Business interruption and COVID-19 insurance

In the movie 2008 Wall-EEarth is a post-apocalyptic wasteland with nothing on it but the abandoned remnants of human society, and a miserable robot squeezing trash. The only living robot company is a pet cockroach named Hal, which I think is a Pixar nod to the popular notion that cockroaches will live after us all. (Or maybe this is a tribute to Hal in 2001: space flight.)

You know what will live after us all? Law firm marketers. I guarantee that in the event of a nuclear holocaust, God forbid, the first email alert will appear from a law firm within half an hour, explaining why you are covering the issue or not, what the implications are for employers, and how you can dramatically tighten cybersecurity better. (Maybe it’s even me…)

The marketing barrage started quickly on the issue of COVID-19, and for good reason. Many businesses, especially small and medium-sized businesses, are suffering devastating economic losses as a result of the pandemic. The insurance industry draws a ‘no pay’ battle line. One prominent insurance defense company wrote in a recent “alert,” for example: “Coronavirus is contagious. The same can be said of articles, penned by coverage lawyers, that address the availability of insurance for pandemic-related losses. We’ve lost track of how many we’ve seen” .

ouch. This painful. (Also, who uses pens to write articles anymore?)

Despite criticism from coverage attorneys on the policyholder’s part, business owners have been asking us specific and urgent questions about business interruption insurance in the context of the current public health emergency. I’m always optimistic when it comes to coverage questions, but unfortunately I think many of the claims of job interruption can be a difficult argument to make.

I’ve written before about how business interruption insurance works (over here, for example). Basically, business interruption insurance is insurance coverage that can replace lost business income for a period of time after a disaster. Business interruption insurance is not sold as a separate policy, but is either added to a property injury insurance policy or is included in a comprehensive package policy as an add-on or rider.

First of all, not all policies are created equal. You should read your policy carefully, not just make assumptions about what it says. Many policies, for example, have a specific exception for losses caused by viruses or bacteria (ISO form CP 01 40 07 06), which read: “We will not pay for loss or damage caused by or caused by any virus, bacteria or organisms.” Another minute induces or is capable of causing physical distress, illness, or disease.” This exclusion would be a difficult obstacle, although I know from discussions with my colleagues that there are some creative arguments being taken into account, especially regarding policies that do not have a causal anti-synchronic clause. (I wrote about those items over here.) The argument would be that the immediate cause of the loss was a shutdown by the civil authority, not the virus itself.

Leaving exclusion aside, business interruption insurance generally requires some sort of direct physical loss in order to take effect. If you can’t prove that your building (or a building near your building, or a facility in your supply chain) has indeed been contaminated by the virus, where is the direct material loss? I can see a (defence-oriented) court saying, All you have here is a shutdown to prevent the further spread of a virus that hasn’t directly harmed your property. (Of course, if there is evidence of contamination within your building, a supplier’s building, or a nearby building, this could significantly alter the coverage picture.)

One potentially beneficial case is Gregory Packaging, Inc. Against Traveler Property and Casualty Company of America, 2014 United States Dist. LEXIS 165232 (DNJ November 25, 2014), which you can read about over here. Gregory Packaging Involves the release of an unsafe amount of ammonia from the cooling system of a juice bottling facility. The factory had to be closed and decontaminated. The policy holder has filed a claim for work interruption coverage. Travelers declined coverage (of course), on the grounds that there was no “direct physical loss”. The court disputed the view, holding that “material damage” meant “a material, distinct and obvious alteration” of the property’s structure. In other words, you don’t necessarily need the damage you can actually see, as long as the property’s usefulness is affected. The court eventually determined that ammonia, a dangerous gas, had rendered the Gregory Packaging Building temporarily uninhabitable, constituting sufficient “direct material loss” to begin coverage.

The key is that there was actual and consistent pollution inside the building, not just a fear of contamination.

Another potentially useful case Wakefern Food vs. Liberty Mutual Fire Ins. Share. 406 NJ Super. 524 (NJ Super. 2009), which you can read over here. This case involved a group of supermarkets and a power outage in 2003 due to problems in the electrical network. Supermarkets suffered food spoilage during a four-day electrical outage and filed a business disruption claim with Liberty Mutual. The policy required “physical damage” to electrical equipment outside the building in order for it to operate. Too bad, too sad, said Liberty Mutual. There was no physical damage to equipment here; Essentially, some circuit breakers in the system tripped, causing a chain effect, because some wires in Ohio were dangling and making contact with the trees.

Fortunately, the Appeals Chamber disagreed, writing: “In the context of this case, the electrical network has been physically damaged” because the network, component generators, and transmission lines, due to a physical accident or series of accidents, were Physically unable to perform their primary function of providing electricity. There is also indisputable evidence that the network is an interconnected system and that, at least in some areas, power cannot be restarted until the various individual pieces of damaged equipment have been replaced.” (emphasis added.)

Here again, we have physical damage in a direct causal chain to the policyholder’s premises. I suspect the less direct the impact, the more difficult it will be to persuade a judge to impose business stop coverage.

This does not mean that you will not be successful in a business interruption claim related to COVID-19. In fact, if you’re a business policy holder affected by the virus (and at this point, what business isn’t), you could potentially file a claim and force the insurance company to take a stand. Then you can decide whether you want to pursue this issue or not.

I’m just warning you not to get your hopes up yet, because you’re probably in for a fight. It will be some time before we see how the courts respond.

Stay safe.

Update as of March 27, 2020: Two lawsuits have now been filed regarding business interruption coverage, one in California and one in Louisiana. By the same lawyer, John Hotaling. The California lawsuit alleges coverage under the civil authority provisions of the property policy. the allegations say that COVID-19 has physically damaged “public and private property, and physical spaces in cities around the world and in the United States” and that the virus “infects physically and remains on surfaces of objects or materials” for “twenty-eight days.” He notes that “China, Italy, France and Spain have implemented clean and sanitize areas before allowing those areas to reopen to the public.” The California complaint also notes that California’s stay-at-home order states that it was “issued based on evidence of physical damage to property.” So, we’ll see…

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