By Christine G. Barlow, CPCU
Insurance property policies generally have a few things in common. One is that they provide coverage for some form of physical damage; it may be listed as direct physical damage, direct physical loss or damage, loss or damage caused by a particular peril, direct physical loss to property or similar phrasing. It is clear that actual physical damage must occur. But what exactly is damage? The policies do not include damage as a defined term. While it seems straightforward, circumstances arise, such as COVID-19, that brings the question to the forefront.
Currently, COVID-19 has swept the world and is now working its way through the United States, where governors and other officials are ordering the closings of schools, restaurants, bars, gyms, movie theaters, and other businesses. Many small businesses will struggle to survive without their normal cash flow. Therefore, they look to their insurance policy for coverage. But what is physical damage?
When policies don’t define a term, courts generally refer to a standard dictionary, as that is what is available to most insureds. Merriam Webster defines damage as “loss or harm resulting from injury to person, property or reputation.” Since this is not definitive, we look at the definitions of loss and harm. Loss is defined as “destruction, ruin,” and harm is defined as “physical or mental damage.”
The virus does not harm physical property. The virus may be cleaned off like any other germs or bacteria that are normally removed with general cleaning, albeit it should be cleaned daily as the virus particles can reportedly stay on material or property for up to nine days. The property does not need to be replaced or repaired, just cleaned as advised by the CDC.
Insurance is governed on the principle of indemnity; that if the property is damaged, the insured suffers a financial loss. Insurance will restore the insured to his pre-loss condition by repairing the property or paying for replacement property if the property is irreparable.
The commercial property Building and Personal Property Coverage Form provides coverage for “direct physical loss of or damage to covered property.” Covered property is the building; building personal property and personal property of others as described in the policy includes fixtures, permanently installed equipment and machinery, furniture, stock, other personal property owned by the insured and used in the business, the property of others in the insured’s care, custody or control, and other property. The policy relies on separate causes of loss forms to determine what types of losses are covered and excluded. The forms are basic, broad and special, with basic and broad being named perils and special being open perils.
The cause of loss forms all provide some additional coverage for fungus, wet rot, dry rot or bacteria from certain causes of loss. However, a virus and bacteria are two different things, so coverage does not apply here. The broad form also excludes discharge, dispersal, seepage of pollutants — and pollutants is a defined term in the CP 00 10, Building and Personal Property Coverage Form. The policy defines pollutants as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed”. To contaminate something is to soil, stain, corrupt or infect by contact or association. Since the virus infects people, it can be considered to be a pollutant.
The pollution exclusion excludes coverage for the discharge, dispersal, seepage, migration, release or escape of pollutants unless such discharge is caused by a ”specified cause of loss.” The “specified causes of loss” are fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot, civil commotion, vandalism, leakage from fire extinguishing equipment, sinkhole collapse, volcanic action, falling objects, weight of snow, ice or sleet or water damage.
The pollution exclusion does not provide coverage for the discharge, dispersal, or other types of release of the pollutant. If an employee or a customer enters the building, is that a discharge, dispersal, or other releases? Merriam Webster defines discharge as “relieve of a charge, load or burden, to unload, release from an obligation, to let or put off as discharging passengers.” Dispersal is the act of dispersing, the process or result of the spreading of organisms from one place to another. To disperse is to cause to become spread widely. Is an employee or customer dispersing the virus when they enter the building, especially if they do not know they’re carrying the virus? ISO has a mandatory virus and bacteria exclusion, but what about carriers not using ISO forms? What about carriers who have adopted parts of ISO forms, such as the business interruption language, but have not adopted the rest and did not adopt the mandatory endorsement?
The issue at hand with the virus is business interruption and action of civil authority. Is there coverage when local authorities require bars, restaurants, gyms and other establishments to close because of the chances of spreading the virus? For this, we need to look at an endorsement; for the sake of discussion, we are looking at the Business Income (and Extra Expense) Coverage Form CP 00 30.
Coverage is provided for the actual loss of business income due to the necessary suspension of business operations during the period of restoration. The period of restoration must be due to direct physical loss of or damage to covered property. Also covered is loss triggered by a civil authority prohibiting access to the insured property because of damage to other property, but two conditions must apply. That other property must be within one mile of the insured property, and the action of the civil authority is taken in response to dangerous physical conditions resulting from the loss, continuation of the covered cause of loss that caused the damage, or to allow the authority unimpeded access to the property.
So herein lies the rub. Coverage is provided only when a property has been physically damaged. COVID-19 does not cause physical damage to property. Even if it is considered physical damage, then you have the pollution exclusion to deal with, and the virus is a pollutant. Pollutants are excluded when they are dispersed, discharged, seep, migrate, or otherwise escape. So it comes down to whether or not an individual can be considered to be dispersing, discharging, or otherwise releasing the virus, action that would trigger the pollution exclusion.
Recently a physician from San Francisco attended a conference with hundreds of other physicians in New York. Upon returning home, he felt ill and was tested for the virus, which came back with positive results. Those people attending the conference were possibly exposed to the virus. Does this count as dispersing the virus, even though unintentionally? It seems so.
This is different from closing businesses because of the threat of exposure or spread of the virus; a threat is not physical damage, and therefore there is no coverage.
It’s a difficult call to make and will vary with each situation. With the current environment of the pandemic, carriers may fall back on the exclusion only to have courts or legislatures override the policy language. Time will tell.
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