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Are Economic Losses Related to COVID-19 Recoverable Under Business Interruption Insurance Coverage?

M. Charles Collins
3/19/20

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3/25/2020 UPDATE:  Ohio House Bill 589 was recently introduced to address business interruption coverage.  The proposed legislation would require insurers who issued business interruption policies to cover losses due to COVID-19, regardless of whether such coverage was excluded from the policies as issued.  Claims for loss could be filed by companies which 1) employ 100 or fewer workers who work 25 hours or more per week and 2) carried valid business interruption coverage as of the date of passage of the bill.  Losses would be covered retroactively to March 9.

Funding for the claims paid would apparently come from a statewide assessment against all insurers, whether such insurers wrote business interruption policies or not, based upon the amount of premiums the insurers had charged in 2019.

The bill has only recently been introduced, and creates significant questions as to its retroactive application, interference with contracts and its funding mechanism.  Eastman & Smith Ltd. will continue to monitor the bill’s progress.

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stoplight and don't walk   Business interruption coverage (which often is comprised of two components, business income and extra expenses) typically is purchased as part of a commercial property policy, though it can be purchased separately as well.  Commercial property policies that provide business interruption coverage typically require “direct physical loss of or damage to” covered property (or within a specified distance of that property, say 1,000 feet).  The most common examples of such “direct physical losses or damages” are property fires and storm-related damages.

   At least one court has determined release of a dangerous gas, ammonia, within a covered structure can constitute “direct physical loss” if such gas release renders the covered building uninhabitable.  Potential arguments exist that contamination of telephones, office surfaces, etc., experience direct physical loss when contaminated with viruses if they are rendered unfit for their usual purpose.

   However, since the Severe Acute Respiratory Syndrome (SARS) outbreak, caused by another coronavirus, many insurers have incorporated into their commercial property policies endorsements that exclude coverage for “Loss Due to Virus or Bacteria,” which exclusion often specifically includes business interruption coverage.  As opposed to a separate endorsement, the property coverage form itself may specify, for example, the insurer will not pay for any loss resulting from “mortality, death by natural causes, disease, sickness, any condition of health, bacteria, or virus.”

   Civil or military authority coverage, when provided, insures losses when a government order restricts access to insured property but typically incorporates a similar requirement that the order be the “direct result” of physical loss or damage.

   Policies may specifically include, for overall policy coverage or specific to business interruption, extended coverages for mitigation of communicable diseases, which may be defined as “any disease, bacteria, or virus that may be transmitted directly or indirectly from human or animal to human.”  The coverage may extend only to the time necessary to detoxify from the communicable disease event.

   While it is unlikely that a commercial property policy will provide for business interruption insurance coverage under the COVID-19 pandemic, all insureds are strongly encouraged to review specific, individual policies for potential coverages.  Any coverage analysis necessarily involves the review of all applicable insurance policy declarations, forms, endorsements and any other documents or terms affecting coverage.  It is imperative this information be obtained from the carrier, often through the selling broker, with a listing of forms and endorsements to ensure all policy documents are provided.

   Should you have any questions regarding this issue, please contact Mr. Collins.

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Disclaimers:

At the date of publication the above information was correct.  It is quite possible the information above has changed as COVID-19 is a rapidly evolving situation. 

The article in this publication has been prepared by Eastman & Smith Ltd. for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.