losses except those specifically excluded. While it is possible that an all-risk policy could specifically exclude losses due to civil authority orders, that is not a standard exclusion in all-risk policies.
With regard to business interruption policy exclusions, there are exclusions to consider even if a policyholder can meet its burden to trigger coverage under the standard business interruption policy. For example, some policies have an exclusion that precludes coverage for losses that result from mold, fungi or bacteria. However, because COVID-19 is a virus, that exclusion may not apply. But, other policies have exclusions for viruses, diseases or pandemics. That type of exclusion appears problematic for policyholders, even those who satisfy the initial question of causation/trigger.
The result may not be all-or-nothing. Might claims be partially covered? It is possible. For example, if a restaurant were shut down because it had been contaminated by COVID-19 and needed to be cleaned and closed for a two-week period to ensure no lingering virus remained, that period of shutdown might be considered direct loss to property even though the shut-down period after the cleaning period was not covered because the following shutdown period was attributable to a government order. Likewise, there may be a different analysis applied to some business interruption claims that result from supply chain impacts. However, claims related to supply chain disruptions are beyond the scope of this article.
Legislation and Duties of Insureds
It is notable that legislators in several states recently proposed bills that would retroactively void the exclusions that would apply to COVID-19 business interruption claims. Although well-intentioned, these bills are deeply troubling because, among other things, they could severely impact the financial stability of the insurance market, which took in premiums based on such claims being excluded. And, because the legislation would not help the 60 percent of businesses that do not purchase business interruption coverage, the risk of crippling the insurance market is even more questionable. Moreover, these bills would address only the exclusions and do nothing to impact the initial question of whether policyholders can trigger coverage.
Nevertheless, if a policyholder believes it may have a claim under its insurance policy(ies), it should provide prompt notice to its insurer(s) so that it does not risk a denial based on late notice. Likewise, once the claim has been made, it is essential that the insured cooperate with the insurer, including providing timely proof of loss.
Michael Menapace is a Triple-I Non-Resident Scholar, a partner at Wiggin and Dana LLP, and a professor of Insurance Law at the Quinnipiac University School of Law.