Businesses across the country are seeking relief from the staggering losses experienced as a result of the novel coronavirus. From Michelin-starred restaurants to movie theaters to barber shops, business owners want to ensure they are poised to emerge financially sound from this pandemic. One potential source of recovery is business interruption insurance coverage.
Business interruption coverage is intended to compensate an insured for losses which result from disruptions to their normal operations. The coverage is generally triggered by “direct physical loss or damage” to property – i.e., damages caused by a fire or natural disaster. Insurers maintain there is no coverage under the circumstances because viruses such as Covid 19 affect people and do not cause any physical damage to property. In several lawsuits filed in recent weeks, however, business owners argue the virus does cause a direct physical loss because it can remain on surfaces for up to 28 days, rendering the property unsafe with the potential to infect employees and customers. Therefore, the insureds argue, remediation of the property is necessary.
There is currently no consistent or uniform test for whether an insured property has experienced a “direct physical loss” when shuttered due to a virus. Some courts have held that the intrusion of irritants such as lead, fumes or dust might constitute direct physical loss that would need to be remediated. TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699 (E.D. Va. 2010), aff'd, 504 F. App'x 251 (4th Cir. 2013) (where defective drywall released sulfuric gas into the premises, the court held "physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces”); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (under Massachusetts law, unpleasant odor rendering property unusable constitutes physical injury to property); Motorists Mutual Ins. Co. v. Hardinger, 131 F. App'x 823, 825-27 (3rd Cir. 2005) (contamination of well water constitutes "direct physical loss" to house if it rendered it unusable). However, those decisions largely turn on the fact that the presence of the contaminant in the building makes the property uninhabitable. Here, in contrast, the closure of business operations generally resulted from state shelter-in-place orders operating as preemptive measures to stop community spread. Where the insured can demonstrate employees or customers contracted the virus, the case may be more persuasive. Though the dangers of making such an admission in litigation may outweigh any potential benefit.
Nevertheless, courts will soon decide whether the threat of contamination by coronavirus constitutes a direct physical loss sufficient to trigger coverage. It is important to note that some policyholders will face an additional, significant hurdle. In response to previous public health crises approximately fifteen years ago, many insurers added an exclusion to their policies to exclude “Loss Due to Virus or Bacteria.” The presence of such an exclusion might be dispositive on the issue, though the effect of a state’s closure order could assist the policyholder in making a stronger argument.