The Battle Over Business Interruption Coverage

April 22, 2020

The COVID-19 crisis has wreaked havoc on the food/beverage and hospitality industries, many of which have turned to their insurers seeking relief under commercial policies for the interruption to their business as a result of the pandemic and widespread government ordered closures.  Commonly referred to as “business interruption” coverage, many policies provide such coverage for the loss of business and related expenses stemming from physical loss or damage to the insured premises resulting from a covered loss.  In other words, a claimant must establish direct physical loss or damage to the insured premises, and that such damage was caused by a covered loss otherwise not excluded by the policy.

As lawsuits have begun to emerge, claimants are asserting that contamination from the coronavirus, which can survive on surfaces for extended periods of time, constitutes a physical loss.  Assuming the courts accept the presence or potential presence of the virus as physical damage, the next question is whether such damage was caused by a covered loss.  Following the SARS epidemic many insurers began excluding viral and bacterial losses from coverage.  While insurers are quick to point to such exclusions as a basis for the denial of coverage, claimants have countered by asserting that it was not the virus that caused business loss, but the orders of local governments exercising their civil authority mandating social distancing restrictions, closures and stay-at-home orders that caused the loss, which depending on policy language may be covered.

Certain policies extend coverage to loss of business that results from access to the insured property being prohibited by order of civil authority.  Civil Authority clauses, however, can vary in language, and some specify that such insurance is extended when access to the insured property is specifically prohibited by order of civil authority as the direct result of a covered cause of loss to property in the immediate area of the insured property, as opposed to the insured property itself.  As with any coverage dispute the language of the particular policy is critical.

There are currently widespread lobbying efforts underway seeking to extend coverage to losses attributable to the coronavirus regardless of whether an insured has pandemic coverage, which is typically a separate and often pricey additional rider.  See our related blog relative to the current proposed legislation in Pennsylvania “Pennsylvania Proposes Legislation Aimed Easing the Burden on Policyholders During COVID-19 Pandemic.”  Insurers respond that such efforts by the government would undermine the nation’s insurance system and result in such an immense volume of claims that it would require a massive federal bailout of the insurance industry to be able to provide such coverage.

It is unclear whether the government will take a position on the issue (and if so whether it would stand up to legal challenges) and/or how the courts will interpret business interruption clauses as cases seeking a declaration of coverage under these clauses become more prevalent.

SMGG is committed to remaining at the forefront of these emerging issues.  If you have questions regarding your policy and whether it provides coverage for business interruption claims, contact Erica L. Laughlin, at elaughlin@smgglaw.com, Chris Azzara, at cazzara@smgglaw.com, or Adam Tragone, at atragone@smgglaw.com.