Governments are responding to the global COVID-19 pandemic with a variety of voluntary and mandatory actions aimed at limiting or preventing large gatherings of people. Across the country, schools, restaurants, bars, gyms, movie theaters, and a variety of other non-essential businesses have been closed by order of local and state governments. In several cities, restaurants are not allowed to serve patrons on-site, but have been allowed to stay open for takeout and delivery services. The various governmental actions that shut down or limit access to businesses raise a number of complicated insurance coverage issues for insurers and insureds alike.
There are several potential avenues to coverage for coronavirus-related claims under various insurance policies. Ultimately, the specific policy language and facts at issue will determine whether coverage is triggered by the coronavirus and its impacts. Business interruption due to civil ordinance or law may trigger coverage under some property insurance policies, but there are a number of hurdles to coverage.
Many commercial property insurance policies include civil authority coverage for business income losses sustained when a "civil authority" prohibits or impairs access to the policyholder's premises. "Civil authority" coverage often requires that the policyholder sustain "direct physical loss of or damage to" the insured property by a covered cause of loss, or alternatively, that the access restriction results from "physical loss" by a covered cause of loss.
For claims stemming from coronavirus-related business interruption, there will undoubtedly be disputes over whether this "physical loss" requirement has been met. At least one such lawsuit has already been filed in Louisiana state court by a restaurant seeking a declaration of coverage for coronavirus-caused losses under a business interruption policy. (Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana). In this case, a New Orleans seafood restaurant is seeking a judicial determination that the Louisiana governor’s public gathering restriction, and the New Orleans mayor’s restriction on restaurant operations, trigger the "civil authority" provision in their "all risks" property policy issued by Lloyd’s.
In this case and similar cases that will follow, courts will have to grapple with the physical damage requirement for triggering business interruption insurance. The Cajun Conti insured directly addressed the physical damage requirement in its complaint, stating that "the global pandemic is exacerbated by the fact that the deadly virus physically infects and stays on the surface of objects or materials," and that "contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment." Presumably, the insured will argue that the presence of the coronavirus causes a direct physical loss to the affected premises, which would satisfy the physical loss requirement for civil authority coverage.
Coverage cases stemming from past crises provide insight into some of the potential coverage hurdles triggered by the coronavirus and its impacts. In addition to having to satisfy the physical loss requirement, insureds seeking coverage may struggle with establishing a direct causal link between prior property damage and the civil authority orders at issue.
In Dickie Brennan & Co. Inc. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011), the Fifth Circuit denied civil authority coverage because no property damage had occurred in Louisiana at the time an evacuation order was issued for Hurricane Gustav. In this case, the insured sought coverage because it was unable to conduct business during a mandatory evacuation of New Orleans as Hurricane Gustav was approaching New Orleans. Hurricane Gustav only caused minor damage to New Orleans and neither the insured nor its neighbors suffered damage. The insured’s insurance policy contained a civil authority provision that covered losses "caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss." One of the requirements for coverage is that action of the civil authority prohibiting access to the premises must be caused by direct physical loss of or damage to property other than at the described premises. The insured argued that the hurricane’s prior damage in the Caribbean, coupled with its projected path toward New Orleans, satisfied this element. Ultimately, the court held that the insured failed to establish a link between the property damage that the hurricane caused in the Caribbean and the issuance of the evacuation order so as to trigger coverage under the insured’s policy.
Likewise, in South Texas Medical Clinics P.A. v. CNA Financial Corporation, No. H-06-4041, 2008 WL 450012, at *10 (S.D. Tex. Feb. 15, 2008), the U.S. District Court for the Southern District of Texas held that a civil authority provision did not cover business interruption losses to the insured’s medical clinics when a mandatory evacuation order was issued based on the anticipated threat of damage from Hurricane Rita. Like in Dickie Brennan, neither the insured’s property nor neighboring property was damaged by the hurricane. The policy provided coverage for business interruption sustained by an action of civil authority that prohibited access to the described premises “due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.” The court held that because the mandatory evacuation order was issued due to the anticipated threat of damage to the county and not due to prior property damage that had occurred in Florida and the Gulf of Mexico, the insured’s business interruption losses were not covered.
In United Air Lines Inc. v. Insurance Company of the State of Pennsylvania, 439 F.3d 128, 133 (2d Cir. 2006), the Second Circuit held that United Air Line’s insurance policy did not provide coverage for business interruptions at the Ronald Reagan Washington National Airport resulting from the government’s decision to suspend flights after 9/11. The insured’s policy required the insured to establish that the order of civil authority was "a direct result of damage to adjacent premises." The insured argued that it was adjacent to the Pentagon, which sustained direct damage. However, the court noted that the airport’s operations were temporarily suspended on 9/11 before the Pentagon was struck, thus there was no causal link between prior property damage and the civil authority order. Likewise, because the government's subsequent decision to halt operations at the airport was based on fears of future terrorist attacks, not the “direct result” of damage to the airline’s adjacent premises, there was no causal link between prior property damage and the civil authority order. Thus, the Second Circuit concluded that there was no coverage under United’s policy.
The United States District Court for the Northern District of Georgia similarly concluded that there was no business interruption coverage after 9/11 for the insured under a civil authority provision in Paradies Shops, Inc. v. Hartford Fire Ins. Co., No. 1:03-CV-3154-JEC, 2004 WL 5704715, at *7 (N.D. Ga. Dec. 15, 2004). The insured, a retail vendor located in airport terminals across the country, sought coverage under a civil authority provision in its insurance policy as a result of a national ground stop after 9/11. Because the ground stop was based in part on the fear of additional terrorists attacks, the court found that the insured was unable to establish that the order of civil authority was issued as the “direct result” of the 9/11 attacks on the World Trade Center, the Pentagon, or Stonycreek Township, Pennsylvania.
As these cases demonstrate, some courts have rejected coverage for losses sustained as a result of civil authority orders that were designed to prevent future damage rather than address existing property damage, which could also be a hurdle in coronavirus-related business interruption coverage. While past cases provide some guidance on potential coverage issues, ultimately the specific policy language and facts at issue will be key in determining whether coverage is triggered by coronavirus and its impacts.
