By now, almost all small businesses have felt the impact of economic disruptions related to COVID-19. The impact has taken the form of decreased sales; supply chain disruptions; and, concerns over sick employees. Many of these businesses are anxious to access financial support through new federal and state small business loan programs to help alleviate some of the financial pressures building up. But the application processes have been riddled with difficulties, and the long waits for these businesses seems never-ending. Some companies have turned to their insurance companies as a lifeline, hoping that the business income they lost due to restrictions and stay-at-home orders would be a loss covered under their insurance policy as a business interruption. Unfortunately, the pleas of small businesses across the country have been met with a resounding and uniform response from their carriers: Coverage denied.
So, what is “Business Interruption Insurance” and are there other sources of coverage businesses can turn to in their policies of insurance? Business interruption insurance helps replace lost income and pay for extra expenses when a business experiences a shut- or slow-down resulting from a covered peril or cause of loss. This type of coverage is not traditional property insurance. A property insurance policy only covers the physical damage to the business. Business interruption insurance is additional coverage to protect the profits that would have been earned by the business, and can be added onto the business' property insurance policy or comprehensive package policy. This “extra” policy provision is applicable to all types of businesses, as it is designed to put a business in the same financial position it would have been in if no loss had occurred.
Since business interruption insurance is included as part of the business' primary policy, it only pays out if the cause of the loss is covered by the overarching policy or a defined event in the case of a standalone. Generally, there are two types of policies: an “All Risk Policy,” which covers all causes of loss unless specifically excluded; and a “Named Peril Policy,” which contains a fairly comprehensive list of covered causes, including: explosions; falling objects; fire; hail; ice; lightening; vandalism; theft; and wind. Nevertheless, obtaining coverage for a business interruption losses caused by the COVID-19 pandemic has proven anything but easy. First, most policies require there to be direct physical loss or damage to property for the coverage to be triggered. Regarding the COVID-19 virus, insurance companies have been successfully arguing that “damage to property” requires structural alteration like those found in typical claims, where, for instance, a fire destroyed the interior of a building or wind damaged windows and furniture. But even if COVID-19 is found to have “damaged the property,” that damage still has to be a result of a cause that is covered under the policy. That is where policy exclusions come in.
Over the years, exclusions to insurance policies have become increasingly more robust. Some policies exclude coverage for pollution; earth movement; flood; military action and war; mudslide or mudflow; and nuclear reaction or radiation. Others commonly exclude losses resulting from mold, fungi, or bacteria. There, because COVID-19 is a virus and not a bacterium, perhaps that exclusion might not apply. Still others specifically exclude losses due to viruses, diseases, or pandemics. Viruses, like COVID-19 are, in fact, common exclusions; but even if not specifically excluded from coverage, courts have been taking the position that viruses are outside the scope of business interruption coverage due to the absence of any physical damage to the property.
The next question tends to be: “Where do I go now?” Well, there are still options to find coverage for the losses business are experiencing due to the COVID-19 pandemic. The likelihood of obtaining coverage under other provisions of an insurance policy may be slightly greater, but the chances of success are still grim. Most businesses have been turning to their Civil Authority provisions for coverage.
Civil Authority insurance insures against loss sustained when access to property is impaired – or prohibited – by an order or action of civil or military authority. Think: stay-at-home and safer-at-home orders. Even when a government order prohibits or otherwise specifically restricts access to an insured premises, the policy may still require a connection to a direct physical loss before triggering coverage. Some policies, on the other hand, do not have that requirement. For example, following a tornado, authorities might cordon off the entire area that was hardest hit. This area might include some businesses that sustained little or no damage, but whose revenue would nevertheless be impacted by the civil authority order.
In the case of orders issued in response to COVID-19, some orders involve mandatory closures of certain businesses, and others merely provide cautionary instructions to citizens. A business, with the best interests of its employees or customers in mind, may nonetheless close the insured property because of concerns of the spread of the virus among employees or customers. Business judgment, however, no matter how prudent, will not provide a basis for coverage. The closure or restriction must be mandated, and be as a result of a civil authority’s order or action. The most memorable recent example was the closure of lower Manhattan for an extended period after the 9/11 attacks destroyed the World Trade Center. Civil authority coverage typically applies if such loss or damage occurs within a defined radius—commonly five miles—of the insured location. State and local governments have ordered a variety of quarantines and restrictions on public gathering in response to COVID-19. These restrictions effectively bar the use of office buildings, hotels, restaurants and other places where people work or gather.
Needless to say, the country has seen a flurry of litigation related to businesses seeking coverage under their insurance policies for the economic losses they have suffered due to COVID-19; and there has been an equally prolific number of cases filed by insurance companies seeking rulings from the Court that the policies they provide do not cover COVID-19 business losses.
If policy language or applicable law construes physical loss or damage to include property that is rendered unusable due to contamination, policyholders will take the position that civil authority coverage is applicable. Some courts have employed such reasoning in cases involving other contaminants, finding that the uninhabitability of property satisfies the physical loss requirement and/or that contaminants cause physical damage by “altering” or “transforming” property. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (ammonia leak that rendered property unusable for a period of time caused physical damage); Farmers Ins. Co. of Oregon v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993) (odors from methamphetamine laboratory are physical because they damage the structure).
The Pennsylvania Supreme Court’s recent decision in Devito v. Wolf may prove to be an arrow in the quiver of businesses. Four of businesses sued Pennsylvania’s Governor, Tom Wolf, alleging that he lacked statutory authority to order the closure of the physical operations of all non-life-sustaining businesses. The Pennsylvania Supreme Court disagreed. It held that a pandemic qualifies as a “natural disaster” within the meaning of the statute, because it is of the “same general nature or class” as the specifically listed natural disasters and because the use of “other catastrophe” was “intended to expand the list of disaster circumstances.” Specifically, the Court said that COVID-19 qualifies as a “natural disaster,” which provided Gov. Wolf the statutory authority to issue that order because it, like other natural disasters, involves “substantial damages to property, hardship, suffering, or possible loss of life.” Devito v. Wolf, 2020 Pa. LEXIS 1987 (Apr. 13, 2020). The science behind the COVID-19 virus, as well as the virus’s very nature, including its propensity to spread and its proclivity to attach to surfaces, supports the Court’s position that, regardless of whether the virus has, in fact, spread at particular locations, COVID-19 constitutes property damage. This proverbial arrow might only go so far, though.
The Court’s opinion in Wolf, however, never once mentioned insurance policies, much less addressed potential coverage arising from COVID-19. It did not hold that a pandemic results in “direct physical loss of or damage to property.” Furthermore, the language the Court interpreted was statutory language, not policy language; and while governor may have declared an area physically unsafe for people to congregate because of COVID-19’s pervasiveness, that does not mean property within that area has been “physically damaged” by the virus.
Businesses using Wolf to support argument in support of business interruption insurance coverage will likely be unsuccessful. However, arguments like the one in Wolf are just one of many that businesses around the country are making. Most typically, lawsuits are taking the form of breach of contract claims. Many businesses are also filing Declaratory Judgment Actions, in which businesses are asking the court to “declare,” based on the language of their insurance policy, that they have coverage for their COVID-19 economic losses. Others are also filing bad faith actions, claiming that their insurance carriers denied coverage in bad faith. Most of these cases are in their infancy right now; but businesses, insurance companies, and their lawyers, will all be watching closely at what the courts do.
RECENTLY FILED LITIGATION RELATED TO COVID-19
Below are some of the most recent, or most notable, cases filed by businesses around the country:
DiAnoia’s Eatery LLC v. Motorists Mut.Ins. Co., No. GD-20-005273, (Pa. C.P., Allegheny Cty. Apr. 29, 2020) – An Italian restaurant and pizzeria in Pittsburgh, Pennsylvania filed a lawsuit seeking declaratory relief, and asking the Court to find that its business interruption losses, damages and expenses caused by the coronavirus, and the government orders closing nonessential businesses and dine-in restaurants, are covered under its “all risk” insurance policy. One of key allegations in the DiAnoia’s litigation are that the restaurant, like many other similarly situated restaurants, operate in a closed environment where many people cycle in and out, thereby increasing the risk of contamination to the premises by persons infected with COVID-19. Another interesting allegation is not just that the Governor of Pennsylvania issued a stay-at-home order restricting gatherings and forcing non-life-sustaining and non-essential businesses to close down, but that the Governor also issued a Proclamation of Disaster Emergency because of the COVID-19 pandemic. This particular allegation may make the Court’s ruling in Wolf more applicable than it would be by merely alleging that the stay-at-home order (order of civil authority) alone caused the economic losses. In other words, the inclusion of the allegation regarding the Governor’s Disaster Emergency Proclamation may trigger another part of that business’s insurance policy, even if that policy contains a virus or bacterium exclusion.
Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London, et al., 2020 WL 1298797 (La. Dist. Ct., Orleans Parish Mar. 16, 2020) – Restaurant seeking a declaratory judgment from the Court that its “all risk” commercial property policy, which covers “direct physical loss,” covers lost revenue flowing from statewide orders that sharply restricted the size of public gatherings and required restaurants to stop, and close for, on-site dining.
French Laundry Partners LP v. Hartford Fire Ins. Co., (Ca. Sup. Ct., Napa Cty., Mar. 25, 2020) – Restaurant seeks a declaratory judgment that its business income losses flowing from current and future civil authority closures of restaurants in Napa County due to physical loss or damage from COVID-19 are covered under its “all risk” insurance policy.
Big Onion Tavern Grp., LLC v. Soc’y Ins., Inc., No. 1:20-cv-02005 (N.D. Ill., Mar. 27, 2020) – Movie theaters and restaurants filed an action requesting a declaratory judgment that business income loss from executive orders shutting down all restaurants is covered under “all risk” insurance policies.
Prime Time Sports Grill, Inc. v Certain Underwriters at Lloyds, 20-cv-00771 (M.D. Fla., Apr. 2, 2020) – A bar and restaurant requests a declaratory judgment that business interruption losses sustained after the Governor of Florida ordered all bars and restaurants closed in response to the COVID-19 pandemic are covered under its “all risk” insurance policies.
Mace Marine Inc. v. Tokio Marine Specialty Ins. Co., No. 105911474 (Fla. Cir. Ct., Munroe Cty., Apr. 6, 2020) – The owner and operator of a dive shop business in the Florida Keys is seeking a declaratory judgment that business interruption losses sustained after the Governor of Florida ordered closing all non-essential businesses in response to the COVID-19 pandemic are covered under its “all risk” insurance policies.
Geragos & Geragos Fine Arts Building, LLC v. The Travelers Indem. Co. of Connecticut, No. 20-0406 (Cal. Sup. Ct., Los Angeles County, Apr. 17, 2020) – The owner of four residential units in Pasadena, California filed an action seeking a declaratory judgment that business interruption losses sustained after the Mayor of Los Angeles issued a series of rent relief orders that made it impossible for the policyholder to collect rent payments are covered under its “all risk” insurance policy.
Aside from the fact that most of these recent cases involved “all risk” policies of insurance, basic common themes appear across all of them. Generally, they all include allegations that contamination from COVID-19 constitutes a direct physical loss or damage to property, and ask the courts to declare that the inability to use insured property because of the risk of contamination from COVID-19 is tantamount to direct physical loss of that property. Most, if not all, also ask the courts to declare that the various governors’ acts of Civil Authority are tantamount to a direct physical loss or damage to property.
While the initial projection is that most, if not all, insurance companies will deny businesses coverage for economic losses due to COVID-19 and the stay-at-home orders and mandatory closures and restrictions on gatherings that stem from them, lawyers are considering creative arguments that the presence or the threat of contamination might constitute some nature of property damage that could trigger the civil authority coverage.
A PUSH FOR A UNIFIED SYSTEM: MULTI-DISTRICT LITIGATION OF BUSINESS INTERRUPTION CLAIMS
Shortly after insured businesses began filing lawsuits in response to denials of business interruption coverage against their insurers, a group of policyholders united and proposed that the disputes related to business interruption for COVID-19 business interruption losses be litigated in one court. One of the possible locations was the Eastern District of Pennsylvania. This effort was met by a strong, coordinated response opposing the establishment of a MDL.
The proponents arguing in favor of establishing a MDL for these types of coverage disputes said that it is appropriate because the cases: 1) involve one or more common questions of fact; 2) promote convenience for parties and witnesses; and 3) will assist in the coordination of discovery efforts and promote the just and efficient conduct of the actions.
Opponents of a MDL contended there were too many differences among cases to effectively consolidate them. They pointed out that: 1) policyholders have already advanced different theories as to whether and how their property caused loss or damage to their businesses; 2) there are vast differences in the government orders that allegedly caused the losses; 3) the businesses of the policyholders are vastly different in nature; 4) the different types of businesses will have differing policy language at issue; and 5) there are differences in the state law governing the coverage situations.
Despite the MDL proponents’ argument that there is only one overarching question that needs addressed, which is ‘whether COVID-19 caused direct physical loss or damage,’ the MDL Panel was not convinced. The Judges, seemingly in agreement with the opponents’ position, cited the questions such as: how much COVID-19 was in a particular area affecting a particular business; how long the exposure lasted; how much interruption there was; and what the state order, if any, said, as weighing against consolidation. Acknowledging those differences, the proponents of the MDL contended that those issues went to damages, not to the question of coverage.
Ultimately, the Panel denied the petition for consolidation into one MDL; however, it left open the possibility of the creation of several smaller MDLs, possibly based on location of the claims, or specific to a particular insurance carrier.
We’ll have to wait and see what happens next before we know whether these coverage cases will be handled on a case-by-case basis in individual courts, or whether they will be consolidated into one of a few MDLs.
WHAT YOU CAN DO NOW
Start by taking the steps below to help you and your business attain the appropriate business interruption coverage.
Mitigate your losses:
For example, for restaurants, focus on take-out and delivery, and develop a “visible” plan to reassure customers of their safety on your premises.
If your business is dependent on someone else’s products, make efforts to find interim alternative suppliers.
Review your policies:
Make sure you have complete copies of all of your insurance policies. Familiarize yourself with the coverage you have, and confirm that policies are correct. It may even be advisable to obtain additional coverage through endorsements to protect yourself in the future.
Document your damages:
Document what you believe your losses are specific to the COVID-19, and not any other cause, so that if you can make an insurance claim, you are ready with the support.
Collect your documents:
If you haven’t already done so, start collecting now the financial documentation you need to calculate lost income and extra expenses, That list might include historical and current annual financial statements, Federal and state annual tax returns, monthly profit and loss statements, budgets, or projections done before and after the closure, bank statements, inventory reports, payroll records, invoices and purchase orders, ledgers detailing expenses related to additional payroll, shipping, and temporary facilities caused by the pandemic, as well as documentation showing extra expenses you have incurred, including receipts, invoices, time sheets, and advertising costs.
Remember, you may have a deadline to report your claim within a certain window of time, such as 60, 90 or 180 days, and the clock starts running as of the date of damage. Ongoing communication with the insurance adjuster is important to address expected timelines for all parties and to cover additional items.
If your claim is denied by your insurance company, consult a lawyer. Your lawyer can review the language of your particular policy of insurance to determine whether there are any alternative provisions which might afford you coverage. Also, your attorney will likely be closely monitoring the rapidly changing landscape of the litigation surrounding coverage denials similar to yours, and can advise you how best to preserve your claim, or even challenge your insurance company’s decision to deny coverage.