The profound impact of the coronavirus on all kinds of businesses raises important coverage questions for insurers and insureds alike. Time—and, surely, litigation—will tell where many coverage disputes will end, but there are questions companies can ask today that will elicit important answers regarding the extent to which current or imminent business losses might be covered by existing insurance policies. In particular, businesses should (1) determine the nature and cause(s) of their losses, and (2) examine their policies’ specific terms of coverage and exclusions.

The many permutations of the types of losses businesses are currently facing and the different policies under which those businesses might claim coverage suggest the answer to which losses are insured will vary from one instance to another. This client alert will focus on factors to consider when analyzing whether, and to what extent, insurance policies provide coverage for coronavirus-related business interruptions.

What Caused Your Loss?

The first step in determining whether business losses might be covered by a business interruption policy is to identify the cause, whether direct or indirect, of such losses. The fact that damage is related to the coronavirus is only the start of that inquiry. We suggest you begin by asking the following questions:

• Did the physical presence of the virus at your business lead to the loss? Be careful to distinguish between (a) the physical presence of the virus at your office or facility—e.g., your factory, restaurant, or other location that was closed because of the presence of the virus—and (b) the presence of the virus at some other location that impacted the operation of your business, such as at a key supplier for your company that stopped or delayed providing your business with materials necessary for your operations.

• Did you close your business, or some segment of your business, voluntarily or pursuant to a government order? Many businesses have faced difficult decisions concerning whether to curtail operations due to the dangers posed by the coronavirus. For others, the choice was made for them, as state, federal, and/or local authorities required the closing of businesses deemed non-essential. In many cases, the reason for closing or limiting a business may fall somewhere in between, such as adherence to government guidance in the absence of a strict directive. The reason for closure may impact coverage.

• Have you taken steps to mitigate damages (e.g., operating in a reduced capacity)?

That your business is impacted by the coronavirus or related government restrictions does not necessarily mean you are unable to conduct business at all. Restaurants might continue delivery service while closing eat-in dining just as financial firms might find ways to continue operating from remote locations. Where policies provide coverage for some virus-related losses, they may require reasonable efforts to mitigate those losses.

What Does Your Policy Say?

Once you determine what kind of loss you are facing and what may have caused that loss, you will be in a better position to review the specific terms of your insurance policy and applicable exclusions. To the extent coverage exists, it will likely be part of your company’s business interruption or business income policy, but all policies should be reviewed, including “extra expense” coverage.

• Does your policy:
  • define covered causes of loss in a way that includes circumstances present here?
  • require a “direct physical loss” or use similar language?
  • address government orders to cease operations?
  • include specific language concerning event cancellations or inability to appear at an event critical to your business, such as a concert or sporting event?
• Focus on your policy’s exclusions. Does your policy include exclusions for communicable diseases in general, or viruses in particular?

Coronavirus Coverage Litigation Has Already Begun

Given the enormous impact the coronavirus is having on nearly all kinds of businesses, it should come as no surprise that coverage litigation has already begun. For example, a New Orleans restaurant sued an insurer in Louisiana state court seeking a declaration that it has coverage for damages should the restaurant be ordered to close by civil authorities in response to the coronavirus. The plaintiff bases its claim on the fact that the applicable policy “does not contain an exclusion for a viral pandemic.” Several other restaurant owners have since followed suit with actions in other jurisdictions, seeking declaratory relief clarifying coverage for similar losses under their policies.

These issues are certainly not limited to restaurants. For example, the Chickasaw Nation filed suit in Oklahoma state court claiming the Nation’s “all risk” policy included business interruption insurance that should cover damages relating to casino closures because the Nation’s casinos “cannot be used for [their] intended purpose.” The Nation referred to recommendations by the U.S. Centers for Disease Control and Prevention as well as local restrictions intended to curb the spread of the coronavirus as support for its claims.

We can expect litigation to multiply as companies and their insurers address the meaning of common insurance policy terms. For example, what constitutes physical loss will surely be the subject of many lawsuits in the months and years ahead, particularly because the relevant body of caselaw interpreting such provisions is far from consistent. Compare, e.g., Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., Civ. No. 2:12-cv-04418 (WHW)(CLW), 2014 WL 6675934 (D. N.J. Nov. 25, 2014) (holding loss resulting from the release of ammonia into the insured’s facility was direct physical loss where the ammonia “physically transformed the air” in a way that “rendered the [insured’s] facility unfit for occupancy”) with Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civ. 98-434-HU, 1999 WL 619100 (D. Or. Aug. 4, 1999) (holding the “mere adherence of molecules to porous surfaces, without more, does not equate [to] physical loss or damage”).

To be sure, both the impact of the coronavirus on insured businesses and responses to the virus from various levels of government are changing at a rapid pace. But this fluid environment does not mean there is nothing for insurers and insureds to do at this stage. Among the many inputs guiding businesses’ decisions during this crisis should be an informed understanding of what losses might be covered under existing policies, and how actions taken today—ranging from remediation efforts to loss mitigation measures—may impact the availability of such coverage.

Takeaways

Given the unprecedented challenges businesses of all kinds are facing today, insurance coverage for coronavirus-related business losses is sure to be a hotly litigated issue. The different circumstances and policies sure to be involved in such litigation means this issue will not be resolved with a one size fits all approach. Consult the specific terms of your policy, consider the specific causes of your actual and potential business losses, and insurers and insureds alike should seek counsel with expertise in this area to best protect their rights.