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Business Interruption Insurance Coverage Challenges Triggered by COVID-19

November 17, 2021
March 18, 2020

The economic fallout of the 2019 Coronavirus (COVID-19) will be staggering. COVID-19 has disrupted supply chains, lowered consumer demand, and wrecked financial markets. Expert economists have begun predicting a global economic recession. Local governments from New York City to Los Angeles have ordered all bars, nightclubs, and restaurants to close. The National Basketball Association, Major League Baseball, National Hockey League, Broadway, and virtually all other entertainment venues have suspended operations. Innumerable conferences and trade shows have been canceled. Faced with the uncertainty of not knowing when—let alone if—they will be able to resume operations, policy holder businesses of all stripes have begun submitting business interruption claims to their insurance carriers to lessen the economic impact. Most of those claims are likely to be denied.

In order to trigger business interruption coverage, most standard policies require that there be a suspension of operations caused by “direct physical loss of or damage to property.” Most courts have interpreted that to mean that the businessowner must establish that it was forced to suspend operations because of actual, physical damage to property covered by the policy in order to trigger business interruption coverage. See e.g. Roundabout Theatre Co. v Continental Cas. Co., 302 AD2d 1 [1st Dept 2002]. Accordingly, businesses that cannot demonstrate physical damage to property would not be entitled to business interruption coverage regardless of the level of economic devastation as a result of a loss. During Superstorm Sandy, many business owners learned that painful lesson. Businesses that did not suffer direct physical damage during the storm—or during the weeks long aftermath—were not entitled to business interruption coverage. See Newman Myers Kreines Gross, P.C. v Great Northern Ins. Co., 17 F Supp 3d 323 [SD NY 2014]. Those principles would seemingly preclude coverage for business interruption claims arising out of COVID-19: the virus has not physically damaged property or rendered property unusable. We therefore expect that insurers will have a strong argument to deny coverage to businesses under standard business interruption policies.

Many policies include more comprehensive business interruption coverages, like “civil authority” coverage. Civil authority coverage is typically implicated if a governmental order prevents access to the insured premises due to physical damage occurring away from the insured premises (typically within one mile). While standard policies require there to be physical damage at the insured’s premises, civil authority coverage will cover the economic impact of physical damages occurring away from the insured’s premises. While numerous governments have already issued orders, civil authority coverage may not be a panacea for policyholders. The same obstacle that would preclude coverage under standard business interruption policies—the lack of physical damage—would also preclude coverage for civil authority coverage. Thus, an insured would have difficulty establishing the physical damage element even in the absence of a proximity requirement.

Of course, other coverage defenses may similarly preclude coverage for business interruption claims. Most policies specifically exclude “virus” as a covered cause of loss. Accordingly, even if an insured can present a convincing argument that physical damage occurred, it may be unable to demonstrate that the damage was caused by a covered peril. In addition, business interruption policies are typically triggered only where there is a complete cessation of all operations. A business that is able to perform some operations would likely not be entitled to coverage. Similarly, a business that shuts down voluntarily or as the result of social pressure, would not be either.

The continued spread of COVID-19 will undoubtedly cause a spike of insurance claims for business interruption. While each claim rises and falls on its unique set of facts and must be analyzed separately, we expect that policyholders will face significant challenges to trigger coverage for business interruption. Chartwell Law’s insurance coverage attorneys remain committed to assisting their clients in these uncertain times. Should you require assistance determining whether a submitted claim anywhere in the United States is covered, please do not hesitate to contact us.