As I’ve written previously, the question of whether business interruption provisions in commercial property insurance apply to COVID-19-related losses has become a major topic of debate during this pandemic. Suits have been filed seeking to establish that policyholders are entitled to coverage for such losses – even when losses associated with infectious disease are specifically excluded in the policy language.
This debate has been muddied in some circles by people confusing business interruption coverage with event cancellation insurance.
Citing the fact that the National Collegiate Athletic Association (NCAA) had its claim paid when it cancelled its annual men’s basketball tournament, as did the All England Lawn Tennis Association when it canceled its Wimbledon event, some wonder why many other businesses’ claims are being rejected.
While superficially similar, these claims couldn’t be more different from the business interruption cases currently being litigated.
Business Interruption: Physical Damage Required
Property insurance covers physical loss or damage to an insured’s property. The business interruption provisions of commercial property policies typically require a direct relationship between a physical loss or damage and the resulting lost income. The Insurance Services Office (ISO) form for commercial property coverage – the basis of many policies – specifies that any covered loss due to “necessary suspension” of operations must be caused by “direct physical loss of or damage to property at premises which are described in the Declarations.”
This is a critical point, as most business losses related to COVID-19 are due to employees and customers remaining absent, supply chain disruptions, and other factors – not to physical damage.
“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,” writes Michael Menapace, a professor of insurance law at Quinnipiac University School of Law and a Triple-I Non-Resident Scholar. “But here’s the rub. Are the business interruptions related to COVID-19 caused by physical damage to property?”
Insurers say no, arguing that “damage to property” requires structural alteration like one would find when, say, a fire destroys the interior of a building or wind damages windows. The virus leaves no visible imprint. Even if remediation is needed – like cleaning mold from metal surfaces – insurers cite cases in which judges have ruled there’s no physical damage from mold if the mold can be cleaned off.
Add to this the fact that most policies exclude coverage for losses related to infectious diseases and it’s hard to imagine U.S. courts finding in favor of the plaintiffs – particularly when pandemic insurance existed well before COVID-19 and was largely ignored by business owners and risk managers.
Event Cancellation Insurance
COVID-19 has led to the cancellation of events from weddings to business conferences to the Tokyo Summer Olympics. Individuals and businesses buy event cancellation insurance against losses resulting from a cancellation due to circumstances beyond their control, including:
- Weather or other natural events like hurricanes, tornadoes, and earthquakes, and
- Human-caused events such as labor strikes and acts of terrorism.
If a policy is an “all-cause” or otherwise unlimited policy, it could cover cancellations due to COVID-19, particularly if purchased before 2020.
Wimbledon’s organizers were among the few who bought event cancellation insurance that specifically included coverage for losses related to “communicable disease” after the 2003 SARS outbreak. They paid about £25.5 million (US$33 million) in premiums since then and are set to receive around £114 million (US$142 million) for this year’s cancelled tournament, according to GlobalData.
GlobalData said the event still faces a net loss. The total Wimbledon revenue loss is estimated at around £250 million (US$328 million).
The NCAA had a policy for its “March Madness” tournament that had to be cancelled. Its event cancellation policy covered just $270 million, even though the tournament generates more than $800 million a year. The organization reportedly was better prepared for a cancellation several years ago, when it built up savings of nearly $500 million to help mitigate the financial impact of a lost tournament.
“Then, in 2015, new leadership decided to spend more than $400 million of those savings without increasing the NCAA’s insurance coverage by following a questionable theory about the risk of saving that much money,” the Washington Post reports, citing former NCAA employees.
The availability of such coverage without exclusions for infectious disease may be limited or even more expensive in the wake of the current pandemic.