As COVID-19 continues to spread, many businesses have found themselves in uncharted territory, wondering how and if they will weather the storm. The impact of government-ordered shutdowns, loss of revenue, and disruptions to supply chains have left business leaders looking to their insurance policies for relief, specifically their Business Interruption Coverage. This article will explore what Business Interruption Coverage is and common issues related to coverage, including how it may or may not cover losses caused by COVID-19. Every business and every insurance policy is different, so if your business has questions about insurance coverage, our attorneys can review your policy and determine what options and coverages may be available.
What is Business Interruption Coverage?
Almost all businesses carry some form of commercial general liability (CGL) insurance. A CGL policy typically protects businesses against liability claims for bodily injury, personal and advertising injury, and provides coverage for physical property damage. While a CGL policy is considered comprehensive, it does not protect against all risks; therefore, many businesses opt for additional coverage, including Business Interruption Coverage.
Business Interruption insurance can provide coverage for lost income, unanticipated expenses, and extra costs incurred due to some types of unexpected interruption to normal business operations. In order for coverage to apply, most policies require proof of damage or loss for a covered peril which resulted in a quantifiable business interruption loss for a discrete period of time. Many policies require some type of physical damage to insured property to trigger coverage, and an interruption to normal business may not be sufficient. Whether virus-related damages will qualify as “physical damage” is likely defined by the terms of your policy.
Limits to Coverage
The scope of coverage and the policy limits of Business Interruption insurance vary widely by policy, and exclusions may preclude coverage entirely. One common exclusion is for losses caused by viruses or bacteria. These exclusions were added after the SARS outbreak in 2003 in which insurers paid millions for business interruption claims. As a result of SARS, pandemics and infectious diseases are now commonly listed as a specific exclusion. For example, your policy may contain an exclusion similar to the following:
The actual or suspected presence or threat of any virus, organism or like substance that is capable of inducing disease, illness, physical distress or death, whether infectious or otherwise, including but not limited to any epidemic, pandemic, influenza, plague, SARS, or Avian Flu.
While the exclusions are unlikely to specifically name COVID-19, you may nevertheless be precluded from recovery. For example, if your policy specifically excludes SARS, your insurer may extend the exclusion to include COVID-19 because both SARS and COVID-19 are coronaviruses. Even if your policy language does not exclude SARS, exclusions are typically written broadly and will likely encompass the current pandemic. However, as with everything else in this pandemic, there are many uncertainties and only a comprehensive review of your policy can determine what coverages may be available.
Timing and causation are also important factors to consider when evaluating whether coverage may apply. For instance, when did your losses begin and are they caused, all or in part, by the COVID-19 pandemic? It may be difficult for a business to prove the cause of the loss was attributable to the pandemic or the government-ordered shutdown. If a business was unprofitable prior to the pandemic or the government-ordered shutdown, it may be very difficult to separate and categorize which losses are covered and which are not.
Statewide Nonessential Business Shutdown
At first glance it may appear that your business losses have been caused solely by the COVID-19 pandemic; however, for many businesses the losses may more accurately be attributable to the statewide shutdown of nonessential business. Governor Wolf’s March 19, 2020 order directly and immediately prevented many businesses from continuing operations and undoubtedly caused major losses. Some policies may provide coverage for losses attributable to governmental action. This so-called Civil Authority coverage may provide coverage even if pandemics are excluded. Civil Authority coverage language is typically narrowly tailored and will only apply to a discrete number of situations. For instance, a Pennsylvania Federal Court has held that a Civil Authority clause provided coverage to a business after a hurricane struck. The court held that a mayor’s order directing the insured’s business to close, as well as the mayor’s order closing access to the road on which the business was located, triggered the Civil Authority clause per the plain language of the policy. Application of a Civil Authority clause is very fact specific and requires a case by case analysis.
Obviously even those businesses who were not directly shuttered by governmental order have suffered real losses and are likely wondering if they too can file a claim under their Civil Authority coverage. For example, if your business’s primary customers were unable to patronize your business because they were closed by governmental order, then your business has almost certainly suffered financial losses, albeit indirectly, as a result of the shutdown. You may think it wise to file a claim under your Civil Authority coverage. Unfortunately, under the current prevailing law in Pennsylvania, your business will probably not succeed on such a claim. This is because most policies require an actual, direct order from the civil authority to trigger coverage. For example, a federal district court ruled that the Federal Aviation Authority’s closure of airports following the September 11, 2001 terror attacks did not trigger civil authority coverage for the owners of Philadelphia parking garages. The Court held that because the order did not officially close parking garages the owners of the garages, although financially hindered by the closure, were not covered under the terms of their policy.
As with everything related to this pandemic, there are many unknowns and the insurance industry’s response to COVID-19 losses remains to be seen. While many industry watchers predict that insurers will deny coverage based on exclusions in the policy, it remains unclear how Courts will interpret and apply those same exclusions in the context of COVID-19 losses.
Several states have proposed new laws that would require insurers to pay COVID-19 related claims. New Jersey’s law (NJ Bill A-3844) would require coverage for companies with less than 100 full-time employees, while Massachusetts’s law (Bill SD.2888) would invalidate virus exclusions and require coverage for businesses with less than 150 employees. The insurance industry opposes these laws for various reasons, including on the basis of contractual and constitutional rights. The viability of the New Jersey and Massachusetts laws is unclear, but they illustrate the strain COVID-19 continues to create for businesses and insurance companies alike.
The only way to know if a policy will cover your business’s losses is to review your particular policy. It is important to note that the circumstances surrounding COVID-19 continue to evolve, and advice as to your business’s insurance coverage is subject to change. And remember, as with any claim, you must submit your claim within a certain time frame in order for the claim to be considered. The requisite time frames are set forth in each policy and failure to submit a timely claim may waive coverage. Even if you are unsure whether your claim will be covered, you may nevertheless want to file a claim in order to preserve your rights.
Insurance policies and business interruption coverage can be complex. If you have questions about your business’s coverage, we recommend having one of our experienced attorneys review your policy. For more information or questions about your policy as it relates to COVID-19, please contact GKH.
This update was prepared by attorney Julie Slabinski, who practices in the areas of litigation and zoning and land use. Julie previously worked at an insurance defense firm where she advised on a broad range of insurance issues. This update does not constitute legal advice and has been prepared for informational purposes only. Please contact us directly with questions about your insurance coverage.