On April 30, Pennsylvania joined a growing list of states, including Ohio, Michigan, New Jersey, South Carolina and Louisiana, by introducing legislation designed to help policyholders obtain business interruption coverage to offset losses resulting from the Coronavirus pandemic. The proposed legislation differs from earlier efforts by creating rules of interpretation for first-party insurance policy provisions, essentially requiring insurers to construe policy language in a manner which favors coverage.
As a practical matter, the proposed bill provides that if a person who has tested positive for COVID-19 has been present in a business location, the location will be deemed to have “property damage” as set forth by a policy. It also provides that the presence of COVID-19 in or near a business location constitutes property damage or direct physical loss. Further, the legislation states that the Pennsylvania governor’s order requiring the closure of non-essential businesses “constitutes an order of civil authority under a first-party insurance policy limiting, prohibiting or restricting access to non-life-sustaining business locations in this Commonwealth as a direct result of physical damage at or in the immediate vicinity of those locations.”
Notably, the legislation also prohibits insurers from denying coverage based on the “loss of market” exclusion included in many policies, warning the exclusion “may not be interpreted to apply to preclude coverage for COVID-19-related losses if one of the reasons for reduced customer demand for a policyholder’s good or services is the same COVID-19 pandemic that gives rise to the policyholder’s losses for which coverage is sought.”
Although somewhat obscure and infrequently litigated, the loss of market exclusion was intended to ensure that business interruption coverage is not used to return the insured to a better position than it would have occupied absent the business interruption. As a result, many policies exclude coverage for “loss of market” or for “loss, damage, deterioration, or expenses arising from delay, whether caused by a peril insured against or otherwise, or from inherent vice or nature of the good insured.” This exclusion is commonly associated with "indirect or consequential economic losses" caused by matters "external to any particular product" and does not exclude coverage for diminution in value of insured property that is damaged. See, e.g., Boyd Motors, Inc. v. Employers Ins. of Wausau, 880 F.2d 270, 273-74 (10th Cir. 1989) (collecting authorities). According to the Tenth Circuit in Boyd Motors, a market is lost “when, for example, due to delay in distribution, changes in consumer habits, etc., a certain type of product is no longer in demand with its intended purchasers.” As one court explained in a case following the September 11 terrorist attacks, “[t]he loss of market exclusion relates to losses resulting from economic changes occasioned by, e.g., competition, shifts in demand, or the like[.]” Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 279 F. Supp. 2d 235, 240 (S.D.N.Y. 2003).
Given the dearth of case law interpreting these provisions, it unlikely that a court would find the loss of market exclusion, in itself, constitutes grounds for denial of coverage for business interruption claim. Nevertheless, at least one state has now made clear that the exclusion should not be used in connection with claims for COVID-19-related losses.