The COVID-19 pandemic has caused a shutdown of numerous business throughout California for an unspecified period of time. This will lead to millions, possibly billions, of dollars in lost revenue on a state-wide basis. Policyholders will need to consider whether they may have insurance that will cover some or all of such losses.
The short answer is that likely depends upon the policy language, and potentially on the facts of the claim. Business interruption insurance typically covers a loss of income suffered by the insured due to damage to property that is covered under the policy, as long as the cause of the property damage is a “covered cause of loss,” such as a fire or windstorm. In addition to coverage for the damaged property, there is coverage for business losses directly or indirectly caused by that damage, such as the loss of profits that occur before business operations can be restored. The length of the “period of restoration” over which lost profits would be covered is usually specified in the policy. Of course, the COVID-19 pandemic and other pandemics are not typically enumerated as “covered perils” in first party property insurance policies (although it is worth noting that certain specialized insurance policies and endorsements added to standard property insurance policies – notably those issued in the hospitality and health care industries – expressly provide insurance coverage for losses caused by “communicable or infectious diseases” without requiring physical damage to insured property), but is it still possible that coverage exists.
There is a specific type of business interruption coverage called “contingent business interruption” coverage. This type of coverage is a specialized form of business interruption coverage which provides insurance for losses resulting from disruptions to a business’s customers or suppliers, as long as the underlying cause of damage to the customer or supplier is of the type covered by the insured business owner’s own property policy. An example is where the insured has its business operations interrupted when a parts supplier must shut down its business due to property damage at said supplier’s factory. Courts in many jurisdictions have held that contamination and other incidents that render the property uninhabitable or otherwise unfit for intended use constitute “property damage” within the meaning of commercial property policies. The argument would be that if a viral infection in the insured’s workforce causes the insured to close its doors and suspend operations, the insured would arguably be covered for its resulting loss if it has contingent business interruption insurance. For example, such an argument could be made where a window supplier does not deliver windows to a construction project because it shut down operations due to a pandemic. That said, most businesses do not carry “contingent business interruption” coverage, and just carry the “standard” business interruption coverage.
Under standard commercial property policies that do not afford coverage for “contingent business interruption,” the most likely argument for coverage for business income losses/business interruption will be under the “civil authority” peril. For example, in the event that a federal, state or local government authority limits access to or from areas where active transmission of infectious disease has been identified, “civil authority” coverage may respond with insurance for the income losses of the affected business. It is likely that most of the upcoming insurance coverage litigation over COVID-19 business interruption claims will be under the “civil authority” coverage because (1) governmental entities are ordering business shutdowns, and (2) this type of coverage typically exists under standard business interruption policies.
There are several potential policy interpretation questions under the “civil authority” coverage that policyholders and carriers will have to consider when looking at whether COVID-19 triggers business interruption coverage. First, many standard first party premises liability policies expressly require a physical loss or damage to property (i.e. “property damage”) to trigger coverage under the civil authority peril. Cases in California have looked at this issue, and have held that typical business interruption policy language requires that the suspension of the business activities “must be caused by direct physical loss or damage to property at the premises described in the Declarations… caused by or resulting from any Covered Cause of Loss.” Buxbaum v. Aetna Life & Casualty Co., 103 Cal. App. 4th 434, 443 (2002). While civil authority shutdowns meet the requirement of “caused by or resulting from a Covered Cause of Loss,” insureds will still have to show that COVID-19 exposure constitutes “direct physical loss or damage to property at the premises described in the Declarations.” One appellate court in California has explained this requirement as follows:
Clearly, this threshold is met when an item of tangible property has been “physically altered” by perils such as fire or water. However, serious questions crop up in instances when the structure of the property itself is unchanged to the naked eye and the insured claims its usefulness for its normal purposes has been destroyed or reduced. That the loss needs to be “physical,” given the ordinary meaning of the term, is “widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property. MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal. App. 4th 766, 778-779 (2010).
Second, many standard commercial property policies with business interruption insurance coverage policies typically require a complete suspension of business activities, i.e. a total cessation of business activities. Buxbaum, 103 Cal. App. 4th at 451. Query whether a restaurant is entitled to coverage if it is still serving “take-out,” but not serving guests inside the restaurant due to orders by the State of California or a County within California.
These issues do not have simple answers, but policyholders affected by shutdowns should be looking at their commercial property policies to see if they may have coverage.
Shareholder Timothy Earl is the chair of Sullivan Hill’s Construction and Insurance practice group. His insurance coverage practice involves representation of policyholders and insurance companies in a variety of insurance coverage disputes primarily involving property damage or bodily injury arising out of construction defect and asbestos claims. He also represents policyholders and insurers in breach contract, declaratory relief, bad faith, unlawful business practices and Insurance Code Section 11580 claims. For more information on business interruption insurance, contact Timothy Earl at email@example.com or 619-595-3279.
About Sullivan Hill:
Sullivan Hill provides full service representation to clients in a variety of industries with an emphasis in insolvency, construction disputes, insurance coverage, employment law, real estate, business disputes, civil litigation, and transactional work. The firm has offices in San Diego and Las Vegas.