If you have a commercial insurance policy, whether there is coverage available for COVID-19 related business losses is dependent on specific policy language and judicial interpretation of policy language. The first step to determining whether your policy might provide coverage is to make sure you have a complete copy of your policy. Many people only keep summary pages and declaration pages from their policies. If you fall into that populous category, you should call your agent or write to the insurance company that provides your coverage and request a complete copy of your policy.
By no means an exclusive list, the most common types of coverage to look for in your policy language, that might apply to COVID-19 losses are the following: Business Interruption / Income and Civil Authority. Educating yourself as to the precise coverage you have, as well as the exclusions is essential. Policy language can be daunting for the most educated of individuals so you should not hesitate to consult with an attorney regarding any questions you might have.
Business Interruption / Income Coverage
This type of coverage is intended to compensate for loss of income a business sustains while under a necessary suspension of activity and extends until operations are able to resume. Typical Business Interruption / Income Coverage language specifies that in order to qualify for the coverage, there must be a direct physical loss of or damage to property and the loss / damage must be derived from a covered cause. For example, if you have this coverage and your business is destroyed by a fire, and fire is listed as a covered cause of loss then you are eligible for compensation. However, in that same example involving a fire, if fire is not a listed covered cause of loss or is listed in an exclusion, compensation will not be payable.
So how would viruses like COVD-19 meet the “direct loss” or “physical damage” requirement? There have been cases in a number of jurisdictions finding that bacterial contamination of premises, noxious fumes, and offensive odors constituted “direct physical loss” or “direct physical damage” to properties, triggering the respective business interruption coverage and homeowners’ coverage. These cases are significant in that the contaminants involved couldn’t be seen and the damage caused was not visible. The “damage” was said to be rendering the properties useless for their intended purpose or uninhabitable. See Pillsbury v. Underwriters at Lloyd’s, 705 F. Supp. 1396 (D. Minn. 1989), Motorists Mutual Insurance Co. v. Hardinger, 131 F. App'x 823, 826-27 (3d Cir. 2005), Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009)
Though the cases mentioned are helpful in that they establish that physical damage encompasses factors that may not cause visible damage but render space unusable for its intended purpose, many policies contain exclusions for damage done from fumes, bacterium and viruses. After the SARS pandemic in 2002 – 2003, a multitude of insurance companies were quick to revise policies to exclude for losses related to viruses. That does not mean that all policies have such exclusions though. The coverages in the above-referenced cases were not found to have applicable exclusions.
More importantly, most COVID-19 related claims will not involve direct contamination of the business with COVID-19. Most will involve closures due to local and State orders prohibiting businesses to operate (stay at home orders, shelter in place orders, curfews etc.). In the next section, we’ll discuss Civil Authority coverage if that is available to you. If not, using these orders as a basis for a claim under Business Interruption will be challenging in North Carolina. In Harry’s Cadillac-Pontiac-GMC Truck, Inc. v. Motors Ins. Corp.,126 N.C.App. 698 (N.C. App. 1997), an owner of a car dealership made a business interruption claim due to a snowstorm that left his dealership inaccessible for a week. The snow had also caused some damage to the roof. Neither the roof damage nor the repairs thereto caused an interruption of plaintiff's business. The North Carolina Court of Appeals noted that the business owner’s claim under the business interruption portion of his policy was solely related to the inability to access the property due to the storm, not because the storm had actually caused sufficient damage to the property itself to render it unsafe or unusable. The North Carolina Court of Appeals found that the policy language was clear and required that the business interruption must be caused by direct physical damage to the property and hindrance of access caused by the storm was not a direct loss or direct physical damage to the subject property.
Civil Authority Coverage
The name of this coverage alone may excite business owners since most business losses due to COVID-19 currently, are due to “stay at home” orders issued by civil authorities. However, Civil Authority coverage generally covers business losses when access to your property is impeded due to an order issued by a civil authority with respect to loss or damage to a property next to or within a specified distance of your property.
This is an example of a standard Civil Authority provision:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
- Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
- The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Note that COVID-19 coverage for your business were this your policy language would require that a business within the range specified, have been contaminated by COVID-19 ; that a civil authority issued an order related to that other business that impedes access to your business; and that the damage to the other business be due to a type of loss that is covered in your policy.
Specific policy language is of the utmost importance. Not all civil authority language is the same and if it includes coverage for civil authority orders issued to prevent the potential spread of disease / contaminants, not just actual spread, you should consult an attorney to discuss claim viability. If the civil authority language in your policy seems unclear or ambiguous, consult an attorney.
As with Business Interruption coverage, the biggest hurdle for civil authority claims will be the direct loss or physical damage requirements. In Source Food Technology, Inc. v. US Fid. And Guar., 465 F.3d 834 (8th Cir. 2006), Source Food made claims under both the business interruption and civil authority clauses of its commercial insurance. Source Foods relied on importing beef products from its single source in Canada to make its cooking oils and shortening. Due to concerns over potential spread of mad cow disease, in 2003, the USDA issued an embargo preventing the importation of ruminants and ruminant products from Canada. Source Foods had picked up cows from its Canadian source but was unable to cross the border with it due to the USDA embargo and therefore sustained loss of income as a result. The Court noted that both the business interruption clause and civil authority clause required direct physical damage or loss to property from a covered source and ruled that there was no direct physical damage involved. “To characterize Source Food's inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word "physical" meaningless.” Do recall though that physical damage can also mean something that is not visible but renders a property unusable for its intended purpose so in a civil authority setting,
While all of this may seem daunting, if you are facing business losses related to COVID-19, it is worth your time and effort to review your policy language with an attorney to discuss possible claims. Just because pursuing these types of claims may seem challenging, doesn’t meant it isn’t worth it or that you won’t succeed. Also, though North Carolina is not yet included, there are some states considering legislation to compel insurance companies to cover COVID-19 related business losses regardless of certain exclusions contained within policies. North Carolina may consider something similar in the future and the Federal Government may step in at some point as well.