As rapidly as the coronavirus is spreading its footprint across the globe, businesses of all shapes and sizes are closing their doors … and losing income. Unfortunately, Mississippi businesses are not exempt from this fast moving reality. Indeed, coffee shops, boutiques, restaurants, office complexes, and a variety of other businesses across the State have been forced to drastically change their operations or, in some cases, completely shutter their businesses in response to the coronavirus pandemic and the related government directives concerning travel and social distancing. As a result, many companies are already reporting lost profits, as well as a significant concern about the future of their businesses.
Fortunately, most companies carry a commercial property insurance policy, which typically includes not only coverage for property damage but also coverage for lost profits incurred as a result of damage to the covered property. In other words, a business may have coverage for its coronavirus lost profits through its commercial property policy. To know that, an insured should first review its policy to determine if it contains any of the following types of coverages which are frequently included in a commercial property policy.
Business Income/Interruption Coverage provides coverage for the loss of income an insured sustains as a result of a suspension of an insured’s operations. However, most policies require that the suspension stem from “direct physical loss or damage” caused by a “covered peril” (typically theft, fire, wind, falling objects or lightning) to the specific covered property. This type of coverage is most commonly found in circumstances where an insured’s covered property is damaged by a fire, or perhaps a storm, forcing the insured to suspend its operations for a period of time. In that scenario, the fire or storm damage to the subject property would be readily apparent, and assuming it is a covered peril, the claimant would have a strong claim for the income lost during the restoration period. However, a claim for lost income as a result of the coronavirus will be much more complex.
First, an insured will need to demonstrate “direct physical loss or damage” to its covered property. Given the nature of the coronavirus, however, there likely will be no apparent damage to the property. So, insureds will likely contend that, regardless of its visibility or lack thereof, the virus is within their workplace – albeit at a microscopic level – and that it is has in fact damaged their covered property.
Courts have heard similar arguments in other contexts (e.g. asbestos, gasoline fumes, etc.) and reached varying conclusions. Some have sided with the insureds that the contaminant damaged the property, while others agreed with the insurers that the contaminant had not damaged the insured’s property. This determination, which will involve a detailed analysis of the relevant policy and applicable law, will be the critical issue in evaluating these claims for coverage.
Next, an insured should review its policy to determine if it excludes coverage for business interruption claims based on communicable diseases. Due to the SARS outbreak in 2003, the insurance industry purportedly paid out a significant amount of claims based on “business interruptions” caused by SARS. After the SARS outbreak, and to avoid a repeat, the insurance industry began excluding losses incurred by communicable disease. Perhaps most importantly, in 2006, the heavily relied upon Insurance Services Office (ISO) issued form CP 01 40 07 06 excluding “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.” Determining whether the insured’s policy contains this exclusion will be a critical component of any coverage analysis.
Contingent Business Interruption
Commercial property policies routinely include coverage for disruptions in an insured’s supply chain. This coverage applies when damage occurs not to the insured’s property but to the property of others relied on by the insured to supply materials to the insured or its customers. Again, it is important to note that these policies usually require damage or physical loss caused by a covered peril to the supplier’s property. As with the Business Income/Interruption claim, the specific language of the policy will be critical in this analysis.
Order of Civil Authority
Many commercial property insurance policies provide coverage for business income losses sustained when a “civil authority” prohibits or impairs access to the policyholder’s premises. Some of these policies do not require “physical loss” to the insured’s covered property, and those that do sometimes do not require that the physical loss occur to the insured’s own property. Thus, if a governmental authority – federal, state, or local – prohibits or even limits access to an area including an insured’s business, the insured may have coverage for its loss of income under its “civil authority” coverage. Yet again, analysis of the specific language in the policy and applicable law will be critical in determining coverage.
The First Coronavirus Coverage Case
On March 16, 2020, Oceana Grill in New Orleans, Louisiana filed what is thought to be the first lawsuit – of many more to come – dealing with a coronavirus business interruption coverage dispute (Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana).
In its Petition for Declaratory Judgment, Oceana Grill requested a declaration of coverage for coronavirus-caused losses under a business interruption policy. Oceana contends that it purchased an “all risk policy” from Lloyd’s of London, “which covers all risks unless clearly and specifically excluded” and further contends that “the policy does not provide any exclusion due to losses, business or property, from a virus or global pandemic.”
With respect to harm caused by the virus, Oceana contends that:
[T]he scientific community, and those personally affected by the virus, recognize the Coronavirus as a cause of real physical loss and damage….The virus is physically impacting public and private property, and physical spaces in cities around the world….The global pandemic is exacerbated by the fact that the deadly virus physically infects and stays on the surface of objects or materials, ‘fomites,’ for up to twenty-eight days, particularly in humid areas below eighty-four degrees….It is clear that contamination of the insured premises by the Coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment.
Oceana also pointed out that the Louisiana Governor issued a statewide order banning gatherings of 250 or more people and the New Orleans Mayor issued additional operating restrictions on businesses.
For these reasons, Oceana has asked the Court to declare that:
- The policy provides coverage to Plaintiffs for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination; and
- The policy provides business income coverage in the event that the coronavirus has contaminated the insured’s premises.
This will be an important case to monitor as the coronavirus crisis and resulting business interruption coverage disputes continue.
The Brunini attorneys are closely monitoring developments in the coronavirus crisis and are counseling clients through the various legal and business issues involved in the crisis.