ECONOMY INTERRUPTED: WILL BUSINESS INSURANCE POLICIES COVER COVID-19 LOSSES
This article was authored by Phillip G. Young, Jr., a partner with the law firm of Thompson Burton PLLC, and Leena Shetty, a third year law school student at Vanderbilt School of Law. Questions regarding this article or its contents may be directed to Mr. Young at 615-465-6008 or [email protected]
The COVID-19 outbreak and its consequences have pressured state and federal governments to impose restrictions on businesses across industries, resulting in closings and disruptions to the supply chain and product sales. Many businesses have insurance policies covering business interruption, but will those policies cover losses associated with COVID-19?
Generally, business interruption policies cover lost revenue, fixed costs, expenses associated with operating from a temporary location if appropriate, and other reasonable expenses that enable the business to continue to operate. The coverage extends until the end of the business interruption period. Business interruption clauses often require “physical loss or damage” resulting from a specific event or occurrence (such as a tornado or hurricane) to trigger coverage. When a business suffers interruption due to a pandemic, and has to suspend or reduce operations, this exposure does not fall neatly within the definition of “physical damage.” However, a business interruption policy may provide coverage even when there is no physical damage.
Oceana Grill, a restaurant group, is asking a Louisiana court to expand the interpretation of “physical damage” to include COVID-19, even though the relevant policy does not have the express extension to infectious diseases.(1) In response to the public health crisis, the Governor of Louisiana issued an order banning gatherings of 250 or more people in a single space. Furthermore, the Mayor of New Orleans mandated that all full-service restaurants must close by 9 p.m. daily, and limited the number of guests to 50% of the restaurant’s overall seating capacity. Oceana Grill’s complaint seeks declaratory judgment on several grounds, including whether the civil authority order triggered the civil authority provisions of the insurance policy. The plaintiff also seeks a judgment finding that the insurance policy contains no exclusion for viral pandemic, and that the policy provides coverage for future civil authority shutdowns due to physical loss from COVID-19 contamination.
One of the key issues in the Oceana Grill case is whether the restaurant suffered “direct physical loss or damage” as a result of COVID-19. Typically, “all risk” policies, such as the one involved in this case, provide coverage for physical property damage only. If the property can be easily cleaned to overcome the issue, it has suffered no direct physical damage. Restaurant groups and other retailers may have difficulty proving viral contamination at their locations, which would be the only physical property damage. In fact, many government mandates have merely limited, not closed entirely, business examples, which may prove to be a further problem for damages. If, for example, the governmental order allows restaurants to continue operations with a drive-thru or carry-out, then there is no true interruption of business operations.
The American Property Casualty Insurance Association released a statement that most insurance policies, including those with business interruption coverage, do not cover viruses such as COVID-19 and that to “retroactively rewrite existing insurance policies” could place the insurance industry at risk.(2) Indeed, a finding that business interruption coverage is applicable to the COVID-19 fallout would cost insurance companies billions in damages.
Business owners in some states seeking coverage under similar types of policies may be more successful than those in other states. Recent decisions in New Jersey, for example, have broadly construed “physical damage” in favor of coverage. In Wakefern Food Corp. v. Liberty Mutual Fire Ins. Co.(3), the court determined that the term “physical damage” was ambiguous and covered loss caused by a blackout. Also, in Gregory Packaging Inc. v. Travelers Prop. Cas. Co. of Am.(4), the District Court for the District of New Jersey stated that “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gasses or bacteria suffered direct physical loss or damage.” Accordingly, during COVID-19, public spaces like restaurants may be considered uninhabitable following the reasoning in this line of cases.
State governments may address the lack of coverage within Business Interruption policies as it relates to COVID-19. For example, the New Jersey State Legislature is considering a bill(5), which would force insurance companies to cover COVID-19 related business interruption claims, even when viruses are specifically excluded from the policy. If passed by New Jersey or other states, insurers may challenge its legality due to the unparalleled risk and exposure that insurance companies could face from a high volume of claims. Recently, the New York Department of Financial Services (“NYDFS”) ordered insurers to provide information about the terms and conditions of business interruption coverage provided in their policies. The order suggests that the NYDFS may seek to regulate how New York based insurers apply business interruption coverages. In the aftermath of Hurricane Katrina, the Louisiana Legislature extended the statute of limitations for companies to sue their insurers to cover the damage that occurred during or in the aftermath of the hurricanes. In State v. All Property & Casualty Insurance Carriers Authorized & Licensed To Do Business In State, insurance companies challenged the extensions on multiple grounds, including that the extensions violated the state and federal contract clauses because the extensions substantially impaired their contract rights.(6) The Louisiana Supreme Court upheld the statute, concluding that the statute substantially impaired contract rights, but finding that it was a reasonably proportionate measure to effectuate a legitimate public purpose. The court also reasoned that “state law has traditionally regulated insurance as a matter of public policy, even including the precise procedural mechanism for filing claims at issue herein.”
COVID-19 has already proven to be an unprecedented disaster, with much broader impact than any hurricane or other natural disaster. The attorneys at Thompson Burton PLLC will continue monitoring developments affecting business interruption policies and other COVID-19 legal issues.
(1) Cajun Conti, LLC et a. v. Certain Underwriters at Lloyd’s London et al., Civ. Dist. Ct. La. (2020).
(2) Katherine Chiglinsky, Insurers Push Back Against Legislation on Business Interruption Claims, Claims Journal (2020).
(3) Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 540 (Super. Ct. App. Div. 2009).
(4) Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-cv-04418 (WHW) (CLW), U.S. Dist. LEXIS 165232, at *20 (D.N.J. 2014).
(5) New Jersey Bill A-3844.
(6) State v. All Prop. & Cas. Ins. Carriers Authorized & Licensed to do Bus. in La., 937 So. 2d 313, 319 (2006).