Finding Coverage Where Once Was None
Plaintiffs’ firms are already filing COVID-19 cases. Here’s how to prepare coverage defenses
A colleague recently diagnosed with COVID-19 was inundated with solicitations from plaintiffs’ firms looking to file suit against the cause of the exposure. A restaurant forced to close filed suit seeking coverage for business interruption losses in Louisiana.
In case you didn’t know, COVID-19 claims are here. With more and more states ordering movie theaters, restaurants, bowling alleys, and other businesses to close, and more and more people testing positive, the claims are just beginning. Lawyers on both sides of the “v.” are rushing to research how to assert and defend lawsuits based on a variety of theories, and for good reason.
Restaurant.org projected sales of $899 billion in 2020 for the restaurant industry. That number is certain to be slashed because of the pandemic. Restaurants will be closed for weeks and maybe even months, and many will shutter their doors for good.
Policyholders will face an uphill battle for coverage of COVID-19 losses under the typical commercial property policy, but astonishingly, the New Jersey legislature is already discussing a statutory means to shift these losses to the insurance industry. Assembly Bill 3844 sought to rewrite insurance policies to provide coverage for COVID-19 business interruption losses whether or not they contained a virus exclusion. The bill was introduced on March 16 and remains subject to revision. If it is ultimately passed, it will certainly be challenged on constitutional grounds by the insurance industry.
The more traditional and prevalent way insureds are expected to try to shift COVID-19 losses to insurers is through litigation. On March 16, 2020, the Oceana Grill in New Orleans filed what is believed to be the first declaratory judgment action against an insurer seeking business interruption and/or civil authority coverage for COVID-19 losses. Shortly before the suit was filed, Louisiana’s governor issued a civil authority order banning large gatherings in a single space, such as the Grill’s restaurant space. After the suit was filed, the governor closed all restaurants to indoor dining by civil order.
The Grill asserts that coverage exists because its policy covers all risks unless excluded; does not specifically exclude coverage for losses from a virus or global pandemic; and, therefore, allegedly covers “direct physical loss and/or from a civil authority shutdown due to a global pandemic virus.” The Grill asserts that COVID-19 satisfies the third provision because it is physically impacting private property and physical spaces by remaining viable on surfaces that then require cleaning and fumigating due to the intrusion of microbials, resulting in a direct physical loss needing remediation. The complaint boldly asserts that any argument by the insurer to the contrary would be a false and potentially fraudulent misrepresentation that could endanger policyholders and the public. The Grill’s complaint is a preview of the public policy arguments other insureds are sure to make.
The case authority for the Grill’s coverage claim appears to be a Louisiana case that held that the intrusion of lead or gaseous fumes that must be remediated constitutes a “direct physical loss.”
Louisiana is not the only state with such case authority. The greater weight of authority is against these claims, but the Louisiana action is likely only the first of many suits aimed at limiting or reversing precedent adverse to insureds.
Standard Business Interruption Coverage Terms
The standard business income and extra expense coverage form in a commercial property policy provides that the insurer will pay for the actual loss of business income that an insured sustains due to necessary suspension of the insured’s operations during the period of restoration, and that the insurer will pay extra expense to avoid or minimize the suspension. However, the suspension must be caused by “direct physical loss of or damage” to the covered property, and the loss or damage must be caused by, or result from, a covered cause of loss. In the standard “Causes of Loss – Special Form,” covered causes of loss mean “risks of direct physical loss unless the loss is excluded or limited.”
Contingent Business Interruption Coverage
Insurers will also see claims for contingent business interruption coverage, which is a relatively recent development in insurance law and has not yet been fully delineated by the courts. It is intended to cover business income disrupted by physical damage to third-party property not owned or operated by the insured, such as suppliers of materials or essential advertisers that attract customers. Regular business interruption insurance replaces profits lost as a result of physical damage to an insured’s production plant or other equipment; contingent business interruption coverage goes further, protecting the insured against supply chain disruption.
Contingent business interruption coverage also typically requires that there be a “direct physical loss or damage” to property, although in this case the property is not operated or owned by the insured, and the loss or damage prevents a direct supplier or recipient of goods or services from providing or accepting goods or services from the insured.
Insureds will likely argue that the requirement of direct physical loss is satisfied by physical contamination by COVID-19 of its suppliers or customers, similar to that found by the release of asbestos fibers in a building that was contaminated but not physically damaged. Some courts have found this sufficient. However, this coverage usually encompasses destroyed property of the insured’s customers or suppliers, which has generally been held not to include contagious diseases.
Civil Authority Provision
March 2020 also brought a flurry of mandatory business closures. It is likely that insureds will look at the civil authority provision for potential coverage for the resulting loss in business, which states generally that losses resulting from order of civil authority are covered for specific described locations, such as an event location or insured premises.
Case law shows that coverage is provided when access to the described location is prohibited by order of civil authority, and this order must be given as a direct result of physical loss or damage from a peril of the type insured by this policy. In Penton Media Inc. v. Affiliated FM Ins. Co., 245 Fed.Appx. 495, 498 (6th Cir. 2007), a case in which the premises was requisitioned as a base of operations for a civil authority but not physically damaged, the 6th Circuit reasoned that coverage did not apply because coverage explicitly applies only to physical loss or damage, and not to prohibition of access due to order of civil authority.
The ISO Virus Exclusion
This “direct physical loss of or damage” to property language will be the front line in the war to come as to each of the above coverages. As demonstrated in the recently filed Louisiana suit, the insured may assert that the covered property was contaminated by COVID-19 and required remediation, and that a governmental body thereafter ordered the suspension of the insured’s operations. There is case law that the insured may cite supporting the proposition that contamination requiring remediation of the covered property is “direct physical loss of or damage” to the covered property.
There are also policy exclusions, though, that the insured must address. The exclusions contained in “Causes of Loss – Special Form” might be found inapplicable because viruses are not included among the typical list of contaminants provided in the pollutants exclusion. The insured may assert that the covered cause of loss is the COVID-19 contamination of the covered property, not a “delay, loss of use, or loss of market” act or decision of any governmental body, or faulty, inadequate or defective maintenance. Still, there is one exclusion contained in most commercial property policies today that insureds will have great difficulty addressing.
In 2006, ISO created the exclusion of loss due to virus or bacteria. It states, “We will not pay for loss or damage caused by or resulting from any virus, bacterium, or other microorganism that induces or is capable of inducing physical distress, illness, or disease.” There is scant case law suggesting that the exclusion itself is ambiguous. Case law that has addressed the communicable disease exclusion in homeowners policies—an exclusion predating the exclusion of loss due to virus or bacteria—seems to suggest that the 2006 exclusion is not ambiguous. [See Lambi v. American Family Mut. Ins. Co., 498 Fed. Appx. 655 (8th Cir. 2013).]
However, some sympathetic trial courts may choose to view this as a jury issue, and plaintiffs’ lawyers will be champing at the bit to get an impacted business owner in front of jurors who were also affected by COVID-19.
Preparing Your Case
It appears that among the major battlegrounds will be the question of whether viral contamination resulting in denial of access by a civil authority may be viewed as direct physical loss or damage, and, if so, whether the policy contains an exclusion that clearly and unambiguously establishes that the direct physical loss was not caused by a “covered cause of loss.”
Many courts have held in what we believe are analogous circumstances that there was not direct physical loss caused by a covered cause of loss, but there will be considerable pressure on courts to find coverage given the extent and scope of the economic impact of the COVID-19 pandemic.
Insurers should expect to see citations to cases holding that the mere presence of asbestos fibers or a harmful pesticide satisfies the “physical damage” requirement, and instances where individual judges allow COVID-19 coverage claims to go to a jury.