There is no question the coronavirus will have lasting impacts upon just about every aspect of our lives—health and safety, social, emotional, and economic. This virus may likely be our generation’s defining moment that we will teach our kids and grandkids about for decades to come.
The economic toll of the virus on small businesses will surely teach us all lessons. Many small business owners are asking themselves “do I have insurance coverage for the economic losses I am suffering because of this virus?”
It is time for a greater understanding of the possible coverages afforded to the business owners among us that are worrying about whether they will be able to keep the doors open and what the future looks like if there is another novel virus or catastrophic event that challenges our lives again in the future.
What is Business Interruption Insurance?
Business interruption insurance is on the mind of many small business owners today. It is important to understand the types of coverages available under the category of “business interruption” insurance.
There are four types of business interruption insurance:
- Business Income Coverage: Business income is net profit or loss before taxes and continuing normal operating expenses, including payroll.
- Extra Expense Coverage: Extra expenses are those above and beyond your normal monthly expenses that are expended to restore a business either at the original or temporary location.
- Contingent Business Interruption Coverage: This coverage compensates you for any income you might have lost due to property loss or damage at a supplier’s or customer’s location. For example, this coverage may compensate you if you own a flower shop and your supplier’s location suffers a fire, preventing the supplier from fulfilling your flower orders.
- Civil Authority Coverage: This coverage would pay for loss of income or extra expenses as a result of a government denying you access to your business due to a covered loss at a location owned by someone else.
Business interruption insurance is typically purchased along with a commercial property policy or a business owner’s policy. It can also be purchased separately as a stand-alone policy.
What Does Business Interruption Insurance Cover?
A typical business interruption policy provides language similar to the language below with regard to business income coverage:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss…
A typical business interruption policy provides language similar to that below with regard to extra expense coverage:
- Extra Expense coverage is provided at the premises described in the Declarations only if the Declarations show that Business Income coverage applies at that premises.
- Extra Expense means necessary expenses you incur during the “period of restoration” that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss.
We will pay Extra Expense (other than the expense to repair or replace property) to:
- Avoid or minimize the “suspension” of business and to continue operations at the described premises or at replacement premises or temporary locations, including relocation expenses and costs to equip and operate the replacement location or temporary location.
- Minimize the “suspension” of business if you cannot continue “operations.”
We will also pay Extra Expense to repair or replace property, but only to the extent it reduces the amount of loss that otherwise would have been payable under this Coverage Form.
Covered Causes of Loss and limitations and exclusions to coverage are typically listed in the Declarations of the policy.
What is the Virus or Bacteria Exclusion?
Important to the analysis of business insurance coverage related to the coronavirus is a common exclusion to coverage (often found in an endorsement known as CP 01 40 07 06), which provides as follows:
EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA
This endorsement modifies insurance provided under the following:
COMMERCIAL PROPERTY COVERAGE PART STANDARD PROPERTY POLICY
- The exclusion set forth in Paragraph B. applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.
- We will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease. However. this exclusion does not apply to loss or damage caused by or resulting from “fungus”, wet rot or dry rot. Such loss or damage is addressed in a separate exclusion in this Coverage Part or Policy.
- The terms of the exclusion in Paragraph B., or the inapplicability of this exclusion to a particular loss, do not serve to create coverage for any loss that would otherwise be excluded under this Coverage Part or Policy.
Have Courts Considered “Direct Physical Loss” and Analogous Coverage Arguments?
Coronavirus and the fallout for small business is a novel issue for courts. However, as coverage lawyers often do, we look for analogous situations that might give us an indication of how a court might view a certain policy provision as it relates to coverage.
Business interruption coverage is triggered when there is “direct physical loss or damage to property.” In this regard, Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, No. 12-cv-04418, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014) is often cited for the proposition that a property can sustain physical loss or damage without experiencing structural alteration. In Gregory Packing, an insured sustained the release of an unsafe amount of ammonia from a refrigeration system contained inside one of its facilities, which caused business loss. The court concluded that ammonia, a dangerous gas, which rendered the insured’s buildings uninhabitable, constituted a “direct physical loss,” sufficient to trigger coverage under the Travelers’ policy.
It is important to note that other courts have found there is no direct physical loss or damage to property in similar contexts. See, e.g., Mama Jo’s, Inc. v. Sparta Ins. Co., 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. Jun 11, 2018) (holding that restaurant did not sustain direct physical loss when dust and debris from nearby roadwork could be remediated by cleaning); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008) (finding that mold which could be removed by cleaning was not physical damage, as it did not alter or otherwise affect the structural integrity of the building’s siding); Universal Image Prods. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010) (holding that intangible harms such as odors or the presence of mold and bacteria in an HVAC system did not constitute physical damage to property); Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass’n, 793 F. Supp. 259 (D. Or. 1990) (opining that asbestos contamination was not a physical loss, as the building remained unchanged), aff’d, 953 F.2d 1387 (9th Cir. 1992).
Have Courts Considered the Virus or Bacteria Exclusion?
Because the virus or bacteria exclusion is relatively new to insurance policies (a response to the SARS outbreak), there is a dearth of cases construing the meaning of the exclusion. A plain reading of the exclusion, however, indicates that your commercial property insurer may likely not agree to pay for business interruption loss or extra expense if the loss was caused by or resulting from any virus.
Because the exclusion has not yet been tested by courts, it is important for insurance coverage lawyers to carefully monitor this potentially developing body of case law.
What Does This Mean for My Small Business Now and Going Forward?
Assuming a good argument could be made for “direct physical loss or damage to property” as was done in Gregory Packing, there may be coverage under your policy to protect you against coronavirus-related losses. However, a careful review of your policy is necessary to determine whether your policy contains the exclusion for virus or bacteria or any other endorsement that may impact coverage. These issues will no doubt be litigated following this pandemic.
In response to the widespread economic fallout from the novel COVID-19, the insurance industry has released two new endorsements for limited business interruption coverage for civil authority orders relating to the coronavirus. This means that, in the future, business owners may have the option to purchase insurance coverage for economic disruption resulting from government action in response to viruses.
What Should Small Business Owners Do in the Interim?
Whether your policy covers loss related to coronavirus, this is a good time to review your insurance policies and to prepare for any future and unforeseen issues that may come up to impact your business.
Of course, the attorneys at LeMaster & Ahmed are here to help should you want to conduct a review of your business policies of insurance. Contact us at our Houston location at 832-356-7983 or our DFW location at 972-483-0410. You can also message us any inquiries directly on our website.
***The foregoing is not meant to serve as legal advice relating to your insurance coverage issue. Please contact one of our lawyers if you have questions specific to your particular insurance issue.