COVID-19 Business Interruption: Back to the Basics

By: John Lupfer, Assistant General Counsel, Suffolk

A. Don’t Forget the Insuring Agreement!

Insurance geeks all know that the first step in determining coverage under any policy is “getting past the insuring agreement.” Generally, if the claim does not meet the criteria of the first paragraph of the policy or endorsement, the analysis can cease. Overall insuring agreements begin with some variation of:

 Subject to all terms, conditions, limitation and exclusions of this policy, in the event of direct physical loss of or damage to insured property…

This type of analysis is paramount when it comes to COVID-19 business interruption claims.  Recently, I’ve seen much opining in articles and webinars on the interpretation of various exclusions and extensions of coverage relating to the words “pandemic,” “virus,” etc.  In the eagerness to discuss these sexy exclusions and extensions of coverage, the insuring agreement is skipped.  Specifically, whether there is “direct physical loss or damage to insured property.” As explained in the popular hornbook Couch on Insurance, “[T]he requirement that the loss be ‘physical,’ given the ordinary definition of that term, is widely held to exclude losses that are intangible or incorporeal, and, thereby to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of property.”  Whether COVID constitutes “direct physical loss or damage to insured property” is a muddy question.  An avalanche of cases filed nationwide are turning on this issue.

B. Is there “physical loss?”

One of the arguments for coverage being made in many court filings is that COVID-19 is making the place of business uninhabitable.  The rationale is that if a substance permeates a building without actually damaging it, but renders the building uninhabitable, the building may be considered to have sustained a physical loss. There is a line of cases supporting this theory.

In Port Authority of New York & New Jersey v. Affiliated FM Ins. Co., large quantities of asbestos were released into the air rendering the building uninhabitable.  The court found coverage.  Similarly, in Gregory Packaging v. Travelers Property Cas. Co. the court found coverage when a release of ammonia rendered the building uninhabitable.  In a third case, Widder v. Louisana Citizens Property Insurance Corporation, the court found that migrating lead dust rendered a person’s home uninhabitable and declared coverage.

This uninhabitable argument is far from a “slam dunk.”  COVID-19 claims can be distinguishable.  In the line of cases cited above, a substance was released within the building.  Following that logic, business owners must show COVID-19 was released into their place of business and is present making the building uninhabitable.  Given the nature of the virus and the ability to test for it, this is a major proof problem for insureds; one which may be insurmountable.  

Some plaintiffs are stretching the “uninhabitable argument” by claiming its governor’s shutdown order renders their place of business uninhabitable, thus falling under the gambit of coverage.  There is a dearth of case law supporting this argument.  In fact, there is a long line of cases cutting against it. 

In Roundabout Theatre Company., Inc. v. Cont’l Casualty Company. the court found no physical loss occurred when the City of New York shut down an area due to an accident thereby making a Broadway theatre inaccessible and forcing them to cancel shows.  Likewise, in Source Food Technology, Inc. v. U.S. Fidelity & Guaranty Company, the USDA closed the border of Canada to beef deportation after a cow tested positive for mad cow disease causing Source Food to lose its best client.  The court did not find coverage and opined, “[A]lthough Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not-as Source Foods concedes-physically contaminated or damaged in any manner.”

Anticipation is building for a court somewhere in the country to make a coverage determination for COVID-19 losses.  A court may invoke a policy exclusion or extension of coverage.  However, it is very possible that it may not “get past the insuring agreement.”