With all but essential businesses shuttered in Maryland, and with revenue streams drying up, executives throughout the state are now reading up on their commercial policies to see if they might be covered for the calamity that is COVID-19. A cursory reading of such policies may lead them to the often incorrect conclusion that “business interruption” claims arising from the pandemic are not covered because no “property damage” has occurred.
In truth, many policyholders have viable claims for loss of income and extra expense irrespective of whether property damage has taken place. Businesses affected by this pandemic should ask their insurance advisers to consider their circumstances under the particular language of their business interruption policies. It is quite possible that they will be pleasantly surprised.
Many policies provide coverage for lost “earnings” and/or “extra expense” when a business is wholly or partially interrupted by “direct physical loss of or damage to” property. Under these policies, the coverage provided for “loss of” the property has to have some meaning independent of the coverage for “damage to” the property. Property owners can often argue that the “loss of” access to their property is a covered loss.
Some policies provide separate coverage for losses arising from civil orders by federal, state or local governments. We have yet to see whether the orders recently issued by the state of Maryland will qualify.
Although jurisdictions are split on the issue, there is actually a line of pre-COVID-19 cases that holds that physical property damage is not required to trigger business interruption/extra expense coverage. In these jurisdictions, even if the policy only provided coverage for “direct physical damage to” property, the policyholder may still have an argument that the loss of use of its property triggers business interruption coverage.
While these cases are helpful to policyholders, they are often not determinative, because policies frequently require policyholders to demonstrate that the losses are “Covered Causes of Loss,” “covered perils” or “specified perils.” This can be problematic when policies contain a now-commonly-issued “virus or bacterium” exclusion. Commercial policyholders may be able to defeat these exclusions, however, for multiple reasons.
Many of the virus or bacteria exclusions are simply tacked on to policies as endorsements, and they can be unenforceable if materially inconsistent with other policy terms. In the alternative, virus exclusions often except coverage for fungus claims from the scope of the exclusion. Scientists are just beginning to investigate the nature and characteristics of this new “virus,” but at least one medical study has already suggested that it may have fungal components. Some individuals who contracted the disease in Wuhan, China, were treated with anti-fungal medications as part of the broad array of drugs that were used in the initial treatments. As such, it remains to be seen whether COVID-19 claims may fall under the fungi exception to many virus exclusions.
We are still reviewing the recent stimulus package passed by Congress, but it is significant to note that prominent hospitality service providers are arguing that the stimulus should be just a first step. Congress is under enormous pressure from the hospitality industry to force insurers to pay business interruption claims, with the backstop of potential government assistance to the insurers for those payments. While events are materially changing on a seemingly minute-to-minute basis, it is not inconceivable that if that proposal gains traction, claimants may ultimately receive business interruption coverage even if a court or regulator ultimately finds that there is no lost income or extra expense coverage under a strict interpretation of the policy’s terms.
If your business has been affected by the COVID-19 pandemic and/or subsequent governmental action, an insurance policy review should be undertaken to determine if coverage may be available.
Alex J. Brown, who chairs the Insurance Law practice group at Shapiro Sher in Baltimore, can be reached email@example.com. Jessica L. Swadow, an associate in the group, can be reached at firstname.lastname@example.org.