Best in Law: Business Interruption Insurance and COVID-19

In March and April, as businesses were suddenly forced to close due to the COVID-19 pandemic, many business owners asked whether there was insurance coverage for the losses caused by the shutdown.

Specifically, business owners asked whether “business interruption” and “civil authority” coverages typically found in Commercial General Liability policies potentially covered the staggering losses associated with the shutdowns.

Business interruption coverage covers lost profits when a business cannot continue its normal business operations due to a covered loss. Civil authority coverage provides coverage for loss of business income due to civil or military orders that impair business operations.

An order requiring non-essential businesses to close to prevent further spread of COVID-19, such as Gov. Gavin Newsom’s March 2020 “shelter in place” order, arguably triggers both coverages.

Nonetheless, in those early pandemic days, there still appeared to be significant challenges to such claims. First, CGL policies normally require proof of direct “physical loss or damage” to the business’ property. Second, many CGL policies contain exclusions for claims caused by viral and bacterial transmissions.

In the months since the shutdown orders were made, policyholders have filed lawsuits addressing these exclusions and advancing novel arguments in favor of recovery.

Several state legislatures also introduced bills that would require insurers to cover COVID-19 claims, although the constitutionality of such bills is not certain. In light of these developments, businesses should file claims even when it is certain that the insurer will initially deny coverage.

Coverage Lawsuits
More than 1,000 lawsuits have been filed since March 2020 addressing business interruption coverage, including several class-action suits.

A Michigan court recently dismissed a restaurateur’s business interruption claim, finding that he did not suffer a direct physical loss. (Gavrilides Management Co. v. Michigan Insurance Co.).

Conversely, a federal court in Missouri concluded that business owners had adequately pled “direct physical loss” so as to trigger coverage. The ruling appears the first in which a court allowed a policyholder’s COVID-19 coverage suit to proceed following a motion to dismiss. (Studio 417 Inc. et al. v. The Cincinnati Insurance Co.)

Currently, there is no clear consensus as to whether coverage exists for COVID-19 business interruption or civil authority claims.

Legislative Responses
Various states, including California, have introduced legislation defining physical damage or injury to include coronavirus claims. Some states have even introduced bills purporting to void the virus exclusion including New Jersey, New York, Pennsylvania.

The California Legislative Assembly passed AB 1552, but it remained in committee before the chamber recessed Aug. 31. While the bill may be reintroduced when the Legislature reconvenes in December, AB 1552 in its current form did not address the “virus” exclusion but would have created certain rebuttable presumptions in favor of policyholders for COVID-19 claims.

Most importantly, AB 1552 would have provided that COVID-19 meets the requirement should a policyholder provide proof of direct “physical loss or damage” to the policyholder’s property.

Insurers have opposed AB 1552 and similar bills, arguing that such bills impermissibly alter existing contracts, violate their due process rights and constitute takings, among other things.

On the national level, a bipartisan group of U.S. House of Representatives members has proposed setting up victim recovery funds similar to those established after 9/11. But in light of the current polarization of Congress and the upcoming November elections, a comprehensive federal response to this issue seems unlikely in the short term.

File Your Claims
In this uncertain landscape, policyholders should review their policies with an attorney or insurance broker and should strongly consider submitting business interruption and civil authority claims even where the claim will likely be denied.

By submitting the claim, a policyholder preserves its rights under the policy and avoids the insurer later denying the claim as being untimely.

If either the courts or a state or federal legislature addresses the critical issues/exclusions in favor of policyholders, then the claimant will be in a more favorable position to obtain recovery funds. Even policyholders with CGL policies containing the virus exclusion should consider filing claims since subsequent state or federal legislation (or case authority) might impact recovery.

As the saying goes, “if you don’t ask, you won’t get.” Policyholders should ask their insurers, otherwise, they undoubtedly will not get anything.

This article first appeared in The Orange County Register and other Southern California Newspaper Group publications online on Sept. 4, 2020. Republished with permission.