With the unprecedented COVID-19 (coronavirus) pandemic devastating cities and states throughout the United States (and the world), and all but bringing the U.S. economy to a screeching halt, business owners are searching for mechanisms to offset the devastating economic impact this virus has wreaked on them. Understandably, many are therefore asking, “Do any of my business insurance policies cover the loss caused by this virus?” The insurance industry is examining this question with equal interest. In any other time, the seemingly simple answer to this question would be an unequivocal, “No.” However, in these strange times, the more likely answer in some jurisdictions may be, “It depends.”

Determining Whether Commercial Property Policies Insure Losses Arising from COVID-19

Every insurance policy is a stand-alone document that must be read carefully and in its entirety before any determination of coverage can be made. Careful consideration of the Declarations, the Insuring Agreement, the policy Conditions, the policy Exclusions, and any endorsements to the policy must be given before a coverage determination can be made, because the specific policy language and specific facts of the claim will ultimately determine whether there is coverage under the policy. That said, there are general guiding principles that can be applied to determining whether a policyholder can reasonably expect to have insurance coverage for business interruption losses caused by the coronavirus under a commercial property insurance policy.

First, look to the insuring agreement to determine what type of commercial property insurance is at issue, i.e., named peril or all-risk? If the policy is a named peril policy, then only the perils named in the policy are covered. For example, if the policy names sinkholes, windstorm, hail, etc., and does not name viruses (or anything arguably akin to a virus), then the policy would not likely be found to include coverage for losses relating to the coronavirus. By contrast, if the policy names bacteria and viruses or only viruses, then there would be a strong likelihood that losses arising from the coronavirus would be covered under the policy assuming no policy exclusions apply. If the policy names contaminants, there may be arguments for and against coverage for losses relating to the coronavirus, depending on the definition of contaminant, if any, and the jurisdiction deciding the issue.

Unlike a named peril policy, an all-risk policy typically covers any risk of direct physical loss or damage unless specifically excluded by the policy. However, physical loss or damage typically must occur to trigger any coverage under the policy. With respect to loss arising from COVID-19, the legal issue would be whether businesses have suffered “direct physical loss or damage” to property as a result of the coronavirus. The intuitive answer to the insurance industry and those who represent insurers would likely be that there is typically is no coverage for losses arising from the coronavirus. However, in light of recent events, whether that result holds true might depend on the jurisdiction determining the issue and will certainly depend on the actual facts and circumstances of each claim, and maybe even what we continue to learn about the COVID-19 virus itself.

The most common approach to determining whether “direct physical loss or damage” occurred requires that the policyholder demonstrate physical injury or destruction to property resulting in “direct physical loss or damage” to the property, e.g., a fire at the premises. Absent a showing of something actually damaging the property, coverage under the policy would not be triggered. However, some jurisdictions have further found that “damage” that is invisible to the eye can trigger coverage under the policy, e.g., noxious fumes/gases.

In that vein, at least one policyholder in Louisiana has already filed a declaratory judgment action relating to damages caused by the closure of a restaurant due to the coronavirus. That policyholder alleged that its all-risk policy “covers all risks unless clearly and specifically excluded” and seeks coverage for business losses arising from the coronavirus on the theory that the policy at issue “does not provide any exclusion due to losses, to business or property, from a virus or global pandemic.” See Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al. (Civil District Court for the Parish of New Orleans State of Louisiana, No. 2020-02558). Recognizing that the policy at issue addressed exclusions for certain pathogens, the policyholder alleged that because the policy “only excluded losses due to biological materials such as pathogens in connection with terrorism or malicious use, thereof” it necessarily “provid[ed] coverage to other viruses or global pandemics.” In short, the policyholder asserted that “the covered causes of loss means direct physical loss unless the loss specifically excluded or limited in the policy.”

In support of those contentions, the policyholder alleged that: “[t]he virus is physically impacting public and private property, and physical spaces in cities around the world” and that “the deadly virus physically infects and stays on the surface of materials and, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees.” Asserting that the virus is akin to “the intrusion of lead or gaseous fumes,” the policyholder asserted the coronavirus “constitutes a direct physical loss under insurance policies that would need to be remediated.”

Setting aside any other potential legal infirmities, such contentions would likely strike an experienced insurance professional as absurd because insurance companies are in the business of insuring known risks, not every unknown risk. Moreover, coverage typically extends to actual damage, not the preventative actions taken to avoid actual damage. That said, analogizing the current crisis to other novel (and catastrophic) events, Chris Cheatham, the founder of RiskGenius, a provider of software for insurance professional including underwriters, brokers, and most other insurance professionals, recently opined that a policyholder contending there is coverage of the coronavirus by silence may gain traction in some jurisdictions. See also How Silence May Impact Commercial Insurers on COVID Cover.

Legislative Intervention

Some members of Congress have urged the insurance industry to provide coverage for the coronavirus. For example, on March 18, 2020, a bipartisan group of U.S. House members asked insurers to retroactively recognize financial losses relating to COVID-19 under commercial business interruption coverage for policyholders. The representatives (much like the Louisiana policyholder) argued that the shelter-in-place orders being issued throughout cities and states during the pandemic should qualify for business interruption losses sustained as a result of civil authority prohibiting or impairing access to the policyholder’s business premises (despite a lack of damage to the property). However, as explained by industry leaders in response to this call for action, the policies at issue do not apply to preventative measures; were never intended to insure a global pandemic, and the premiums changed did not contemplate coverage for such risks.

Similarly, New Jersey proposed a law requiring coverage for the business losses arising from the coronavirus (see New Jersey Bill A-3844), though that proposal has since quieted somewhat.

Additionally, numerous states have turned to the insurance industry to provide guidance and assistance to states and policyholders through this crisis. As explained more below, New York was the first state to take such action. To date, New York, Wisconsin, Florida, California, Indiana, Washington, Georgia, and W. Virginia have made such overtures.

The New York Department of Financial Services’ Initial Responses to the Coronavirus

On March 10, 2020, the New York State Department of Financial Services (DFS) sent a letter to all authorized Property/Casualty Insurers regarding business interruption and related coverage written in New York under commercial property insurance, which DFS defined to include business owner policies, commercial multiple peril policies, and specialized multiple peril policies. In that letter, DFS instructed insurers to provide a host of information to DFS. It also required insurers to provide the information requested to every commercial property policyholder in New York.

Among other things, insurers were directed to provide “a clear and concise explanation of benefits” to policyholders and to “indicate whether the policy contains a requirement for ‘physical damage or loss’ and explain whether contamination related to a pandemic may constitute ‘physical damage or loss.’” Insurers’ responses were due to DFS on or before March 18, 2020.

Thereafter, DFS posted a Frequently Asked Questions (FAQs) section to its website providing an explanation of typical benefits under those policies. The FAQs mirror the policy language, intent of the insurance industry’s business interruption coverage and provide in relevant part:

What does my business interruption insurance cover? 

Business interruption coverage typically can only be triggered if you have property loss that leads to the business interruption. One example could be that a fire in your office has caused you to suspend your business activities.

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I have a policy that is called a contingent business interruption insurance policy — how is that different from a regular business interruption policy?

As explained in ‘What does my business interruption insurance cover?’ above, business interruption coverage requires a related property damage…

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How does my business interruption insurance policy treat the novel coronavirus (COVID-19)?

[A]ny claim would still need to be related to your property damage for coverage to be triggered….

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Does my business interruption insurance policy cover me if my employees stay home from work out of concern about COVID-19?

As explained … above, business interruption coverage requires a related property damage. Fear of COVID-19 alone is unlikely to trigger business interruption insurance coverage….

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Does the Governor’s declaration of a State of Emergency affect my business interruption insurance policy?

The State of Emergency declaration does not change the terms of your business interruption policy….

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The FAQs posted illustrates that proof of “property damage” will be the critical legal and factual issue to determine what, if any, coverage exists for business interruption losses arising from the coronavirus.

The Takeaway for Insurers and Policyholders

The losses arising from the coronavirus will be staggering. Though Congress is attempting to pass legislation to assist companies with offsetting losses from the virus, federal and state governments have already looked to the insurance industry to absorb some of the losses businesses are experiencing. However, the insurance industry neither prepared for nor charged premiums for this global pandemic and will therefore likely continue to resist such government pressure. Policyholders’ attorneys have already begun filing suit to test the scope of coverage under certain policy terms and will presumably continue to do so in an effort to obtain coverage for their clients.

Given these competing interests and differing views, whether and to what extent policyholders will have business interruption coverage under commercial property policies will likely hinge of the specific facts of the claim and the jurisdiction in which the claim is filed. Below are suggestions for policyholders and insurers alike for navigating these uncharted waters:

Policyholders

• Identify any and all insurance policies that might provide coverage for losses arising from the Coronavirus (commercial property, worker’s compensation, general liability (third-party claims, etc.).
• Gather complete copies of those policies, including Declarations and endorsements.
• Review the policies carefully with your risk manager, broker, and/or coverage attorney, paying particular attention to the specific language in the insuring agreement, including definitions, exclusions, and endorsements.
• Document any and all damage and loss arising from the coronavirus. For example, if your business was advised that someone who had tested positive for the Coronavirus or was believed to have been exposed to someone who had tested positive for the Coronavirus and, as a result, the business was shut down for remediation and/or other measures, document with as much detail as possible the evidence of exposure/potential exposure and the specific losses arising from that exposure/potential exposure.
• Keep careful records of any information concerning actual exposure to the virus or information of potential actual exposure on the property, the steps taken to mitigate damage from the exposure, and the costs of such actions.
• Consider working with professional evaluators to quantify and demonstrate any loss.
• Put your broker and insurance company on notice of any claim/s and provide supporting details of same. Work with your risk manager, broker, and/or attorney in detailing the claim. Timely notice is a condition of coverage under all insurance policies and the failure to provide timely notice of a claim can prevent a policyholder from obtaining coverage of insured losses.
• Respond promptly to any requests by the insurance company for additional information and/or documentation and adhere to any “duty to cooperate” condition set forth in the policy/ies.

Insurers

• Be aware of and adhere to any additional inquiries and/or requirements set forth by various states concerning the handling and assessment of claims arising from the Coronavirus.
• Provide timely information to policyholders concerning any information requested by a particular state and/or required by any state statute.
• Engage in careful analysis of the particular policy language at issue and the facts provided in any notice of claim when making a coverage determination. Provide such analysis to the policyholder in any declination of coverage and/or reservation of rights letter issued.
• Consider consulting outside coverage counsel regarding the interpretation of property damage and loss as they related to the specific policy provisions at issue prior to making coverage determinations for the Coronavirus.
• Consider consulting with outside coverage counsel regarding implementing best practices for claims handling under the circumstances.