While governments and health organizations work to contain the coronavirus (COVID-19) outbreak, including quarantine procedures and protocols, a lurking issue surrounds the availability of insurance for losses associated with the outbreak. Area businesses are rightfully concerned as to the potential financial impact of the outbreak on their daily operations — supply chain issues, operating income, payroll, lost rents, event cancellations and employee absences are troubling examples for the business owner.
These business owners may also claim business interruption loss related to ten¬ant vacancy and lost rent if they own and operate apartment buildings or multifamily properties. The coronavirus outbreak is forcing students from their private and public housing as schools come to a close for an undetermined period of time.
Commercial Property/Business Owners Insurance Policies and the Coronavirus Outbreak
As a result, insurance carriers can expect an increase in business interruption claims of all types. Business interruption coverage is typically purchased as an additional coverage within a company's business insurance portfolio package. It is meant to protect against income losses due to disruptions or changes to business operations. Like every other aspect of insurance coverage scenarios, "the devil is in the details." Many factors come into play when determining the application of coverage to a particular loss. While certain lines of insurance such as health, workers compensation and life/disability will likely have covered claims, this may not be the case for business interruption claims. The types of coverage available and the trigger mechanisms required all factor into the analysis.
Whether or not a loss triggers coverage will depend on the type of coverage avail-able and the policy specifics, to include grants of coverage, conditions precedent and exclusionary language. The initial hurdle for business interruption claims involves scaling an impermeable wall known as the insurance policy's grant of coverage or insuring agreement. Most residential, commercial and business owner's insurance policies include language in the insuring agreement as follows:
"We will pay for direct physical loss of or physical damage to covered property at the premises described in the declarations (also called "scheduled premises" in this pol¬icy) caused by or resulting from a covered cause of loss."
As a threshold challenge, therefore, the policyholder will need to establish both (1) direct physical loss and (2) that dam¬age resulted from a covered cause of loss. Within this insuring agreement, policies may include additional coverages for business income losses and civil authority. These additional coverages have their own unique grants of coverage.
Common business income loss coverage language reads as follows:
"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 of or damage to property at the described premises. The loss or damage must be caused by or result from a covered cause of loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of the site at which the described premises are located."
Common civil authority coverage language reads as follows:
"When a covered cause of loss causes damage to property other than property at the described premises, we will pay for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
- Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the dam-age, and the described premises are within that area but are not more than one mile from the damaged property; and
- The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property
Civil authority coverage for business income will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premiges and will apply for a period of up to four consecutive weeks from the date on which such coverage began."
In the case of communicable diseases, such as the coronavirus, industry and legal authority is lacking as to what definitively triggers coverage under a particular insurance policy. Communicable diseases are not included within the enumerated causes of loss ' forms — basic, broad or special. There are no cases on point that connect similar outbreaks (SARS, swine flu, etc. to business interruption claims) to defined causes of loss.
Moreover, business interruption claims tied to the coronavirus outbreak and related quarantine matters will hit several stumbling blocks exploring the potential for coverage. Rarely do claims like these see the light of day. The simple explanation is that coverage is not likely to apply due to lack of direct physical loss to the property.
However, what constitutes direct physical loss is subject to multiple interpretations. The Georgia Court of Appeals held that a direct physical loss "contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so." AFLAC Inc. v. Chubb & Sons, Inc., 581 S.E.2d 317, 319 (2004). Extending this concept, the California Court of Appeal, Second District, held for a loss to be covered, there must be a "distinct, demonstrable, physical alteration" of the property. MRI Healthcare Center of Glendale, Inc. v. State Farm General Ins. Co., 187 Cal.App.4th, 766, 779 (2010).
Massachusetts courts have recognized and enforced the physical damage requirement in property insurance policies. The case law holds that that the requirement of physical damage means "material" damage. See, e.g., Crestview Country Club, Inc. v. St. Paul Guardian Ins. Co., 321 F.Supp.2d 260, 264-56 (D. Mass. 2004) (coverage for "direct physical loss or damage" to golf course caused by wind or hail applied to felled tree only and not costs of re¬designing or modifying the golf hole to restore its previous degree of difficulty). The use of the phase "direct physical loss or damage" in the policy is significant, because it connotes physical damage to property. See HRG Development Corp. v. Graphic Arts Mut. Ins. Co., 26 Mass. App. Ct. 374, 377 (1988); Pi-rie v. Federal Ins. Co., 45 Mass. App. Ct. 907, 908 (1998). Coverage is not meant to apply to physical loss in the absence of physical damage. HRG Development Corp., 26 Mass. App. Ct. at 377.
Defined examples of direct physical loss or damage vary across the board. Expo-sure to high humidity, mold and mildew was not considered direct physical loss or damage. See Universal Image Productions, Inc. v. Federal Ins. Co., 475 Fed.Appx. 569 (6th Cir. 2012). More¬over, the mere presence of potentially injurious materials in a building may not qualify as a covered physical loss, yet when these types of materials are activated, for example by releasing gases or fibers, courts have held there exists a covered physical loss. See e.g., Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir.2002) (holding the mere presence of asbestos in an office building does not constitute a direct physical loss); Pine v. Fed. Ins. Co., 45 Mass. App.Ct. 907, 696 N.E.2d 553 (Mass. App.Ct.1998) (holding lead paint in a home, absent peeling or chipping paint, or paint dust, does not constitute a physical loss); Farmers Ins. Co. v. Trutanich, 123 Or.App. 6, 858 P.2d 1332 (1993) (holding the saturation of an insured dwelling by methamphetamine fumes constituted a physical loss); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir.2009) (applying Massachusetts law to find that unpleasant odor constituted a physical injury to property). This survey of nationwide case law clearly establishes that the definition of direct physical loss or damage is handled on a case-by-case basis.
From the policyholder standpoint, business owners, including owners of apartment buildings or multifamily residences, are presented with numerous economic consequences associated with coronavirus outbreak-related quarantines that may give rise to business interruption claims. However, to the extent that business owners seek damages because their operations are located within a region exposed to coronavirus or subject to quarantine protocols, absent verification of physical dam¬age directly related to the outbreak, insurance carriers should not provide coverage for these claims.
For the sake of argument, how should insurance carriers react if the coronavirus outbreak exposure meets the definition of direct physical loss? Again, the analysis returns to specific policy language. Common policy terms, conditions and exclusionary language may further limit or preclude coverage.
In Massachusetts, the insured, as the party seeking coverage, bears the initial burden to prove that it sustained a loss covered by the insurance policy. See Highland Ins. Co. v. Aerovox, Inc., 424 Mass. 226, 230 (1997); Boazova v. Safety Ins. Co., 462 Mass. 346, 351 (2012) (affirming that insured bears the initial burden of proving that the claimed loss falls within the coverage of the insurance policy).
Separately, the insuring agreement for business income also requires that the loss or damage must be caused by or result from a covered cause of loss. With regards to the application of any policy exclusions, the burden falls on the insurance carrier to prove that an exclusion applies. Boazova, 462 Mass. 351.
Turning to exclusions applicable to business income coverage, insurance policies typically contain an exclusion related to governmental action. The policy exclusion for governmental action excludes coverage for loss or damage caused directly or indirectly by the seizure or destruction of property by order of governmental authority. Massachusetts courts have upheld the exclusion. See Alton v. Manufacturers and Merchants Mut. Ins. Co., 416 Mass. 611 (1993) (holding exclusion applied to damage to building which resulted from action by police in carrying out search warrant).
As to the additional coverage for civil authority, when a covered cause of loss causes damage to property other than property at the described premises, insurance policies provide for payment for the actual loss of business income sustained caused by action of civil authority that prohibits access to the described premises, provided that: 1) access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and 2) the action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the covered cause of loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
In relation to the coronavirus outbreak, we question whether this coverage applies because policyholders will face an arduous battle establishing that a covered cause of loss caused damage to their property, rather than the subjective fear of contagion exposure driving business or tenants away.
What is Coming?
Event cancellations and quarantines function to trickle down unparalleled economic gloom on particular industries. Apartment and multifamily property owners will see an increase in lost or delayed rent as tenants abruptly vacate the premises due to fears of expo¬sure to the coronavirus outbreak. Poor planning and inconsistent guidance from governmental agencies will only increase the fear and paranoia as the world comes to grip with the situation.
Insurance carriers will serve as backstops of last resort while business owner's feverishly attempt to recoup their losses through their commercial property and business owner's insurance policies. Chaos and confusion will boil to the surface in the interactions between policyholders, their agents, and ultimately, the insurance company adjuster as¬signed to handle these types of claims.
So what do you, the insurance professional, undertake to properly address and deploy appropriate response plans in the face of the unknown storm on the horizon? As with all challenging times, expect that policyholders and their attorneys will aggressively hit the books in an attempt to push creative cover¬age arguments and legal theories in response to the coronavirus outbreak. Desperation associated with the potential negative financial consequences will drive efforts to find coverage like never before.
- Business interruption and other losses due to the coronavirus outbreak are projected to surpass billions of dollars and span every aspect of the business environment.
- Commercial property/business owner policyholders will proactively review their insurance coverage provisions to guard against the risk of coronavirus and other infectious disease-related losses at their facilities and operations.
- Certain insurance policies may respond with coverage for coronavirus and other infectious disease-related losses, subject to the insuring agreements, conditions, exclusions, and endorsements contained within a particular insurance policy.
- Businesses interested in proactively managing their coronavirus exposure will have plans and procedures ready to deploy well in advance to properly and timely evaluate the adequacy of the coverage with laser precision provided under their existing insurance programs.
- The best response will be team-driven with a combination of experience, the assignment of appropriate staffing, and the expert comprehension of relevant legal authority to guide the claims handling process towards an ultimate coverage determination.