Trial Magazine

In response to the coronavirus pandemic, state and local governments across the country issued stay-at-home orders and ordered “non-essential” businesses to close to try to prevent the virus’s spread.¹ While these closures benefit public health, they can devastate businesses. The National Restaurant Association, for example, estimated that U.S. restaurants lost $225 billion due to the pandemic in the first three months alone.²

Insurance, however, may help cover business owners’ losses. To assist business owners when they come to you, become familiar with the basic types of coverage and exclusions you are likely to encounter. 

As with all first-party insurance issues, the first step is to closely examine the language in the particular policy. You likely will see variations in the coverage language. For example, some policies include language that expressly covers damages caused by microorganisms, some exclude those types of damages, and others may exclude coverage for damages caused by bacteria but not viruses. The main things you should look for in a business owner’s policy are business interruption coverage, civil authority coverage, and microorganism coverage, as well as any coverage exclusions.

Business Interruption Coverage

Business interruption coverage insures a business for losses caused when its normal business operations are disrupted. This coverage usually is part of a broader insurance policy, but some businesses may have separate policies that specifically cover business interruption losses. In most cases, business interruption coverage will begin immediately and last for 12 months; some policies have either 24- or 72-hour “deductible” periods before coverage starts, as well as shorter periods of coverage (usually 30 days).

Be aware that business interruption coverage typically includes standard policy language limiting coverage to losses caused by “direct physical loss of or damage to property.” Usually, physical loss or damage is caused by things such as fire, wind, or water, and we can expect insurers to argue that business closures related to cornavirus do not meet the requirements of a direct physical loss of or damage to property. 

But a number of cases confirm that physical loss or damage can occur without damage to actual property structures. For example, in Wakefern Food Corp. v. Liberty Mutual Fire Insurance Co., a New Jersey court held that because a blackout damaged a company’s electrical grid and the company’s electrical system experienced a “loss of function,” it had suffered physical loss or damage.³

Likewise, in Western Fire Insurance Co. v. First Presbyterian Church, the Colorado Supreme Court—noting that the facts could not be viewed “in splendid isolation”—concluded that there was physical loss or damage to a church building after gasoline accumulated around and under it because “the premises became so infiltrated and saturated as to be uninhabitable, making further use of the building highly dangerous.”⁴

Some courts, however, have interpreted this language very strictly.⁵ For example, when a food wholesaler lost business income after the U.S. Department of Agriculture prohibited importing beef from Canada to prevent the spread of mad cow disease, a court found that this loss did not count as a direct physical loss.⁶ Because this case dealt with a microorganism, it often is cited in industry blogs or articles considering the applicability of business interruption coverage to COVID-19-related losses and is likely to be used as a justification for denying coverage. 

Other courts have held that business losses caused by a threatened loss—from a nearby flood or fire, for example—are not physical losses.⁷ In some states, a business may not be covered for business interruption losses unless it can prove that the business was contaminated by (or at the very least exposed to) the coronavirus and was forced to close as a result.⁸ As part of your investigation, look into whether the business owner has evidence of actual coronavirus contamination: Did an employee or multiple employees test positive for the virus? 

A policy with business interruption coverage and an “extra expense” provision usually will cover extra expenses resulting from the loss. This coverage pays for costs a company incurs to minimize the suspension of business and for the costs of repairing or replacing the property. Your clients should record these extra expenses, such as the setup costs of working remotely or decontaminating their business. 

Civil Authority Coverage

The insurance policy also may have civil authority coverage—this covers lost business income when your business is closed by order of a government entity. However, coverage may apply only when orders are specifically directed to a particular location or industry. 

After Sept. 11, 2001, and the resulting closure of U.S. airspace, travel, hotel, restaurant, and other hospitality businesses were devastated by lost revenue due to the lack of airline travelers. Although these businesses had civil authority coverage, insurers denied their claims, arguing that the government did not order those businesses to close. Unfortunately, a number of courts agreed.⁹

Other courts have reached similar decisions in the aftermath of hurricanes. For example, a Louisiana federal court held that there was no civil authority coverage when a government order encouraged people to stay off the streets but did not prohibit access to the business.¹⁰

However, you can use these same decisions to make a strong case that civil authority coverage applies to business losses caused by government-ordered closures due to the coronavirus. Stay-at-home orders are broad, and many of the closures have been specifically directed at the types of businesses that may seek help. Most restaurants were limited to takeout or delivery service, and many non-essential businesses—retail stores, elective or non-emergent surgical centers, and others—were ordered to close completely. 

Be aware that the analysis of civil authority coverage may be related to whether a “direct physical loss of or damage to property” has occurred. Some courts have found that there is  coverage only if the business was ordered to close by a government entity and the closure was the result of a direct physical loss of or damage to property.¹¹

Microorganisms

Since the 2003 SARS outbreak, some insurance policies explicitly exclude damages caused by microorganisms. A standard provision excludes payment “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.” Other policies, however, may exclude from coverage only losses caused by bacteria and not by viruses such as the coronavirus. Again, a careful reading of the policy is crucial. 

Insurers also likely will argue that standard policy language barring coverage for damages caused by “pollution” applies to business losses caused by the coronavirus. Courts have not uniformly interpreted the applicability of these provisions to microorganisms. 

An Arizona court held that bacterial contamination does not constitute pollution despite the presence of the word “contaminant” in the term’s definition.¹² A Wisconsin court interpreting identical policy language reached the opposite result, however, concluding that bacteria fell under the plain meaning of “contaminant” as used in the policy’s definition of pollution.¹³

The standard language in a pollution exclusion states the insurer will not cover “damage caused by or resulting from the discharge, dispersal, seepage, migration, release, or escape of ‘pollutants and contaminants.’” Since “discharge,” “dispersal,” and the other terms clearly envision what would usually be understood as industrial wastes, there is an untested but strong argument based on this language that the exclusion should not apply to viruses.

However, at least some policies that target restaurants, gyms, theaters, doctors’ offices, and similar industries explicitly provide coverage for losses caused by “communicable or infectious diseases,” without the need to show that the loss was the result of physical damage to property. 

The First Wave of Litigation

Business owners have filed cases asking courts to determine the extent of coronavirus-related insurance coverage. A New Orleans restaurant in the heart of the French Quarter filed what appears to be the first coronavirus-related first-party insurance lawsuit in March, seeking a declaratory judgment that the business suffered a direct physical loss and was covered for damages caused by civil authority closures.¹⁴

The Chickasaw Nation and the Choctaw Nation of Oklahoma both filed broadly pleaded suits against Lexington Insurance Company and others,¹⁵ and the famed Napa Valley restaurant French Laundry filed a similar suit.¹⁶ Suits alleging breach of contract and bad faith for claim denials, as well as class actions seeking broader relief on behalf of policyholders, also have been filed, and we can expect to see many more.¹⁷

The bottom line is that U.S. business losses caused by the coronavirus will be staggering, and insurers will raise every excuse to avoid covering these losses. But when businesses obtain insurance, they expect to be protected if they are unable to continue normal operations. These basic tips will help you get started in your quest to get insurers to hold up their end of the bargain.

Patrick Luff is an attorney at The Ammons Law Firm in Houston and can be reached at patrick.luff@ammonslaw.com. 

Notes

1. Forty-two states, Washington, D.C., and Puerto Rico issued stay-at-home or shelter-in-place orders. Sarah Mervosh, Denise Lu & Vanessa Swales, See Which States and Cities Have Told Residents to Stay at Home, N.Y. Times (Apr. 20, 2020), https://www.nytimes.com/interactive/2020/us/coronavirus-stay-at-home-order.html. Most  of these states reopened by late May. Sarah Mervosh et al., See Which States Are Reopening and Which Are Still Shut Down, N.Y. Times (May 21, 2020), https://www.nytimes.com/interactive/2020/us/states-reopen-map-coronavirus.html. 
2. Letter from Nat’l Rest. Ass’n to Donald J. Trump, President; Nancy Pelosi, House Speaker; Mitch McConnell, Sen. Majority Leader (Mar. 18, 2020), https://restaurant.org/Downloads/PDFs/business/Natl-Rest-Association-COVID-Letter. 
3. Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724, 734 (N.J. Super. Ct. App. Div. 2009).
4. W. Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968) (en banc).
5. See, e.g., Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710 (E.D. Mich. 2010), aff’d sub nom. Universal Image Prods., Inc. v. Fed. Ins. Co., 475 F. App’x 569 (6th Cir. 2012); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E. 2d 1130, 1144–45 (Ohio Ct. App. 2008).
6. Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834, 836–38 (8th Cir. 2006).
7. See, e.g., Phoenix Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 824–25 (S.D. Iowa 2015).
8. See Gen. Mills, Inc. v. Gold Medal Ins. Co., 622 N.W.2d 147, 151–52 (Minn. Ct. App. 2001); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300–01 (Minn. Ct. App. 1997).
9. See, e.g., S. Hosp., Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1139–41 (10th Cir. 2004); Phila. Parking Auth. v. Fed. Ins. Co., 385 F. Supp. 2d 280, 289–90 (S.D.N.Y. 2005); 730 Bienville Partners, Ltd. v. Assurance Co. of Am., 2002 WL 31996014, at *2 (E.D. La. Sept. 30, 2002), aff’d, 67 F. App’x 248 (5th Cir. 2003).
10. Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, LLP v. Nat’l Fire Ins. Co. of Hartford, 2007 WL 2489711, at *4 (M.D. La. Aug. 29, 2007). But see Assurance Co. of Am. v. BBB Serv. Co., 593 S.E.2d 7, 7 (Ga. Ct. App. 2003); see also Narricot Indus., Inc. v. Fireman’s Fund Ins. Co., 2002 WL 31247972, at *4 (E.D. Pa. Sept. 30, 2002). 
11. See Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683, 685 (5th Cir. 2011); S. Tex. Med. Clinics, P.A. v. CNA Fin. Corp., 2008 WL 450012, at *2 (S.D. Tex. Feb. 15, 2008).
12. Keggi v. Northbook Prop. & Cas. Ins. Co., 13 P.3d 785, 789–90 (Ariz. Ct. App. 2000).
13. Landshire Fast Foods of Milwaukee, Inc. v. Emp’rs Mut. Cas. Co., 676 N.W.2d 528, 532–33 (Wis. Ct. App. 2004).
14. Petition for Declaratory Judgment, Cajun Conti LLC v. Certain Underwriters at Lloyd’s, London, No. 2020-02558 (La. Dist. Ct. Orleans Parish filed Mar. 17, 2020).
15. Petition for Declaratory Judgment, Chickasaw Nation Dep’t of Comm. v. Lexington Ins. Co.,  No. CV-20-35 (Okla. Dist. Ct. Pontotoc Cty. filed Mar. 24, 2020); Petition for Declaratory Judgment, Choctaw Nation of Okla. v. Lexington Ins. Co., No. CV-20-42 (Okla. Dist. Ct. Bryan Cty. filed Mar. 24, 2020).
16. Complaint for Declaratory Relief, French Laundry Partners, LP v. Hartford Ins. Co. (Cal. Super. Ct. Napa Cty. filed Mar. 25, 2020), https://www.claimsjournal.com/app/uploads/2020/03/frenchlaundrycomplaint-1.pdf.
17. See, e.g., Civil Action—Complaint Seeking Declaratory, Compensatory, and Injunctive Relief, Joseph Tambellini, Inc. v. Erie Ins. Exch., No. GD-20-5137 (Pa. Ct. Com. Pl. Allegheny Cty. filed Apr. 17, 2020); Civil Action—Class Action Complaint, HTR Rest., Inc. v. Erie Ins. Exch., No. GD-20-5138 (Pa. Ct. Com. Pl. Allegheny Cty. filed Apr. 17, 2020); Plaintiff’s Original Petition & Request for Disclosure, Aesthetic Vein & Laser Inst., LLC v. Sentinel Ins. Co., No. 2020-DCL001763 (Tex. Dist. Ct. Cameron Cty. filed Apr. 13, 2020); Class Action Complaint, Rising Dough, Inc. v. Soc’y Ins., No. 2:20-cv-00623-WED (E.D. Wis. filed Apr. 17, 2020). On Apr. 20, a motion was filed with the U.S. Judicical Panel on Multidistrict Ligitation seeking to consolidate “pretrial proceedings for all lawsuits filed on behalf of small business owners nationwide who have been denied insurance coverage for business interruptions linked to the COVID-19 outbreak.” Irvin Jackson, Centralization Sought for COVID-19 Business Interruption Insurance Coverage Lawsuits, AboutLawsuits.com (Apr. 21, 2020), https://www.aboutlawsuits.com/covid-insurance-mdl-sought-170933/.