Business Interruption: The Convergence of Coverage and Science

The United States is now reported to have the most COVID-19 cases in the world, with more than 140,000 cases confirmed. This number is projected to increase significantly over the coming weeks and months. The COVID-19 pandemic has already caused substantial worldwide economic disruption and its impact is likely to be felt for years.

Businesses are already feeling the economic effects of this pandemic. In many states, businesses have had to alter their practices, either by choice or in response to various governmental recommendations or orders, resulting in lost income and profits. When an employee, customer or visitor to a business has been diagnosed with COVID-19, some businesses have closed to decontaminate their premises. Other businesses have chosen to close even without any indication that a COVID-19 infected person was on the premises, in order to protect their employees and customers from potential exposure. Many of these businesses will look to their insurers in an attempt to recoup their losses.

Whether a particular business has insurance coverage for such losses will depend on the type of coverage in place, the particular terms of the policy and the specific facts of the claim. It may also depend on the results of the scientific study of how long the virus that causes COVID-19 can survive in an infectious state on the surface of insured properties. This article generally examines the coverage available under the business income coverage part of a commercial property insurance policy, and the scientific research that may impact the insurance coverage issues.

Coverage for Lost Business Income and Extra Expense — Overview

Commercial property insurance policies may include coverage for lost business income and extra expense. These coverages are intended to protect the insured from business interruptions resulting from a covered loss under the policy, and also to indemnify the insured for expenses incurred in connection with continuing business operations or mitigating the suspension of operations. Coverage for lost business income and extra expense (often referred to generally as “business interruption coverage”) may be found in a standalone policy, or may be incorporated into the standard commercial property policy. In the latter case, such coverage is frequently contained in an endorsement to the policy, and the coverage afforded by such endorsements may be subject to a reduced “sublimit,” that limits the amount payable to an amount less than the full coverage limit. Moreover, such coverage may be limited to a maximum period of time (e.g., 12 months). In evaluating coverage, it is also important to make sure that the document being reviewed is the current policy and contains all endorsements, riders and amendments.

To trigger coverage under a typical commercial property policy for lost business income or suspension of operations, an insured must demonstrate that the loss meets certain threshold requirements. As a general rule such policies require that (1) there be a direct physical loss of or damage to the property at the premises described in the policy and that the loss or damage result from a covered cause, (2) the covered loss must cause a necessary suspension of or interruption of the insured’s operations, and (3) the business income loss must be caused by the suspension or interruption. In addition to coverage for business income loss, a commercial property policy may also provide a separate “Extra Expense” coverage, which affords coverage for “the necessary expenses incurred during the period of restoration that would not have been incurred if there had been no direct physical loss or damage.” As with coverage for lost business income, the insured must generally demonstrate that the “extra expenses” sought would not have been incurred absent a direct physical loss or damage to the insured property that resulted from a covered cause.

Requirement of Direct Physical Loss/Damage — General Rule

To afford coverage for business income loss and/or extra expense, most policies will require that the insured suffer a “direct physical loss” of or damage to the insured property. These terms are generally not defined in policies, so under the rules of construction applicable to insurance policies they should be interpreted in accordance with their plain meaning. Under ordinary circumstances, coverage is sought when an insured property is damaged as a result of a single act or event — a fire, a hurricane or an earthquake. In those cases, it is clear that the property has suffered a “distinct, demonstrable, and physical alteration of its structure,” and therefore there is no question as to whether coverage is triggered. See, e.g., Port Authority of N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d. Cir. 2002) (explaining that this statement of the requirement of physical damage is a widely accepted definition); see also, MRI Healthcare Ctr. Of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779-780 (2010) (“A direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring repairs be made to make it so’”) (citation omitted).

Can A Pandemic Result in Direct Physical Loss/Damage?

A pandemic, of course, is different than a fire, hurricane or earthquake as it does not cause readily observable distinct, demonstrable and physical alteration of property’s structure. Does this mean that a pandemic cannot trigger coverage for lost business income and/or extra expense?

Direct Physical Loss/Damage Is Required for Coverage

No court has yet determined whether the requirement of direct physical loss or damage can be satisfied by businesses facing lost income or suspension of operations due to the COVID-19 pandemic. Exposure to the virus that causes COVID-19, SARS-CoV-2 does not result in a readily observable physical alteration of the insured’s property.

Many courts interpret the requirement of direct physical loss narrowly, and require a demonstrable physical harm to the property, rather than simply the loss of use of the property to trigger coverage. See, e.g., The Phoenix Ins. Co. v. Infogroup, Inc., 147 F. Supp. 3d 815, 826-28 (S.D. Iowa 2015) (flooding of parking lot was not a direct physical loss); Newman Myers Kreins Gross Harris, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323, 331-32 (S.D.N.Y. 2014) (no direct physical loss when loss of power prevented access to building); Universal Image Productions, Inc. v. Chubb Corp. 703 F. Supp. 2d 705, 710-11 (E.D. Mich. 2010) (no “direct physical loss” when insured demonstrated presence of mold and odor, but building was not rendered uninhabitable and there was no evidence of structural or tangible damage to the property); MRI Healthcare Ctr., 187 Cal. App. 4th at 779-80 (no direct physical loss when MRI machine failed to ramp up properly after it was turned off in connection with roof repairs, because no physical injury to machine); Source Food Tech. Inc. v. USF&G, 465 F.3d 834, 837-38 (8th Cir. 2006) (embargo that prevented beef from being imported did not trigger business income coverage because beef was not contaminated); Philadelphia Parking Authority v. Federal Ins. Co., 385 F. Supp. 2d 280, 288-89 (S.D.N.Y. 2005) (PA law; economic loss due to ground stop after terrorist attacks of September 11, 2001 did not trigger business income and extra expense coverage, because there was no direct physical loss or damage to the parking lots). In each of these cases, courts held that coverage for lost business income and/or extra expense required a showing of tangible physical harm to the property at issue.

On the other hand, a small number of cases have interpreted the requirement of direct physical loss broadly, so that coverage is triggered even without a physical alteration to the insured’s property. It is these cases that insureds will likely point to in an effort to obtain coverage. For example, in Gregory Packaging, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 6675934 (D.N.J. Nov. 25, 2014) the District of New Jersey held that a release of ammonia gas within a building that rendered the building unsafe for human occupation was a “direct physical loss of or damage to” the insured’s property, even though there was no physical alteration of the structure. Id. at * 6. In so holding, the court examined case law from various jurisdictions, and concluded that, because there was no genuine dispute that the release of ammonia “physically transformed the air within Gregory Packaging’s facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipated,” the requirement for direct physical loss was satisfied. Id.

Other courts have also interpreted the requirement of direct physical loss more broadly, and found that coverage based on more expansive arguments of what impacts to property can qualify as direct physical loss or damage. See, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. 968 A.2d 724 (N.J. App. Div. 2009) (“tripping” of power equipment to avoid electrical overload sufficient to meet direct physical loss requirement when equipment was then out of use for several days); General Mills, Inc. v. Gold Medal Ins. Co., 622 N.W. 147, 152 (Minn. Ct. App. 2001) (contamination of oats with pesticide not approved by FDA constituted direct physical loss, because oats could not be sold, even though insurer argued that oats were still safe for human consumption); and Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (1968) (infiltration of church by gasoline vapors was direct physical loss within the meaning of the policy).

Importantly, in finding coverage, these courts did not hold that loss of use of property, without more, was sufficient to trigger coverage. Rather, the courts acknowledged that the policies required a finding that direct physical loss or damage had occurred. The courts then held that the evidence in the case supported such a finding, based on the particular facts at issue. It therefore does not appear that mere loss of use of property, without more, could constitute the direct physical loss or damage required to trigger coverage for business income loss.

Does the Presence of SARS-CoV-2 Constitute Physical Loss/Damage?

In one of the very few suits filed to date, the insured argues that the traces of the virus that causes COVID-19, SARS-CoV-2, physically “infect” and stay on the surface of objects and materials for days, if not weeks, particularly in warm and humid environments. Because SARS-CoV-2 is a novel virus, many properties of the virus are not known. For example, the length of time the virus can survive and/or be detected on various surfaces is still being studied. The New England Journal of Medicine recently published research demonstrating that infectious SARS-CoV-2 viral particles are stable on cardboard, stainless steel and plastic surfaces under laboratory conditions for multiple hours (up to 72 hours in the case of plastic). In another report published in the Centers for Disease Control and Prevention Morbidity and Mortality Weekly Report (MMWR), traces of the viral genetic material (RNA) associated with SARS-CoV-2 were detected 17 days after the property at issue was vacated but before the property underwent any cleaning process. It is important to note that it is not uncommon to detect viral genetic material for weeks after infectious viral particles were last detected. Furthermore, viral genetic material is not infectious on its own, and is only one of many different components that make up an infectious viral particle. With that in mind, even if it can be reliably established that such genetic material persists on surfaces over longer periods of time unless the surface is cleaned, its presence alone cannot be used to infer the presence of viable and infectious virus. In addition, it appears that certain cleaning and disinfection procedures appear to destroy SARS-CoV-2 particles on surfaces, thus potentially limiting the scope of loss that can be attributed to any direct physical loss associated with the presence of the virus.

Most of the Business Interruptions now Occurring Are not Related to Concerns About Lingering Virus Particles

As noted above, some businesses have closed after a documented exposure among its employees or customers. However, most businesses have chosen to close, not because of any documented COVID-19 exposure at their site (in the form of infected individuals or the virus particles themselves), but rather to protect customers and employees from potential exposure to other people who may be infected and either work at the insured property or visit it. Similarly, the various shelter-in-place and stay-at-home orders that have been issued by many civil authorities and governmental entities were not prompted by a perceived need to protect workers or customers from exposure to SARS-CoV-2 virus particles lingering on surfaces. Rather, they were entered to preserve the public health and safety of the population at large due to the potential for transmission from one human to another, as demonstrated by the push for social distancing and the six-foot separation rule. Absent a documented COVID-19 exposure on the insured property, it may be difficult for most insureds to demonstrate the direct physical loss or damage required to trigger coverage.

Conclusion

In the wake of the COVID-19 pandemic, whether coverage will be afforded for losses will turn, in part, on whether an insured can demonstrate a direct physical loss or damage to its property. As in any insurance coverage analysis, the language of the policy and endorsements, as well as the specific facts of the claim, will control the determination of whether, and to what extent, coverage is triggered. While the primary mechanisms of transmission of the virus are understood, the issues surrounding the properties of this virus, such as how long it remains infectious on an insured property, are in the relatively infant stages and subject to future expert opinion and analysis. Thus, coverage determinations will require careful analysis and application of a developing science.

As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.