Faced with mounting lost profits and escalating expenses related to COVID-19, including potential liability to third parties, business owners are turning to their insurance policies to cover these losses.
The following is intended as a roadmap of potential coverage issues related to COVID-19 in the commercial property insurance, commercial general liability insurance, and event cancellation insurance context. Individual policy language will govern and should be closely reviewed.
Commercial property insurance for first-party claims, including business interruption
Most first-party commercial property insurance policies require the policyholder to show that the covered property has suffered “direct physical loss, damage, or destruction” resulting in loss of use. This requirement will likely be one of the most heavily litigated issues in coverage disputes involving COVID-19. Unlike obvious property damage from hurricanes or fires, it is less clear whether the mere presence of an invisible virus on covered property would constitute the required physical damage. However, some courts have held that contamination, including smoke damage, bacterial contamination, toxic gases, and airborne odors constitute “direct physical loss” when they render an insured facility unusable or uninhabitable, or where the functionality of the property is nearly eliminated or destroyed.
Conversely, other courts have found no coverage where structural or other tangible damage to the property cannot be shown. For example, an Ohio court found that mold did not constitute physical injury to the covered property because it was a temporary condition that did not affect the structural integrity of the building, and could be cleaned. Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App.3d 23, 41 (Oh. Ct. App. 2008). Other courts have denied coverage where loss of use of the covered property was from fear of contamination rather than actual contamination, or where a power outage left a property inaccessible but resulted in no actual physical damage. Because courts in different states can interpret policy terms differently, choice of law and venue provisions will be important.
Another hotly contested area of coverage litigation will be the scope of “civil authority” coverage, which traditionally covers losses resulting from an action or order of a civil authority that prohibits, prevents, or impairs access to a business. Many states and municipalities are under “stay at home” orders that prohibit, discourage, and otherwise affect the normal operations of businesses. The mandatory or permissive nature of these orders will be key in determining whether the policyholder had a reasonable expectation that it was being ordered to shut down its business.
Civil authority coverage is typically triggered by actual property damage (the “direct physical loss” discussed above), unless “suspected” property damage is included as a trigger to that coverage. However, sometimes property damage that occurs within a specific geographic proximity to covered property can trigger coverage, so policyholders in COVID-19 “hotspots” may fare better than policyholders where confirmed cases of the virus are few and far between. Businesses can also look to pollution liability policies for potential civil authority coverage where contamination is found in the covered premises.
Where businesses need to close for decontamination or other mitigation efforts, business interruption coverage can cover the actual costs of remediating damaged property plus any lost profits sustained during the remediation period. This coverage may still be subject to the “direct physical loss” requirement, meaning that remediation of suspected rather than proven contamination may not trigger coverage. If actual restoration is delayed due to COVID-19 concerns, “extended” business interruption coverage may cover lost profits for a certain period of time beyond when the property should have been restored under normal circumstances until profits have reached their pre-loss level.
Some policies may provide “contingent” business interruption coverage where the policyholder’s loss stems from covered property damage at an upstream supplier or a downstream distributor or customer. The terms “supplier” and “customer” can be broadly interpreted to include indirect suppliers and “leader” businesses that typically drive demand for the policyholder’s business (i.e., hotels near theme parks). This coverage is still subject to the “direct physical loss” requirement.
Other applicable coverages in a commercial property policy may include coverage for pandemics, preventative measures, and communicable diseases. “Preventative measures” coverage may apply where a business has voluntarily closed in anticipation of likely contamination to mitigate potential damages from a covered loss. A policyholder’s failure to purchase such optional coverages may support an insurer’s argument that coverage does not exist under the policy as purchased.
Potential applicable exclusions for COVID-19-related coverage include property damage caused by microorganisms, viruses, communicable disease, mold, seepage, pollution, and contamination. Exclusion language, like all policy language, is given its plain and ordinary meaning, and construed against the drafter (insurer) if ambiguous. Of particular concern may be “anti-concurrent cause” language, which bars coverage even if an excluded cause was only partially to blame for the loss (i.e., if the loss was caused by both a covered civil authority order and an excluded virus). Coverage may also be subject to applicable sublimits.
Commercial general liability insurance for third-party claims
If a business owner is sued by a third party for alleged bodily injury or property damage caused by the business’s response (or lack thereof) to COVID-19, commercial general liability (CGL) policies may provide coverage for a defense and resulting liability. The policy’s definition of “bodily injury” may or may not cover allegations of mental distress or anguish, or may be limited to mental distress resulting from physical injury or disease. In cases alleging property damage related to lost income or loss of business, courts in most states bar recovery for “pure economic loss.” However, coverage may exist if the policy’s definition of “property damage” includes “loss of use of tangible property that is not physically injured.”
The policy’s definition of “occurrence” is also key in determining whether coverage is available, particularly because knowledge and guidance concerning COVID-19 is rapidly evolving. The timing of the alleged act or omission by the insured, and what knowledge the insured had regarding conditions at its facility at that time, as well as contemporaneous knowledge about how the virus is spread, will determine whether the insured’s conduct constitutes an “accident” under the policy. Where “occurrence” is defined to include “continuous or repeated exposure to substantially the same general harmful conditions,” multiple exposures to the virus would likely constitute a single “occurrence” for purposes of policy limits, potentially limiting the amount of proceeds available to pay claims.
The availability of CGL coverage is subject to many of the same exclusions discussed above, in addition to pollution exclusions in jurisdictions where traditional environmental contamination is not required to trigger a pollution exclusion.
As with any CGL dispute, careful examination of both the policy language and the claims alleged against the insured is necessary.
Event cancellation insurance
Event cancellation insurance differs from traditional commercial and CGL policies in that it provides special coverage tailored to a single event, including weddings, concerts, conferences and sporting events. For this reason, some event cancellation policies issued in recent months may contain provisions addressing COVID-19. It is important to remember that cancellation of the event alone is not a trigger for event cancellation coverage. Rather, the policy language looks to the reason why the event was cancelled. Policies often require that cancellation be “beyond the control of the insured,” or that holding the event is a “legal or physical impossibility.”
Cancellations required by civil authority orders barring large public gatherings would likely be covered, but not cancellations that are voluntary or due to a performer/speaker’s choice. Exclusions may bar coverage for cancellations related to closure of the venue, failure to mitigate by attempting to reschedule or limit the size of the event, or communicable diseases. Where coverage exists, it can reimburse loss of revenue, ticket sales, and extra expenses incurred to avoid cancellation, such as rescheduling or changing the venue.