Will Business Interruption Insurance Protect Against Losses Caused by COVID-19?Print PDF
As the COVID-19 pandemic increasingly affects businesses across the United States, the question whether business interruption insurance will cover economic losses felt by the business community has arisen. This advisory addresses the general nature of this coverage and whether it could insure against business losses arising from the spread of the virus.
What is Business Interruption Insurance?
Many commercial property insurance policies contain a business interruption component. This coverage generally protects against a loss of business income sustained because of a suspension of business operations caused by an external event. At first blush, this would seem to be a promising avenue to recover economic losses caused by the COVID-19 pandemic. There are several critical terms and concepts, however, that could limit or even eliminate coverage.
Direct Physical Loss Requirement
Typically, provisions covering business interruption losses are triggered when the insured suffers “direct physical loss of or damage to” the insured property. A classic case exists when severe structural damage from a hurricane (or similar event) causes a brick-and-mortar facility to close.
Some courts, however, have held that intangible conditions—such as gases, fumes, and bacteria, when they render a building uninhabitable—constitute direct physical loss of or damage to property. For example, Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am. sets the pace. No. 2:12-cv-04418 (D.N.J. Nov. 25, 2014). In that case, the record showed that ammonia was released throughout the plaintiff’s facility, preventing access to the building. The plaintiff sought coverage, although only a “direct physical loss” would trigger the business interruption provision. The court held for the plaintiff, finding that “property can sustain physical damage without experiencing structural alteration.” Id. The First Circuit reached a similar conclusion in Essex v. BloomSouth Flooring Corp. 562 F.3d 399, 406 (1st Cir. 2009). Applying Massachusetts law, the First Circuit ruled that an unpleasant odor constituted physical damage because it rendered the property unusable. Id. at 406; see also Matzner v. Seaco Ins. Co., No. 96-0498-B, 1998 WL 566658 (Mass. Super. Aug. 12, 1998) (finding that because “direct physical loss” was ambiguous, carbon monoxide exposure fell under the definition).
By contrast, some courts have strictly construed the key language, holding that insured’s property must suffer material structural harm. See, e.g., Crestview Country Club, Inc v. St. Paul Guardian Ins. Co., 321 F. Supp. 2d 260, 264 (D. Mass. 2004) (finding that “an intangible loss in value of a golf course because of a change in its slope rating, difficulty, etc.” was not a “physical loss,” reasoning that “‘physical’ must be given its plain meaning—e.g., ‘material’ . . . ”); Welch v. CNA Ins. Cos., 1996 WL 1353314, at *3 (Mass. Super. Aug. 13, 1996) (finding that “loss in value or the inability to sell a piece of land” was not “direct physical loss”); Arbeiter v. Cambridge Mut. Fire Ins. Co., 1996 WL 1250616, at *1 (Mass. Super. Mar. 15, 1996) (finding that diminution in value to house because passive ventilation system used to dissipate oil fumes was not “physical loss”).
The bottom line: even before the COVID-19 pandemic hit, what constituted a physical loss was not free from controversy. This controversy will only intensify, we anticipate, as insureds and insurers battle over whether COVID-19 related losses trigger business interruption coverage.
Many policies also provide coverage for business-income loss where the insured cannot gain access to its property because of the actions of civil authorities. Here, as always, the precise language of the policy is critical. One common policy form contains language providing that access to the area immediately surrounding the “damaged building” must be prohibited by the civil authority because of damage within one mile of that building. The form also requires that the civil authority’s action must be taken “in response to dangerous physical conditions resulting from” the underlying covered damage. This language incorporates the physical-damage requirement discussed above and, in many instances, may not provide a separate grant of coverage.
Moreover, how the language of this coverage operates with respect to the COVID-19 pandemic will be subject to different interpretations. The policy language contemplates a situation in which a hurricane, fire, or similar event damages a facility, and the authorities close that building and related buildings within the stated radius, with the effect the business loses money. But was this language intended to reach a situation in which the presence of the virus is itself the damage—and hence the damage would be universal throughout a given jurisdiction? Would a broad interpretation nullify restrictions in the policy language? One can expect that insurers and policyholders will reach diametrically opposite conclusions on these questions.
Many property damage policies include an exclusion for damage caused by contaminants, including viruses. These exclusions have been prevalent since the SARS outbreak in 2003. In one form, this provision excludes coverage for “loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease.” Policyholders can expect that insurers will assert this exclusion as to COVID-19 claims.
Given the requirements for coverage discussed above, some state legislatures are considering bills that would retroactively expand the scope of coverage under business interruption policies. For example, in Massachusetts, Senator James B. Eldridge recently filed Massachusetts Senate Bill 2888, “An Act Concerning Business Interruption Insurance.” If enacted, the bill would retroactively expand the scope of coverage under business interruption policies in Massachusetts.
The bill would sweep away both hurdles to coverage discussed above—the “physical loss” hurdle discussed above, as well as any virus exclusion. “[N]o insurer in the commonwealth,” the proposed legislation states, could “deny a claim for . . . business interruption on account of (i) COVID-19 being a virus even if the relevant insurance policy excludes losses resulting from viruses; or (ii) there being no physical damage to the property of the insured or to any other relevant property.” The bill would apply to policies sold to businesses in Massachusetts with 150 or fewer full-time employees.
Legislation of this kind would no doubt alter the legal battles around coverage for losses caused by the pandemic. But whether the legislation will pass remains to be seen. And whether the legislation could survive challenges made by insurers—including on constitutional grounds—also remains to be seen.
While there are several open questions around how business interruption policies will be interpreted, legal battles are likely to result from the enormous losses already sustained by businesses across the country and world. The precise language of the policies in place, future legislative action, and business owners’ and the insurance industries’ responses to these losses will all shape the answers to these questions in the coming months and years.
This advisory was prepared by Sarah Kelly, Steve Brake, and Eric Magnuson in Nutter’s Litigation Department. For more information, please contact Sarah, Steve, Eric, or your Nutter attorney at 617.439.2000.
This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.