The Coronavirus Pandemic Fuels a Battle Over Business Interruption

Dawn Saunders  Photo courtesy of Crosbie Gliner Schiffman Southard & Swanson (CGS3)

With federal social distancing guidelines now extended through April 30, property owners nationwide are reexamining their policies with the hopes that insurance policies can provide a source of economic relief amid the escalating coronavirus pandemic. 

Whether or not insurance will be available depends on policy language and what actions the courts and the government take in the coming months. 

In any event, insured entities should review their policies and tender claims to their insurers, if warranted. When in doubt, tendering claims and advocating for coverage may be wise, even if the historic interpretation of policy language would have made coverage unlikely. This is in part because the flood of anticipated litigation resulting from this pandemic is likely to result in policy interpretations and arguments not previously made. Activism by a sympathetic judiciary coupled with potential government action to expand the scope of coverage mitigates in favor of tendering claims, especially because policies often have time periods within which claims must be tendered, so insureds cannot wait and see.

An Unprecedented Situation

This situation is unprecedented. The world has changed. Yes there have been other viruses, other pandemics, but none have had a global and economic impact that equals that of COVID-19. What will happen as a result will be equally unprecedented. 

Some possible results: Courts may interpret insurance policy language in novel ways in order to provide coverage where historically there was none. Governments and regulatory bodies are likely to intervene in markets to provide relief and allocate risk as widely as possible, which may include broadening insurance coverage or filling gaps in coverage. 

There have already been attempts at legislation to mandate business interruption coverage in states such as Ohio and Massachusetts. Whether these attempts will stand up to legal challenges by the insurance industry remains to be seen. U.S. property casualty insurers had a “surplus” of over $800 billion as of year-end 2019, according to the Insurance Information Institute, and lawmakers are pointing to this as a source of funds to cover the broadened business interruption claims. Meanwhile, insurance industry leaders are claiming that this surplus is not intended as a safety net for global crises and that pushing these losses onto insurers is not the proper risk allocation for a global pandemic.

Is Insurance a Viable Solution?

The California Business Property Association (CPBA), which is the legislative advocate for leading real estate industry associations including the International Council of Shopping Centers (ICSC), the Commercial Real Estate Development Association (NAIOP) and the Building Owners & Managers Association (BOMA), sent a letter to Gov. Gavin Newsom on March 17, in response to his shelter-in-place executive order, suggesting that California should consider various actions to alleviate the burden on property owners, including enabling the use of business interruption policies and other types of insurance, identifying gaps in coverage for companies and providing direct state support to fill those gaps. CPBA and similar groups are lobbying state agencies to help shape the response to this pandemic, and it is likely that insurance will be part of the solution.

The most likely source of COVID-19 claims will be under business interruption policies, which are often a subset of general property insurance policies. Typically, coverage under standard business interruption policies is only triggered by physical damage to insured property caused by a covered peril and resulting in a quantifiable business interruption loss. 

In the context of COVID-19, it will be difficult to prove physical damage, but this is an area where novel arguments that stretch the traditional notions of physical damage will be asserted, especially where a property has confirmed exposure to the virus. Depending on how sympathetic the judiciary and regulatory agencies are to such arguments, there may be an expansion of the definition of “physical damage.”

Some insurance policies have express exclusions for viruses and pandemics, but many policies do not contain such exclusions. Insurance coverage attorneys are already making the argument that a policy that does not include an express virus exclusion should be construed to mean that virus claims are expressly included by implication—especially given that express exclusionary language has been available to, and used by, the insurance industry for many years. 

Some property damage policies include coverage for losses caused by forced closure of property by civil authority. However, some civil authority provisions require physical damage, while others do not. One key factor in determining the applicability of civil authority coverage is whether businesses were mandated to close by government order or whether the closure was voluntary. 

Cases involving civil authority coverage and the definition of “physical damage” are already being litigated, including the declaratory relief actions filed by New Orleans restaurant Oceana Grill against Lloyd’s of London and Napa Valley, Calif., restaurants The French Laundry and Bouchon Bistro’s action against The Hartford Insurance Company.

Another type of lesser known, and lesser maintained, coverage that may provide relief is contingent business interruption (CBI) coverage, which could also apply. This type of coverage provides for losses resulting from damage to suppliers and others upon whom the insured depends for its business. CBI coverage is specialized and often still requires a “trigger” of physical damage to a supplier of goods or services to the insured, so coverage could be limited, but for businesses who carry this coverage, it is worth exploring its potential.

What to Do Now

In the meantime, property and business owners should take the following actions as soon as possible:

• Review your policy—every policy is different and there may be coverage available. Because insurance policies are very nuanced and specialized, insureds would be well advised to consult a coverage expert to determine if coverage may be available.
• Tender claims to your insurer as soon as possible—some policies have time periods within which claims must be submitted and some business interruption policies have waiting periods, so sooner is always better.
• Do not overshare information. Cooperate with the requests of your insurer and let the insurer drive the information exchange and frame the information it is seeking. Provide what is needed, but do not provide unnecessary information.
• Document your losses, additional costs incurred and all correspondence with your insurer relating to the pandemic. Similarly, keep records of any tender and/or denial of claims. When in doubt, document it, and do so contemporaneously with the losses to ensure you are capturing all the information you will need as your claim proceeds.

The key takeaways are that while insurance is unlikely to be a panacea for covering business losses arising out of the COVID-19 pandemic, the landscape is uncertain and evolving amid this unprecedented pandemic. Each policy must be carefully reviewed and insureds should err on the side of tendering claims. This action is further warranted in the event that lawsuits like those filed by The French Laundry and Oceana Grill are successful, or if judicial activism or governmental intervention expressly permit businesses to avail themselves of any available coverage.

Dawn Saunders is a partner at Crosbie Gliner Schiffman Southard & Swanson (CGS3)—a Southern California-based commercial real estate law firm with offices in San Diego and Los Angeles.