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Business Interruption in the Era of COVID-19

June 8, 2020

Closures due to COVID-19 concerns have wreaked havoc on the business community as well has consumers. Many businesses have been left teetering on the verge of bankruptcy or at least in a long fight to regain their clientele and income. Fortunately, most businesses’ insurance policies include coverage for lost earnings typically called Business Interruption or Business Income coverage. Business Interruption insurance replaces lost income and pays for expenses incurred when a business is affected by a covered threat. This coverage is typically part of a business owners insurance policy. Business Interruption coverage can be complex and analyzing the language of the policy at issue is the first step.

Generally, to be eligible for payment under its business interruption/business income loss coverage, a business must demonstrate the following: 1) Existence of a businessowners’ policy or a commercial property insurance policy with a business interruption/business income loss coverage with a civil authority provision; 2) Be current on their premiums; 3) The business should be deemed “nonessential” in the various applicable government closure orders; and 4) Maintain a minimum of 12 months of profit/loss statements that record the business’s financial losses.

Most property insurance policies provide coverage for “property” against all “risks of physical loss or damage” unless otherwise excluded. These policies generally provide coverage for loss of earnings, profits, and/or extra expenses for a defined period of time resulting from “physical loss or damage” of the insured’s property for “business interruption” or “time element” losses and is often subject to a very high per occurrence limit of coverage. Sometimes these policies also extend business interruption coverage to situations not involving physical loss or damage to the property itself. These extensions of coverage are often subject to a “period of liability” and/or limited amount.

Contests can be expected to arise from the “direct physical loss of or damage to property” requirement. Insurance carriers will likely take the position that the businesses closed due to the COVID-19 restrictions and concerns did not suffer direct physical damage. Complicating matters is the fact that courts have not generally settled upon a clear definition for when insured property has suffered a "direct physical loss." In some jurisdictions, courts have determined that contamination and other causes rendering property uninhabitable or otherwise unfit for its intended use constitute a "direct physical loss" sufficient to trigger coverage. See Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (“When the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner.”) Conversely, a federal court in Florida recently found that a restaurant did not sustain direct physical loss when dust and debris from nearby roadwork could be remediated by cleaning. Mama Jo’s, Inc. v. Sparta Ins. Co., 17-CV-23362, 2018 WL 3412974 (S.D. Fla. Jun 11, 2018.) This is likely where the battle lines in contested cases will be drawn.

Most business interruption coverage policies are subject to a "restoration period." This is the length of time after a claim that your policy will help pay for lost income and extra expenses while you your business recovers. If applicable, the policy will define what triggers the restoration period and its duration period.

There is oftentimes a 48 to 72-hour waiting period before the period of restoration kicks in, but it typically lasts up to 12 months and cannot be extended by the business. For example, a business making a claim on January 1 can expect to receive business interruption coverage benefits until January 1 of the following year — even if the policy expires. This typically means that if the business has not recovered before the restoration period ends, the business interruption coverage would expire. This would halt reimbursement for lost income. Therefore, swift and sure recovery is essential to the survival of many mid-to-small size businesses.

Many businesses’ insurance policies also include coverage for interruptions due to government-imposed shutdowns called “civil authority” coverage -- coverage for lost business income when the business is closed by order of a government entity. Civil authority coverage may also cover business losses caused by government-ordered closures due to the COVID-19 crisis, since the current closures are directed at specific entities or areas of establishment. This coverage is typically subject to a time limit of coverage from losses and expenses resulting from an order issued by a civil authorities limiting or preventing access to an insured location where the order is a result of physical loss or damage of property near the insured’s location.

The orders related to COVID-19 that have restricted or prevented access to specific locations around the country are often based on the high contagiousness of the virus and its potential to attach itself to surfaces for extended periods of time, resulting in a physical loss or damage to property. The latter finding also supports claims for business interruption coverage, as noted above.

WHEREAS, this Emergency Order is necessary because of the propensity of the virus to spread person to person and also because the virus is physically causing property damage due to its proclivity to attach to surfaces for prolonged periods of time;

There are currently proposals in various levels of government to try and address these concerns as well. Some are in support of businessowners’ rights to collect on these business interruption coverages. For example: Congress is currently considering House Resolution 6494 entitled Business Interruption Insurance Coverage Act of 2020 that seeks “to make available insurance coverage [under current insurance policies] for business interruption losses due to viral pandemics, forced closures of businesses, … and for other purposes.”

At the state level, Florida and Nevada have not currently introduced similar legislation, although both state legislatures are still examining ways to support local businesses affected by this pandemic. However, there is pending legislation in states like Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania and South Carolina that seek to void the “virus exclusion” in any business interruption insurance policy. There are numerous constitutional considerations that make such attempts not at all sure to succeed, but it is encouraging from the perspective of the businessowner that governments appear to be devising ways to support local businesses’ rights to collect the proceeds of their business interruption coverages.

Business interruption claims can oftentimes be complex. The sheer volume of expected claims as the COVID-19 restrictions ease and businesses seek the money they need to resume operations will almost assuredly see the insurance industry contesting claims aggressively. They can also be expected to drag out litigation while they seek to obtain favorable rulings that may bolster their position against other pending claims. During this time, businesses will be struggling to stay afloat while prosecuting their claims for these proceeds. Many will be unable to do both for an extended period of time. It will be essential to retain counsel that is familiar with the issues, has experience in coverage-related litigation, and will aggressively pursue swift resolution in favor of the business.

**UPDATE** As of May 14, the Louisiana legislature has effectively shelved its efforts to retroactively compel insurers to cover COVID-19 losses with business interruption insurance.

Jason B. Trauth

Managing Shareholder