We wrote previously on the general application of business interruption and related insurance coverages in the current COVID-19 epidemic. We update that piece here to address existing and emerging litigation and legislative issues on these topics, and to share some practical tips for considering whether coverage may exist for your or your business.

Practical Tips

Did you purchase communicable disease coverage?

While not prevalent due to their cost, specific coverage products including communicable diseases have been available for years. Hospitality, sports and gaming businesses in particular may have purchased such coverage. A hotel may be covered under such a policy, for example, if it must shut down because a guest tested positive for a communicable disease such as COVID-19, or if the government orders the business to close for that reason.

While it is too late to purchase such a policy for the current outbreak, look for such policies to become more common and thus more affordable.

Does your policy include a virus exclusion?

Absent communicable disease coverage, a commercial property policy likely includes an exclusion for viruses such as the coronavirus. As previously noted, the 2003 SARS outbreak prompted the Insurance Services Office to issue a form virus exclusion that insurers widely adopted. The form language overrides the coverage provisions.

Given this, it might make sense to first look for a virus exclusion before navigating the policy’s labyrinthine provisions to assess potential coverage. In the presence of a virus exclusion, in relation to COVID-19, questions of whether the claim resulted from physical loss or damage to the covered property, whether the presence of the virus in the business premises or a government-mandated shutdown will satisfy this requirement may all be moot.

Does your policy require “physical loss or damage” for civil authority coverage?

If your policy lacks a virus exclusion, in the current climate the next item to check is your policy’s civil authority provision, under which coverage may exist when government action prohibits or impairs the insured’s access to the covered property. Specifically, check for whether the civil authority provision incorporates the policy’s “physical loss or damage” requirement, and whether that “physical loss or damage” must occur to the insured premises as opposed to adjacent or other property.

Insurers and insureds have litigated what constitutes “physical loss or damage” in various contexts. Emerging cases addressing the issue as to COVID-19 are discussed below.

Litigation Developments

When provided as part of a commercial property policy, business interruption coverage is structured such that the claim must result from a covered cause of loss. In a property policy, that typically is stated as physical loss or damage to the covered property. For example, depending on the policy language there might be room to argue that the presence of a COVID-19 positive employee or customer spreading coronavirus in the workplace physically damaged the property. Similarly, disputes arising over the application of civil authority provisions similarly qualify under these circumstances.

Not surprisingly, coverage lawsuits prompted by COVID-19 are popping up.

The issue of whether the coronavirus damaged a business property is at the heart of the dispute in Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London. In that case, the Oceana Grill restaurant in New Orleans seeks a declaration that coronavirus contamination of its premises would be a covered physical loss or damage to the property, particularly in the event of a government-mandated shutdown due to the coronavirus. Notably, Oceana Grill alleges that its policy does not include a virus exclusion.

On March 17, 2020, a number of owners and operators of Chicago-area restaurants sued Society Insurance when it declined to cover for business interruption losses resulting from Illinois Gov, J.B. Pritzker’s order shuttering bars and restaurants in light of the COVID-19 outbreak. Big Onion Tavern Group, LLC v. Society Insurance, Inc., 20-cv-2005 (N.D. Ill.). As in the Oceana Grill case, the Big Onion insureds assert that their policies did not include a virus exclusion. Thus the issue is whether coronavirus caused physical loss or damage to the insured premises.

As previously noted, all situations are different, and variation exists among policies. Some civil authority provisions, for example, require that the insured’s property becomes inaccessible by government action that results from physical loss or damage to the insured premises. Others provide that coverage when the government action results from physical loss or damage to adjacent property or even to some other property. One must consider the specific policy language in connection with the applicable government shutdown order.

Legislative Developments

In response to insureds’ displeasure at discovering that their business interruption coverage may not pertain to business interruptions caused by COVID-19, several state legislatures have entertained legislation that would retroactively write out virus exclusions from commercial property policies. The applicable exclusion began to appear in industry standard policy following the regulatory approval of the 2006 ISO “Exclusion for Loss due to Virus or Bacteria.”

As of this writing, no state has enacted such a measure, but several are pending in states that include New Jersey, Ohio, Massachusetts, and New York with more likely to follow. The most recent such bill, introduced by Massachusetts State Sen. James Eldridge, has been proposed as an “emergency law” which by statute allows for an expedited approval process. The bill, which would provide coverage retroactive to March 10, 2020 (to coincide with the governor’s emergency declaration) would apply only to policies issued to insureds with less than 150 full-time employees in the state. The proposed legislation in other states follows similar parameters, with each adopting a different threshold or retroactive date. One of the key distinctions, however, has been in the policy limits – some under consideration will set their own limit as applied to losses stemming from COVID-19, while others match the limit to the underlying policy.

The reaction of the insurance industry to these bills has been swift, with the President and CEO of the National Association of Mutual Insurance Companies (NAMIC) issuing a condemnation on constitutional and contract law grounds. Specifically, Article I, Section X, Clause 1 of the U. S. Constitution, provides that “No State shall … pass any … Law impairing the Obligation of Contracts….” These concerns are a likely motivator of the slow response to the proposed legislation. While other forms of relief have moved through state and federal legislatures with unprecedented speed in the wake of the pandemic, these proposals have languished, and in some cases (like the first such bill, introduced in New Jersey last month), were pulled from consideration before any vote was taken.

States hoping for federal intervention to assist in settling this question are unlikely to find such guidance — not only because of the state-based regulatory regime for P&C insurance, but also given that attempts in Washington to urge the industry to move in this direction have been similarly rejected by the industry. On March 18, a bipartisan group of members of the U.S. House of Representatives urged the American Property Casualty Insurance Association (APCIA), NAMIC, and the Independent Insurance Agents and Brokers of America, among others, to begin recognizing financial loss due to COVID-19. One of the signatories to this letter, Rep. Nydia Velazquez of New York, has herself tested positive for the virus.

APCIA President David Sampson and other industry leaders responded to this entreaty by arguing that business interruption policies are not designed to provide coverage against communicable diseases of this type, while assuring the House members that the insurance industry has taken charitable steps to aid in the national response, and that it “remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.” The so-called, retroactive application legislation would “fundamentally change the agreed upon transfer of prospective risk of loss exposure to coverage for a known and presently occurring loss” which was not factored into the approved rates charged by insurers for this line of coverage.

We will continue to monitor legislative developments in this area and post updates to this article on the forward progress of any of such measures, and the likely ensuing litigation that could have a broad impact on insurance coverage nationally.

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