The coronavirus (COVID-19) pandemic has lumbered on for over seven months now, resulting in significant, and in some instances, catastrophic losses to a wide variety of businesses. This update focuses on the state of COVID-19 coverage litigation and what factors your business should be considering to recoup COVID-19-related losses.
Wins for Business Policyholders in COVID-19 Litigation
Currently, more than 1,000 lawsuits are pending in courts around the country involving insurance coverage for COVID-19 losses. Businesses are demanding payment under their business interruption and civil authority coverages from their respective insurers for losses suffered in the wake of closures and disruptions caused by the COVID-19 pandemic. In most cases, business policyholders have asserted causes of action against insurance companies for breach of contract, unjust enrichment, and declaratory judgment under applicable state and federal statutes. Insurers have responded by arguing the insurance policies issued to businesses do not cover COVID-19-related losses because insurance coverage only extends to losses incurred as a result of direct physical loss or damage to covered property, such as from a fire or natural disaster, not losses resulting from a business’ closure or disruption due to a public health emergency.
In the nascent COVID-19 litigation, a Missouri federal and New Jersey state court gave business policyholders reasons to celebrate. In Missouri, a federal district court judge ruled businesses can experience physical loss on their property without physical damage when the covered property is rendered unusable because physical loss is not synonymous with physical damage. Notably, the presiding judge ruled the business policyholders suffered a loss when the spread of the COVID-19 virus led to prohibitions or restrictions on the policyholders’ businesses. Takeaways from the ongoing Missouri case include: (1) Where the presence of COVID-19 on a business property has occurred, resulting in a shutdown, there is emerging legal precedent that the policyholder’s claims against the insurer should continue on and not be dismissed. (2) Allegations a business was contaminated by the highly contagious and easily spread COVID-19 virus, and its likely presence, led to a physical loss. The closing and disruption of a business should be included in any lawsuit the business files against its insurer.
In New Jersey, the court ruled physical loss may occur where the business policyholder loses functionality of its property. In that case, the policyholder, a retail optical business, closed pursuant to New Jersey’s stay-at-home order for all non-essential businesses. The business policyholder sought payment for losses from its insurer under its business interruption coverage. Critical to the business policyholder’s win was the court’s finding that physical loss was required by the actual presence of the COVID-19 virus on the business’ property. This ruling bolsters the business policyholders’ argument and provides support for the position that physical loss does not require structural damage or material impairment, but that physical loss can include a business’ loss of functionality stemming from the likely presence of the COVID-19 virus, the exact location of which may be unknown, but which led to a civil authority issuing an order mandating the business close.
Should Your Business File a Claim for COVID-19 Losses, and If Denied, Sue Your Insurer?
First, as with any insurance claim made, review of the policy to determine coverage for COVID-19 losses is time sensitive. Whether the business is covered will depend greatly on the language of the policy, the facts causing the loss, and the proof of losses. Providing timely notice to insurers of a loss is tantamount to any recovery.
Below are the types of coverage to be evaluated and which may pay for losses:
- Business Interruption Coverage: Typically, this kind of coverage is triggered only where business losses stem from physical loss or damage to covered property. As noted above, although COVID-19 is not known to cause permanent damage to property, some courts have found that contamination leaving a building unusable for a period of time constitutes “physical damage” for purposes of determining whether there is business interruption coverage. Critically, policy exclusions must be examined when determining the availability of coverage. Sometimes, but not always, businesses have policies which exclude coverage for contamination of the covered property by bacteria, viruses, or other pathogens or from pandemics, communicable diseases, or infectious diseases.
- Civil Authority Coverage: Property insurance policies often include coverage for economic losses resulting from an order of a civil authority that prohibits access to the business policyholder’s property. Civil authority orders were issued by most state and local governmental authorities and are extremely helpful in finding a pathway to coverage. Determining the applicability of any such orders to the losses a business sustained should be a top priority.
- Coverage for Communicable or Infectious Diseases: Some insurers offer business interruption coverage for economic losses resulting from communicable or infectious diseases without requiring the presence of physical loss or damage. This specialized coverage is typically purchased by businesses in the hospitality and health care industries. Check your policy!
- Event Cancellation Coverage: This type of coverage may be implicated if an event was cancelled due to COVID-19. Such coverage may pay for lost income and/or expenses incurred based on the cancellation of the event. If the business was forced to cancel an event for reasons related to COVID-19, also review any event-related contracts to determine the ability to terminate the contracts under a force majeure clause.
MMM Is Ready to Help with Business-Minded Advice
The landscape regarding the COVID-19 pandemic is changing on a daily basis. We are headed into what is predicted to be a tough winter battling the virus with uncertainty as to whether another round of government-imposed closures may be coming. A best practice in these uncertain, volatile times is to seek advice now about what coverage the business has, how and when to file a claim, and when it is smart to fight the insurer by filing suit. The MMM insurance team stands ready to analyze your business’ coverages and to provide valuable advice on the most prudent course for your business to follow.