Understanding The COVID-19 Business Interruption Insurance Quandary

This article was originally published in the Summer 2020 issue of ActionLine, a Florida Bar Real Property, and Trust Law Section publication.

The coronavirus disease 2019 (COVID-19) pandemic appears to have softened the ground for a legal battle between commercial property insurance companies and the growing number of businesses seeking reimbursement for their lost revenues. Insurers are experiencing a surge in the reporting of COVID-19 business interruption claims and anticipate a significant uptick in litigation relative to this complex matter.

Most will essentially be asking the same question. Does business interruption or civil authority insurance cover the income lost by businesses while they were closed because of COVID-19? If the answer is yes, insurance companies may end up paying billions of dollars to cover a risk that was not specifically underwritten or offset by premiums. If the answer is no, countless businesses may find that the doors they closed during the COVID-19 pandemic will never be opened again.

Business interruption coverage, which is also known as business income coverage, is a type of commercial property insurance that covers the loss of income suffered by a business that is forced to slowdown or suspend its operations because the premises are damaged by a covered cause of loss. Business interruption policies often include a civil authority clause that covers the loss of income caused by action of civil authority that prohibits access to the insured premises because other property (i.e., not the insured premises) was damaged by a covered cause of loss.

Notably, the word virus is not typically found in standard commercial property policies. This means that COVID-19 claims are not specifically covered or excluded. If the policy’s conditions for business interruption or civil authority coverage are otherwise satisfied, claims cannot be denied merely because COVID-19 was the cause. On the other hand, if a policy does have a virus exclusion then a COVID-19 claim would not be considered a covered loss and there can be no business interruption or civil authority coverage. Insurers are expected to start adding virus-specific exclusions to new policies and upon the renewal of existing policies. 

In the absence of an express virus exclusion, the only way to know whether business interruption or civil authority coverage will apply to a COVID-19 claim is to examine the policy itself. The ISO Business Income (and Extra Expense) Coverage Form, which is a standard form used by admitted insurance companies, provides that the insurer “will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’” This provision appears to support the contention that business closures caused by COVID-19 are indeed covered, but it cannot be interpreted in isolation.

The construction and interpretation of an insurance policy is a question of law for the court to decide. Courts must analyze and interpret insurance policies as a whole, endeavoring to give every provision its full meaning and operative effect. Courts may not rewrite policies, add meaning that is not present or interpret policies in a manner that is contrary to the intention of the parties. Importantly, courts cannot focus on some provisions to the exclusion of the others. This interpretational limitation is crucial because the very next sentence in the policy states that the suspension of operations “must be caused by direct physical loss of or damage to” the insured property. The standard civil authority clause similarly requires “direct physical loss of or damage to” property other than the insured property. In other words, there can be no business interruption or civil authority coverage without direct physical loss of or damage to the insured property or other property.

Ultimately, many if not most of these lawsuits will come down to a seemingly simple question. What does direct physical loss of or damage to property mean? Courts must analyze and interpret the specific policies at issue according to their plain meaning. Since “direct physical loss of or damage to” is not defined in the standard ISO policy form, reference to legal or non-legal dictionaries may be necessary. Business interruption is not a new form of insurance coverage. Identical policy provisions have already been interpreted by multiple courts, albeit under different circumstances, though outcomes have varied. COVID-19 cases, however, will no doubt test the limits of existing case law.

There are other coverage requirements that may prove equally problematic for COVID-19 claimants. For example, coverage typically commences 72 hours after the time of direct physical loss or damage. It ends when the damage is repaired. This may disqualify many from coverage if it is determined that a thorough cleaning with basic disinfecting supplies is sufficient to remove COVID-19 from the premises. Policyholders may also find it difficult to prove that the suspension of business operations was necessary when other businesses facing similar circumstances remain open.

Finally, it is worth noting that legislative efforts may affect the trajectory of COVID-19 business interruption litigation. Whether these or similar bills ultimately become law remains to be seen, but the insurance industry will likely commit considerable resources to resist the enactment or enforcement of any such legislation.

These are unprecedented times. Insureds and insurers alike are facing existential threats through no fault of their own. Public policy concerns will no doubt influence the manner in which COVID-19 business interruption claims are resolved. Shutting down the economy was a drastic, yet necessary measure to stop the spread of COVID-19. But it comes with a cost. Courts will soon be called upon to decide who should pay.