The COVID-19 pandemic and resulting government orders helped grind construction projects to a halt. States varied significantly regarding the level of restrictions enacted. Some states allowed construction to progress relatively unimpeded while others permitted only “essential” projects to continue. Some jurisdictions enacted waiver programs where businesses could apply for exemptions. Several cities, including Boston and San Francisco, went beyond their state’s restrictions to stop all construction projects.
Although many of these restrictions are gradually being lifted, the resumption of construction activity remains subject to important limitations regarding social distancing and other public health measures.
Will Business Interruption Insurance Cover Losses from COVID-19?
The COVID-19 pandemic is creating profound, ongoing interruptions to businesses operations across the country. “Non-essential businesses” closed by state government orders have lost income and furloughed employees. Millions of customers were ordered to shelter in place for months, depriving the economy of much-needed demand. Insurance industry experts estimate total business losses arising from the pandemic may soar above $200 billion.
Many businessowners pay for business interruption insurance. To their disappointment, their claims continue to be denied by insurers. The resulting wave of litigation has yielded several important trends. While it remains unclear how courts will rule in these cases, seldom-used policy exclusions are suddenly at the center of the debate. With billions of dollars on the line, the legal and economic stakes are both extraordinarily high. Although many of these high-profile claims involve restaurants, the same arguments apply to the construction industry.
Business interruption insurance is separate form of first-party coverage which seeks to compensate policyholders for losses due to a suspension of operations. Typical policy language states coverage will be triggered only by a “physical loss” or “physical damage.”
Many business interruption policies also offer Civil Authority coverage. This provision has been cited widely in many of the pending business interruption lawsuits pending across the country. Civil Authority coverage is designed to protect policyholders from situations where a government authority prevents access to their place of business. Insurers argue this is not applicable to most COVID-19-related claims because many policies require a nexus of physical damage involving the insured premises.
What is a Physical Loss, Anyway?
Whether policyholders will prevail on their COVID-19 business interruption claims turns largely on the definition of a “physical loss.” In certain instances, courts have sometimes extended the definition of “physical loss.” In some examples, courts have held a large presence of ammonia or asbestos rendered a structure unusable.
Arguably, the same logic could apply to certain COVID-19 claims, especially where the virus was present at the insured premises. Insurers argue this extension would not only be erroneous but lead to the widespread insolvency of carriers who did not price such coverage into premiums.
It’s important to remember that insurance remains in large part a creature of state law. Although many contract law principles will apply generally, many state courts have carved out important distinctions particular to their jurisdictions. This not only makes a generalized analysis difficult, it undermines the argument that business interruption cases warrant multi-district litigation.
What About Exclusions?
Virus exclusions are a relatively new limitation on coverage. In only the past 15 years they’ve become common in most business interruption policies. As coverage litigation proliferates in the wake of the COVID-19 pandemic, virus exclusions are poised to take center stage alongside traditional insurance law concepts like “physical loss” and “reasonable expectations.”
Insurers will likely argue a virus exclusion isn’t required to deny coverage because COVID-19 does not produce a physical loss sufficient to trigger coverage. However, this argument will lead to a predictable response by policyholders: If a virus exclusion isn’t needed to limit coverage, then why has the exclusion become standard on so many policies in the first place?
Other policy exclusions may address bacteria or fungi. These do not appear relevant to COVID-19. However, a surprising number of commercial liability policies don’t contain a virus exclusion at all. Several recent complaints filed by policyholders underscore the potential exposure of insurers to business interruption claims arising from COVID-19 in the absence of this exclusion.
Possible Legislation Could Require Coverage
Congress and several states have drafted legislation which could require insurers provide business interruption coverage under certain situations. These proposals vary and thus far none seem to be gaining momentum.
Some of the most notable variables include, but are not limited to; whether coverage would be retroactive to cover losses arising from COVID-19 or only apply to future pandemic claims, whether the coverage will only apply to “small” businesses, and whether insurers will be eligible for reimbursement for coverage.
Policyholders should review their policies to determine whether it contains a virus exclusion. If a policyholder believes their losses are covered, filing a claim quickly is critical. Policyholders should file an accurate and complete proof of loss statement and be prepared to cooperate with their insurer during the claims-investigation process. If a virus exclusion was added during the renewal of a pre-existing policy, state law may limit its applicability if the insurer failed to disclose the new limitation. Finally, it’s important to note that impacted policyholders have a limited window of opportunity to enforce their existing contractual rights.
Regardless of the outcome of the hundreds of business interruption cases now before the courts, virus exclusions appear likely to become even more common in the wake of COVID-19.
Author Patrick McKnight is an associate in the Litigation Department at Klehr Harrison Harvey Branzburg LLP in Philadelphia, Pennsylvania. Patrick also serves on the Klehr Harrison Coronavirus Task Force. He can be reached at firstname.lastname@example.org.