The coronavirus is spreading rapidly and its course remains unknown. States across the country have responded by passing measures to keep millions of people in “self-isolation.” Governor Gavin Newsom has ordered everyone in California to stay at home, with the exception of getting food or medications, caring for a relative or a friend or working at an “essential job.” All non-vital businesses have closed and even many of those deemed “essential” have had to severely restrict their hours. Thousands of businesses in California are experiencing substantial financial distress. In addition, countless businesses are experiencing disruptions due to stalled supply chains, decreased consumer demand and travel restrictions. Although the federal government has passed measures to aid some of the companies, many companies are examining their insurance policies to determine if any provisions cover the economic losses caused by this pandemic.
Many businesses have Business Interruption insurance as part of their first-party property insurance or as a free-standing policy. Business Interruption insurance protects against losses suffered due to periods of suspended operation caused by property damage. In the majority of cases, pandemics or widespread illnesses do not constitute property damage. Rather, the actual contamination of tangible property may constitute property damage for insurance purposes. Specifically, the majority of these policies require “direct physical loss or damage” as a requirement for receiving payment. Consequently, if actual contamination of property causes a business to shut down facilities or assets, Business Interruption insurance might provide coverage. Although quarantines and travel bans render it impossible for many employees to perform their jobs, they do not cause the physical damage to the workplace necessary to trigger successful Business Interruption clauses. A determination of whether “physical loss” has occurred, requires a close examination of the particular facts of each case.
In the past, Business Interruption insurance policies were more permissive. However, following other viral epidemics- such as the SARS in 2003, the Ebola in West Africa in 2014 and Zika in 2015, insurance companies began limiting the application of the Business Interruption clause. Under these policies, standard Business Interruption policies primarily cover property damage caused by events such as fire, terrorism and natural catastrophes. Specifically, insurers added specific exclusions to their policies for bacterial or viral infections. This means that in order to succeed on a claim under a Business Interruption provision, a company’s insurance policy would have had to contain a pre-negotiated communicable disease provision.
One way to potentially succeed on a Business Interruption claim is to demonstrate that the interruption in one’s business is because a pandemic or communicable disease has rendered one’s business contaminated or otherwise “uninhabitable.” Consequently, the resultant loss of the business constitutes physical damage. In cases in which an outbreak forces a business to sanitize and/or close its business, there may be a plausible argument that physical damage has occurred. This will depend on both the generally agreed-upon definition of physical damage in the company’s jurisdiction, as well as on whether the specific wording of the policy excludes such a claim. In the latter case, a business would not be able to assert a claim for coverage.
Businesses also contend that if the classic business interruption provision does not apply, then the contingent business interruption should. Contingent business interruption provisions provide insurance for losses resulting from disruptions to a business’s customers or suppliers, as long as the underlying cause of damage to the customer or supplier is of the type provided by the insured business owner’s own property. A straightforward example is when an insured party has its business interrupted because a parts’ supplier must shut down its operations due to a fire or flood. As a result, the insured cannot produce goods incorporating those parts for its own customers, resulting in substantial economic loss. In the case of the coronavirus, the insured could plausibly argue that fear of viral infection caused a supplier to shut down production and, therefore, the contingent business interruption applies.
To determine whether or not the Business Interruption insurance coverage applies to the impact of the coronavirus on your business, it is essential to work with an attorney knowledgeable in the interpretation of contracts. Together you will want to examine the precise wording of your insurance policy as well as thoroughly document all of your losses. Ms. Gohar Abelian of the Abelian Law Firm is an experienced and highly regarded attorney who can work with you to maximize your likelihood of recovery under your insurance policy. To schedule a free consultation with Ms. Abelian, contact the Abelian Law Firm at (818) 588-5337.