Business Interruption Insurance
Coverage Issues in Business Insurance Policies Implicated by COVID-19
The novel 2019 coronavirus, dubbed COVID-19 by the World Health Organization, first emerged in December 2019, and reached the United States in January 2020. Since then, it has damaged and changed people and economies in the United States and across the world in a myriad of unforeseen ways. “Social distancing” has transformed from an unknown phrase to a way of life. Workers have been required to work from home indefinitely, with Zoom videoconferences replacing in-person meetings. Beyond the immediate response, the long-term consequences remain largely unknown, and will continue to evolve over time. Quarantines and lockdowns have been enacted in cities and states across the country, and in countries spanning the globe. Businesses have lost customers and revenue that may never return. As the business world copes with this new reality, insurers will be faced with novel coverage questions related to the myriad effects of the COVID-19 public health emergency on their insureds. This page briefly discusses some of the most common types of commercial insurance coverages, and whether losses relating to COVID-19 may be covered.
Business Property Coverage
The insuring clause in most commercial property policies provides coverage for direct physical loss of or damage to covered property at the insured’s premises caused by or resulting from a covered cause of loss. Business property coverage applies when an item of tangible property has been physically altered by perils like fire, wind, or flood. But when the structure of the property itself remains unchanged to the naked eye, and the insured alleges that its usefulness for its normal purposes has been destroyed or reduced, there could be disputes as to whether the loss satisfies the policy trigger.
The spread of COVID-19 presents unique coverage issues. As businesses shut their doors, either voluntarily or by government order, they may file claims under their business property policies to recover damage from their ceased or diminished operations. Devastating as COVID-19 is to people and businesses, the virus itself does not cause damage to physical property. The virus infects people, and a sick or injured employee is not covered under business property policies. Additionally, businesses that are closed or are operating at partial capacity have not suffered, and likely will not suffer, an outbreak of COVID-19. Businesses are closing to prevent the spread of the virus. While threat of the spread of the virus may be very real to the business, the business’s physical property – its equipment, inventory, and raw materials – is generally not damaged by the virus. Commercial property policies require that a loss be “physical” to be compensable. Courts applying the ordinary definition of the term have generally excluded losses that are intangible or incorporeal and preclude any claim against the property insurer when the insured merely suffers a negative economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property, as is likely to be the case with claims arising out COVID-19. As such, business property coverages may not respond to losses related to COVID-19.
Business Interruption Coverage
Business interruption coverage (“BI”) is a specific type of coverage frequently made available to insureds under a business property policy. Standard BI insurance replaces profits lost as a result of physical damage to the insured’s property or equipment. The coverage attempts to place the commercial insured in the position in which it would have been if there had been no interruption. Contingent business interruption coverage goes one step further and covers an insured against the consequences of suppliers’ problems. While the property insurance covers the cost of replacing the damaged property itself, the BI policy is intended to cover the loss of income the insured suffers while the property is damaged and out of commission.
As with commercial property insurance, most BI policies require that the interruption be caused by a physical loss to the insured’s covered property. That is, the loss of income must be tied to damage to the underlying property. By way of example, if a fire damaged a manufacturing plant, the business property coverage covers the cost of replacing the equipment itself and the BI coverage covers the manufacturer’s lost income until the equipment is replaced and the manufacturer has resumed operations. Courts are in accord that where there is no physical loss to the insured’s property – including losses to the property of a third party which in turn causes a disruption in insured’s operations or supply chain – there generally is no coverage under a BI policy.
Thousands of businesses have suffered, and will continue to suffer, loss of income because of COVID-19. COVID-19 has decreased the general market demand for many goods and services. Whether a business may recover under its BI coverage for losses related to COVID-19– losses which likely do not have any accompanying physical damage – may also depend on the jurisdiction in which the business is physically located.
American businesses are understandably concerned about the potential financial impact the continued global spread of COVID-19 may have on their operations in the wake of more than 3 Million declared cases of the disease in 210 countries globally, with more than 208,000 people having lost their lives so far as of the end of April 2020. As a result, including COVID-19 related losses in business interruption coverage is key.
In many commercial property insurance policies, business interruption coverage is triggered when the policyholder sustains ‘direct physical loss of or damage to’ insured property. In addition, many commercial property insurance policies provide coverage for business income losses sustained when a civil authority prohibits or impairs access to the policyholder’s premises.
Civil Authority Order Coverage
In addition, or in the alternative to BI coverage, a commercial property policy may include coverage for losses caused when a civil governmental authority impairs or prohibits access to the business’ premises (“civil authority order”). At first blush, a quarantine or stay-at-home order may appear to fall within this definition. Like the coverages above, some civil authority order policies may require that the restriction arise out of physical damage, though not necessarily to the insured’s property. Other policies may not impose a physical damage requirement. If the policy requires physical damage, and the insured cannot show a connection between the government order and that physical damage, there may not be coverage.
While we believe strongly in our negotiation skills, sometimes the other side is going to dig in and want to fight. If that happens, you have an experienced team working for you. We have handled a number of complex litigation matters in Texas and around the nation. Our attorneys will not hesitate to go to court if it is the only way to get you fair compensation.
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To meet with one of our attorneys to discuss your specific business interruption issue, call 832-835-0393 or send us an email. We will provide you with a thorough analysis and tell you exactly what we can do to help. We offer free consultations, and there are no attorney’s fees unless we are able to recover compensation for you. Se habla español.
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