As more than a billion people are under some sort of quarantine law and numerous US states and foreign countries have “shelter in place” laws now shuttering many businesses, COVID 19 has caused a financial crisis for many businesses.
Companies are already turning to their insurers to determine if there is coverage for business loss due to COVID 19. Already, at least one California restaurateur has sued its insurance company, The Hartford, and six Chicago bar and restaurant groups have sued their insurance company, Society Insurance, seeking coverage for COVID 19 business interruption.
In the weeks and months and maybe even years to come, the focus in the insurance industry will be on the COVID 19 crises and whether the Business Interruption” endorsement and/or “Civil Authority” coverage will apply. The issue of whether insurance policies will cover business losses as a result of the COVID 19 pandemic will rely upon the language of policy, public policy and the individual state’s interpret these provisions.
Business Interruption Endorsement and COVID 19
Generally, Business Interruption endorsements in insurance policies are intended to do for the insured what the business itself would have done had no interruption occurred. Business Interruption coverage indemnifies an insured for losses sustained because of the insured’s inability to continue to use specified premises.
Typical Business Interruption Language
Insurance policies vary in the wording of the Business Interruption endorsement. A common version of the insuring agreement language used in a Business Interruption endorsement is:
The insurer will pay an insured during its period of suspended business operation the
Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred . . . ; and
Continuing normal operating expenses incurred, including payroll.
The purpose of the Business Interruption coverage is to replace the amount of earnings required to return the insured to the same financial condition that would have existed had no loss occurred.
The COVID 19 situation does not neatly fall within the law interpreting the Business Interruption endorsement and raises more questions than answers about whether the Business Interruption endorsement applies to the COVID 19 pandemic.
Business Interruption Endorsement and Policy Language Limitations
While companies may assume that their insurance policies would cover an occurrence such as the COVID 19 pandemic, the answer is not as simple. The actual policy language may not be so broadly written to encompass a medically catastrophic event, and the contract may include terms and conditions that limit the coverage, leaving the insureds earning less than they would have earned in the absence of the catastrophe.
- There must be a compensable loss.
Generally, an insured cannot recover for lost profits due to Business Interruption where there has been no actual loss. In other words, Business Interruption is not itself a loss. An actual loss occurs only where the insured is unable to reduce or eliminate lost profit caused by the interruption. Thus, where the insured can later recoup the loss, there is no recoverable business interruption. Delay, without more, is generally not compensable. Moreover, there may be the issue of whether the cause of the business interruption is due to the COVID 19 virus or a change in the consumer demand for that good or service.
- There must be a physical loss.
States also vary in how broadly or narrowly they interpret “physical loss.” Some courts interpret “physical loss” narrowly to mean a physical alteration/destruction of the property while other courts interpret “physical loss” more broadly to apply to the loss of use and/or habitability of the property. With the COVID 19 pandemic, most shuttered businesses will not have any physical alterations, but may have damages related to clean up after a COVID 19 exposure.
States also differ on how they treat “loss of habitability” and whether the property is “habitable.” Loss of habitability due to a COVID 19 outbreak may be sufficient to trigger coverage depending on policy language.
- There must be a suspension of business operations.
The typical Business Interruption provision applies where the business “suspends” operations, yet are still otherwise operational. Undoubtedly, there are many businesses that are operating at less than full operational capacity in this COVID 19 situation.
- There may be exclusions for pollution.
CIVIL AUTHORITY COVERAGE AND COVID 19
Civil Authority provisions are another source of potential coverage where the insured may not meet the requirement of the Business Interruption coverage because there is no physical loss or damage at the described premises.
Typical Civil Authority Coverage
The typical "Civil Authority" provision reads:
Coverage is provided when access to the described location is prohibited by order of civil authority. This order must be given as a direct result of physical loss or damage from a peril of the type insured by this policy. The company will be liable for the actual amount of loss sustained at such location for a period of up to 30 consecutive days from the date of this action.
The COVID 19 pandemic and governmental response does not fall neatly within the typical Civil Authority coverage provisions.
Civil Authority Coverage Limitations and COVID 19 Pandemic
There is no easy answer to whether a policy with a Civil Authority Coverage provision will cover businesses that are closed due to COVID 19. The actual policy language may not be so broadly written to encompass a medically catastrophic event, and the provision may include terms and conditions that limit the coverage, leaving the businesses with no insurance recovery.
- The prohibited access must be by “Civil Authority.”
In order to trigger this coverage, the access must be denied or prohibited by the “Civil Authority.” Policies differ on what constitutes “Civil Authority”. The language generally requires that the civil authority prohibit access. Most businesses are operating under the COVID 19 “shelter in place” orders, with at least the ability to access the premises and maintain a certain amount of employees so long as they maintain social distancing. The policies may require that the entire business be shuttered in order to even fall within this coverage.
- The action must also be prohibited – not just recommended.
Voluntary actions may not satisfy most policies. Many businesses are making the voluntary choice to close their business temporarily to protect their employees and to stop the spread of COVID 19 in their community. These “voluntary” closures may not fall within “Civil Authority” coverage.
- There must be “Physical Damage.”
Most policies do not insure against impairment of operations that occur simply because a civil authority prohibits access to the property. The denial of access must meet the requirements of the policy--one of those requirements is a nexus between the governmental order and certain physical damage.
While the property damage need not be to the business, and could be to a neighboring business or street, the same issues arise under Civil Authority coverage as do under the Business Interruption Coverage – is there property damage as defined by both state law and the policy? Again, states differ greatly on what constitutes property.
- There must be a nexus between the order and “Physical Damage.”
Under most the most common policy, the coverage does not insure against impairment of operations that occurs simply because a civil authority prohibits access unless the civil authority order meets the requirements of the policy--one of those requirements is a nexus between the order and certain physical damage.
- There must be a loss.
As with Business Interruption provisions, there is still the issue of whether the loss is the result of the “Shelter in Place” order or the consumer response to those shuttered businesses and a redistribution of needs and wants. For some goods and services it is merely a delay in consumer needs; the goods and services will again be needed at some future point.
COVERAGE ISSUES WILL MOST LIKELY RESULT IN YEARS OF LITIGATION.
The issues raised above are by no means an exhaustive list of concerns with COVID 19 and whether businesses will be afforded any insurance coverage for loss of business. These are unprecedented times. Litigation over these issues may take many years to sort out and will forever shape insurance coverage for a future where pandemics are no longer considered theoretical.
MCKENNA STORER IS COMPLYING WITH ILLINOIS’ SHELTER IN PLACE ORDER.
While Illinois has a “Shelter in Place” order that provides an exception for legal professionals, such as attorneys, to go into their office, McKenna attorneys, paralegals and staff are able to work remotely while still providing full service to its clients. In the interest of protecting other employees and Illinois citizens as a whole, we are Sheltering in Place when possible but are still able to handle all legal matters.
If you have any questions regarding coverage and the COVID 19 crisis, contact Kristin Tauras at McKenna Storer. firstname.lastname@example.org