Insurers must be proactive in reviewing policies to identify the potential exposure arising out of the COVID-19 outbreak. Multiple lines of coverage that exist within a single policy can make it difficult to analyze coverage. Even though some policies provide coverage for business interruption, which sounds like it would apply to situations where a business has stopped operating, it does not mean that the insured is automatically entitled to coverage. The following are examples and summaries of prior decisions which the courts will undoubtedly turn to when faced with insurance coverage disputes.
Most commercial property policies require that the loss in business revenue be caused by the physical loss, damage or destruction of property. Courts have generally interpreted the adjective “physical,” which modifies the nouns “loss” or “damage” in property insurance policies, as requiring that the loss or damage be “of or relating to that which is material.” The requirement that the loss or damage be “physical” therefore has been found to preclude coverage for losses that are solely intangible such as an economic loss unaccompanied by a distinct physical alteration to property. However, physical damage unnoticeable to the naked eye can still trigger coverage under business interruption policies.
Courts have found contamination of property by vapors, bacteria, or other foreign substances constitutes “physical” loss when it renders the property essentially unusable. In Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo. 1968), a church building's saturation with gasoline vapors constituted a “direct physical loss” when the building could no longer be occupied or used. In Motorists Mutual Ins. Co. v. Hardinger, bacteria contamination of a home's water supply constituted a “direct physical loss” when it rendered the home uninhabitable. 131 Fed.Appx. 823, 825-27 (3d Cir. 2005). In Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002), the Third Circuit similarly found that physical contamination of a building with asbestos rendering it useless would constitute physical loss. These cases demonstrate that physical loss or damage generally requires some sort of physical invasion, however minor.
Mere loss of use which does not render insured property unusable or uninhabitable has been held insufficient to trigger coverage. For example, in Source Food Technology v. United States Fidelity and Guaranty Co., 465 F.3d 834, 835 (8th Cir. 2006), the court found no coverage under a policy requiring “direct physical loss to property” when the property was meat which was not allowed to cross the border into the United States and was thus treated as unusable but in fact suffered no spoilage or contamination. Similarly, in Phoenix Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, (S.D. Iowa 2015), the court found no coverage when the claimed cause of the insured’s loss of use was the mere threat of flood.
Following the 9/11 attacks, courts distinguished between business interruption losses which resulted from physical damage to the insured location versus those which resulted from preventive measures. In United Airlines, Inc. v. Ins. Co. of the State of Pa., 439 F.3d 128, 129 (2d Cir. 2006), United Air Lines, Inc. filed a declaratory judgment action seeking business interruption insurance coverage for its system-wide loss of revenue resulting from the terrorist attacks at the World Trade Center and the Pentagon, including losses related to the total shutdown of the United States aviation system by the Federal Aviation Administration. There was no dispute among the parties that United was entitled to indemnity for any loss of gross earnings resulting from the destruction of the United ticket counter located within the World Trade Center. However, the court determined United was not entitled to recover the system-wide loss of gross earnings resulting from the FAA’s ground stop order or the denial of access to United’s airport facilities because these measures were taken to prevent further terrorist attacks, and not as a result of physical damage to an insured location.
Courts have similarly declined to find business interruption coverage applicable to losses caused by preventative measures taken in relation to natural disasters. Following Superstorm Sandy, numerous courts declined to find coverage for business loss occasioned by the power supply company’s preemptive decision to shut off power to several utility service networks in order to safeguard its own system and equipment. See e.g. Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 333—34 (S.D.N.Y. 2014). Despite the preemptive measures, Superstorm Sandy caused major flooding which rendered the utility service networks inoperable. Coverage was deemed available for business interruption losses occurring during and after Superstorm Sandy because the interruption in electrical service was the result of a "direct physical loss or damage" to the power supply service. See e.g. Johnson Gallagher Magliery, LLC v. Charter Oak Fire Ins. Co., 2014 U.S. Dist. LEXIS 35548, (S.D.N.Y. Mar. 18, 2014).
It is expected that similar coverage disputes will arise as businesses submit COVID-19 related claims. Businesses forced to close as a result of an actual exposure will have a much stronger argument for coverage than businesses which closed simply to avoid an exposure from happening or to prevent spread of the disease. Ultimately, whether physical damage can be established in order to trigger business interruption coverage will depend on the specific policy language at issue and the facts of the claim.
Even without physical damage to the insured property, coverage for business interruption may still be available pursuant to “civil authority” provisions. The general rule is that this coverage is intended to apply when a civil authority (e.g., state, local or federal governmental entity) prohibits access to an insured’s premises due to direct physical loss of or damage to property other than at the insured’s premises, from a covered cause of loss.
Many policies require a nexus between the issuance of the civil authority order and existing damage or destruction to property in order to trigger coverage. As a result, courts have generally held that civil authority orders issued prior to actual, physical damage of an insured property do not trigger business interruption coverage. In South Texas Medical Clinics, PA v. CNA Financial Corp., Hurricane Rita was predicted to hit Wharton County, Texas, which issued a mandatory evacuation order that the insured obeyed. Before the order was issued, Rita had made landfall and damaged property in Florida. Although property in Wharton County suffered no actual damage, the insured suffered business losses due to its evacuation. Because the record in South Texas showed that the official who issued the evacuation order did so because Rita was threatening the Texas coast, not because Rita had already caused property damage in Florida, the court concluded that the necessary nexus between the damage and issuance of the order had not been established. By contrast, in Assurance Co. of Am. v. BBB Serv. Co., 265 Ga. App. 35, 593 S.E.2d 7, 7-9 (2003), coverage was found where orders for evacuation in anticipation of Hurricane Floyd were based on “fact that the storm had been causing damage in its path.”
Civil authority provisions usually require prohibition of access to the insured premises. Courts have been reluctant to find coverage where the civil authority order had only the indirect effect of restricting or hampering access to the business premises. For example, in Southern Hospitality, Inc. v. Zurich American Ins., 393 F.3d 1137 (10th Cir. 2004), certain insured hotel operators brought suit against their insurer for denying their claims for loss of business income sustained when customers of their hotels canceled visits due to cancellation of airline flights by the Federal Aviation Administration ("FAA") in the wake of the 9/11 attack. The court denied coverage because even though the order stopped the flying of airplanes, it did not “prohibit access” to hotel operations. Likewise, in Kean, Miller, Hawthorne, D'Armond McCowan & Jarman, L.L.P. v. Nat'l Fire Ins. Co., 2007 U.S. Dist. LEXIS 64849, 2007 WL 2489711 (M.D. La. 2007), coverage was not available for business losses suffered as a result of the governor of Louisiana and other authorities “asking” and “encouraging” residents to stay off streets immediately prior to Hurricane Katrina coming ashore because there was no evidence its employees, or any other residents of Baton Rouge, were specifically prohibited from traveling to and entering its business premises.
As the COVID-19 pandemic continues to unfold, state and local governments have issued various orders profoundly impacting the ability for businesses to operate. The civil authority orders vary by location to location and have increasingly become more restrictive. As a result, coverage determinations will have to include an analysis of the specific events in subject locale which led to the civil authority order.
The financial impact that COVID-19 has caused worldwide will certainly lead businesses to look to their insurance policies to mitigate their damages, and insurance coverage disputes will follow. Whether there is coverage under various policies will depend on the terms and conditions of each policy.
Chartwell Law’s insurance coverage attorneys remain committed to assisting their clients in these uncertain times. Should you require assistance in handling COVID-19 claims, please do not hesitate to contact us.