Many businesses have been forced to shut down or scale back their operations in response to governmental COVID-19 orders, resulting in loss of income. Affected business owners should immediately determine whether their commercial insurance policies cover business losses caused by the COVID-19 shut-down order. As discussed more fully below, the answer depends on policy language, and perhaps creative lawyering.

Business interruption insurance is commonly found in the property coverage section of commercial insurance policies. It is also found in stand-alone policies, such as the “Pandemic Disease Business Interruption” policy issued by Lloyds of London in 2014.

The purpose of business interruption insurance is “to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business … consequent upon the destruction of the building, plant, or parts thereof.” Pacific Coast Eng. Co. v. St. Paul Fire & Marine Ins. Co. (1970) 9 Cal.App.3d 270, 275

Here is a sample business interruption coverage provision:
“We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’ The ‘suspension’ must be caused by direct physical loss or damage to property at premises which are described in the Declarations … The loss or damage must be covered by or result from a Covered Cause of Loss …

Thus, historically, for business interruption claims to be covered, the suspension of operations had to result from direct physical loss of or damage to the covered property from a covered peril.  For example, when the Thomas Fire burned produce trees, growers suffered direct physical loss from a covered peril (i.e., fire.) Typically, direct physical loss to a building involves burned or broken windows, doors, roofs or walls. To date, no courts have addressed whether COVID-19 (or any other virus) in a building constitutes a direct physical loss to the building. But one California case held that incorporation of asbestos-containing building materials (ACBM) into a building damaged the structure within the meaning of an insurance policy. Armstrong World Industries v. Aetna Casualty & Surety Co. (1996) 45 Cal.App.3d 1, 92-93. In that case, the permanent linkage between the ACBM and other building supplies was important to the court in departing from existing law. It does not appear that COVID-19 can become permanently linked to structures, therefore, it is unclear whether the Armstrongrule will be applied in the virus context.

Although under most commercial insurance policies, physical damage to insured property is a necessary condition to invoking insurance coverage, some specialized insurance policies and coverage extensions – especially those issued to the hospitality and health care industries – contain endorsements expressly providing insurance coverage for losses caused by “communicable and infectious diseases” without requiring any physical damage to the insured property. 

Without such an endorsement, most policies do not cover business interruption caused by a virus. Viruses and disease are typically not an insured peril unless added by endorsement and viruses and disease are frequently expressly excluded. A common virus exclusion provides:     

We will not pay for loss or damage caused by …[t]he actual or suspected presence of any virus, organism or like substance that is capable of inducing disease, illness, physical distress or death, whether infectious or otherwise, including but not limited to any epidemic, pandemic, influenza, plague, SARS, or Avian Flu.

Thus, determining whether your policy covers COVID-19 business interruption requires a careful review of your policy.

What if your business could remain open except that you can’t purchase new inventory or equipment because your vendors are closed? Contingent Business Interruption coverage is also usually included in commercial property insurance policies. This coverage applies where damage occurs to property owned by others that your business depends upon to (a) deliver materials or services to you, (b) accept your products or services, or (c) manufacture products for delivery to your customers.

Coverage may also exist for business income losses caused when a “civil authority” limits access to the policyholder’s business.  The County of Ventura “Stay Well at Home” order dated March 31, 2020 should qualify.  That order requires all non-essential businesses to close.  Some insurance policies do not require a physical loss to the insured premises when access is restricted in such a manner in order to trigger “civil authority” insurance coverage for resulting economic losses.

Depending upon policy terms, commercial property policies may or may not cover business interruption caused by COVID-19. When policies do provide business interruption coverage that coverage can help businesses survive a temporary shut-down. Therefore, all owners of closed businesses should review their policies or have them reviewed by their broker or an insurance coverage attorney for a coverage opinion.  

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