BUSINESS INTERRUPTION CLAIM DENIED?
December 8, 2020 | Richard M. Williams
The business world is fraught with uncertainties and risks. That’s why many businesses count on insurance for protection. Business interruption coverage is designed to cover business expenses and income if the company unexpectedly can no longer operate. Unfortunately, when a claim is coronavirus-related, it is almost always denied.
The insurance industry would have us believe that business interruption insurance coverage is not available for coronavirus-related claims, arguing that they lack the requisite “direct physical loss or damage”.
Physical Loss or Damage
Marine cargo insurance policies in the 1930’s marked the first appearance of “physical loss or damage” language. When property insurers introduced all-risk policies in the 1950s, they incorporated the “physical loss or damage” test.
Hourigan, Kluger & Quinn Attorney Richard Williams notes that “While the policy language is created by the insurer, the interpretation of it is the responsibility of the courts.” A court must give effect to the plain language of the insurance contract read in its entirety. When the language of an insurance policy is ambiguous, the provision must be construed in favor of the insured.
The dictionary definition of “physical” suggests that that physical loss or damage requires a demonstrable physical change to insured property. No court had interpreted “physical loss or damage” otherwise until 1968. That changed with the Colorado Supreme Court’s ruling in Western Fire Insurance Co. v. First Presbyterian Church 437 P.2d 52 (Colo. 1968). The Littleton Fire Department had ordered the church closed because an accumulation of gasoline under and around the church rendered the premises uninhabitable and dangerous. The court concluded that the church’s “loss of use equated to a direct physical loss.”
In 1992, a Pennsylvania court reached a similar conclusion. In Hetrick v. Valley Mut. Ins. Co., 15 Pa. D. & C.4th 271 (Pa. Com. Pl. 1992) the court ruled that an oil spill that polluted ground water in the vicinity of an insured building “may make a building uninhabitable,” and that if the building is uninhabitable, it has sustained a physical loss for the purposes of insurance coverage.
Once the insured clears the “physical loss or damage” hurdle, there may still be other obstacles such as exclusions. After the SARS epidemic in the early 2000s, insurance carriers began to exclude viral or bacterial outbreaks from standard coverage. An example of this type of exclusion might read: “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.” If your policy doesn’t contain such an exclusion, you are in a better position. Even if there is a virus exclusion, it may not apply in your particular circumstances. In Pennsylvania, exclusions are interpreted narrowly.
Civil Authority Orders
Business and property insurance policies often contain a civil authority coverage provision. This coverage typically applies when a civil authority (e.g., state, local or federal governmental entity) prohibits or restricts access to an insured’s premises due to direct physical loss of or damage to property other than at the insured’s premises, from a covered cause of loss. Even with the provision insurers may deny civil authority coverage on the grounds that the COVID-19 closures do not qualify as a covered cause of loss.
The best hope for policyholders may be found in state legislation. Pennsylvania’s Senate and House have proposed bills aimed at providing or increasing coverage.
House Bill 2372, would require an insurer to find coverage even though its policies do not cover such claims, whether due to the required “direct physical loss or damage” condition precedent or an explicit virus exclusion. The Bill construes the policy to include, among other perils, coverage for business interruption due to global virus transmission or pandemic.
In addition to requiring an insurer to find coverage, Senate Bill 1114 creates coverage of between 75% and 100% of policy limits and contains broader interpretations of the terms “property damage” and “covered perils.” The Bill would provide coverage for loss of property damage due to COVID-19 and coverage for loss due to a civil authority order related to the declared disaster emergency caused by COVID-19.
Senate Bill 1127 provides that businesses or organizations located within municipalities where the presence of a person with COVID-19 has been identified, or in which the presence of the coronavirus has otherwise been detected, are deemed to have experienced property damage.