By Jeff Dunsavage
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Whether business interruption coverage in property policies applies to COVID-19-related losses has become one of the dominant insurance debates during this pandemic. Lawsuits have been filed – some even before insurers have denied a claim – seeking to establish that policyholders are entitled to coverage for losses sustained during the current shutdowns.
The debate often focuses on a simple phrase in the insurance policy: “direct physical loss or damage.” Business interruption coverage can apply to losses stemming from direct physical loss or damage. Losses that didn’t come from direct physical damages aren’t covered.
“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 in a typical claim, where, say, a fire destroyed the interior of a building or wind damaged windows and furniture.
The virus, on the other hand, leaves no visible imprint. Left alone, it can’t survive long and, after it has perished, whatever it was attached to is as good as before. Even if some remediation is needed – like cleaning metal surfaces – insurers might argue that this is no different from cleaning dirt off a surface. They cite cases in which judges have ruled there’s no physical damage from mold if the mold can be cleaned off.
Departing from common sense
Others depart from this common-sense, legally recognized definition. Some plaintiffs’ attorneys argue that if coronavirus is not direct physical damage then insurers would not have created an exclusion for viruses in the first place. Many insurers added exclusions for losses from viruses and communicable diseases after the SARS outbreak in 2003.
Policy language, Menapace says, controls whether COVID-19 interruptions are covered. Some policies have standard terms and exclusions, some provide “all-risk” coverage – covering loss arising from any fortuitous cause except those specifically excluded – and others are variations on these types.
“The threshold issue will be whether the insureds can prove their business losses are caused by ‘physical damage to property’,” he writes.
In past cases, where there is direct physical loss to property – such as contaminated food that couldn’t be sold or a building rendered useless by asbestos contamination – courts have found business interruption coverage was triggered. But when an earthquake caused a power loss in two factories, courts found the only injury was a shutdown of manufacturing operations that didn’t constitute “direct physical loss or damage.”
What About Current Claims?
Are business interruptions related to COVID-19 the result of the government restrictions, or are they due to the physical loss to their property? Menapace writes that many of the current claims would seem not to trigger the standard coverage in a commercial business interruption policy, but he cautions that this might not always be the case.
A true “all-risk policy,” he writes, “generally would 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.”
But most commercial property policies aren’t true “all-risk policies”; instead, they typically cover business interruption losses “caused by direct physical damage to property” at or near the insured premises.
“That will be difficult burden for policyholders to meet,” Menapace says.
Some policies exclude coverage for losses resulting from mold, fungi, or bacteria. Because COVID-19 is a virus, that exclusion might not apply. Other policies exclude viruses, diseases, or pandemics.
“If a policyholder believes it may have a claim,” Menapace advises, “it should provide prompt notice to its insurer(s) so 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.”
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