Todd S. Page
Member, Stoll Keenon Ogden, PLLC
As a result of COVID-19 concerns, many businesses are experiencing reduced hours of operation, temporary closures, and disruptions of global supply chains and sales. This has resulted and may continue to result in a significant loss of income and additional business expense for those businesses. Affected businesses should consider whether they have insurance policies in place that could provide business interruption and/or contingent business interruption coverage. Whether such business interruption claims are covered will depend on the terms and conditions of the particular insurance policy procured by the business as well as the circumstances of the loss.
BUSINESS INTERRUPTION INSURANCE
Business interruption coverage protects insureds against economic losses resulting from a business’s loss of revenue because the business cannot use its insured property damaged by a covered peril. Business interruption typically indemnifies for that loss of revenue sustained by the business interruption and the continuing normal operating expenses incurred during the time required to restore the damaged property.
While policy language may vary, standard business interruption policies typically require: (1) physical damage, (2) to insured property, (3) caused by a covered peril, (4) resulting in quantifiable business interruption loss, (5) during the period of time it takes to restore the damaged property.
Designated Peril Requirement
Business interruption coverage is designed to assist policyholders that suffer financial losses in their operations, generally arising from a designated cause such as fire or earthquake. If the insurance policy requires a designated cause of loss, but the loss does not qualify, coverage for business interruption will generally not be available. A business’s policies should be carefully examined to determine whether the designated peril requirement will preclude a business interruption claim.
Direct Physical Loss
Commercial property policies frequently require “direct physical loss” to the property and proof of causation. In the event of a claim for coronavirus-related business interruption, a business may need to determine whether this “physical loss” requirement has been met. In particular, where a business has been closed as part of a mandatory or voluntary closure − but is otherwise still habitable and uncontaminated – the insurer may take the position that the business has not suffered a direct physical loss since infectious diseases arising from human-to-human transmission generally will not qualify as property damage. In addition, “direct physical loss” will generally be construed to exclude consequential or resulting economic loss. In other words, even if coverage applies, it may be limited to actual physical loss and may not extend to lost business income or expense.
Conversely, if business property has become physically contaminated and uninhabitable due to coronavirus, the business may be able to claim that a direct physical loss has occurred. For example, if a person is infected via contact with tangible property, the contamination of physical property may qualify as direct physical loss to property. However, measures taken by a business to protect against future contamination, or shutdown due to fear of contamination, may not qualify as direct physical loss to property.
Each potential claim should be evaluated based on the specific facts applicable to that claim.
Contingent Business Interruption
Contingent business interruption coverage protects an insured from economic losses sustained due to damage to the property of an entity upon whom the insured depends for its business. For example, the coverage might apply when the business of a supplier or customer has been affected. The terms of this coverage will vary, and losses may be limited to damage to a direct supplier’s property or damage to the property of indirect suppliers.
Other policies may provide contingent business interruption coverage arising from disruptions with a supplier or customer, while still requiring that the underlying cause fall within a designated cause of loss and arise from direct physical loss to property − similar to the policyholder’s own coverage for a first-party loss. For businesses dependent on supply chain production, contingent business interruption coverage often provides coverage when a supplier suffers a direct physical loss to its property that impairs its ability to provide delivery of goods or materials. Insureds in the manufacturing, hospitality and health care businesses are some of the more common policyholders for this product line.
Notably, many contingent business interruption insurers require that affected suppliers be identified or scheduled in the insured’s policy in order for coverage to exist. Contingent business interruption policies may also include the same exclusions found in a standard form first-party policy.
Specialized Business Interruption
While traditional policies may not cover economic losses arising from the suspension of operations due to a health crisis or pandemic, the insurance industry has made various specialized products available, and business insurance policies should be reviewed closely to determine if any of these coverages have been procured.
Hospitality and Health Care − for Communicable and Infectious Diseases
The insurance industry offers specialized coverage arising from the shutdown of operations, in some circumstances without requiring physical loss to property. These policies or policy endorsements primarily focus on insureds in the business of health care and hospitality and typically extend insurance coverage for business interruption losses caused by “communicable or infectious diseases.”
Pandemic-Specific Coverage or Exclusions
Viruses and disease are typically not an insured peril unless added by endorsement. Further, viruses and disease may be excluded expressly. Standard business interruption policies typically include an endorsement excluding viruses and/or epidemics. For example, in response to the Ebola crisis, several insurers expressly excluded coverage for Ebola-related claims. However, in response to past epidemics, specialty insurance has been offered. For example, in response to the Ebola epidemic, specialty brokers offered “Pandemic Disease Business Interruption Insurance” to cover loss of income arising from government-mandated closure of healthcare facilities and diminished revenue resulting from a quarantine. Other insurers have offered specific business interruption coverage to facilities such as hospitals, hotels, airports, shopping centers, restaurants, theaters and gyms or any other business that might be forced to shut its doors because of an Ebola outbreak.
Civil Authority Coverage
Some Commercial property policies afford coverage for losses resulting from the forced closure of property by civil authority. This coverage may arise when an insured cannot access its property because of a government order resulting from physical damage to adjacent property. The scope and limitations of business interruption coverage under such endorsements vary and can be issued pursuant to an insurer’s standard form endorsement, and they can vary based on whether a “direct physical loss” will be required. Insurers also may issue Civil Authority Coverage on a manuscript basis (custom designed for a particular insured), addressing specific needs based on expenses, geography, disease, calendar year, voluntary or mandatory orders, direct physical loss, a designated risk or other criteria.
Civil authority coverage usually requires physical damage to property. If the policy requires physical damage to adjacent property and the business cannot establish a causal connection between that physical damage and the closure order, coverage for this claim is unlikely.
Causation and Financial Losses
Business interruption losses must be caused by a covered peril. In addition, losses may arise from multiple causes — covered and uncovered. Whether there is coverage for a combination of covered and uncovered causes will be based on the policy language and the jurisdiction’s law regarding concurrent causes.
Further, proof of financial losses can be complex, similar to proving lost profits damages in a commercial case. Causation and losses must be well documented and mitigation efforts should be made where possible.
All of this highlights the importance of examining the particular policies that have been issued to a business, so it can determine whether any of the business losses are covered by its insurers.
Stoll Keenon Ogden understands that these are trying times for our clients and our country. Our firm operations have continued uninterrupted and our attorneys are equipped to serve as we always have – for over 120 years.
If you would like to discuss insurance issues as they impact your business, or simply have us review your insurance policies to provide guidance about possible coverage for your business losses, or any other important matters, please contact your trusted SKO professional.