VIRUS INTERRUPTUS

Will business interruption insurance cover losses due to COVID-19?

Natalie Brandt, May 12, 2020

The word “pandemic” is not in your policy. At least not yet. According to a 50-year insurance industry insider – who asked to remain anonymous, so I will call him Mr. Insurance – we can expect to see insurance companies offering pandemic coverage in the very near future. The reality of today’s outbreak will necessitate myriad changes to our current way of life, and risk mitigation is no different. Much like the way insurance for terrorist attacks emerged following the Sept. 11th attacks, so too will pandemic coverage become an option when choosing a policy. But this terrorist attack analogy highlights a very important fact: There will be a trend in insurance toward coverage for pandemics as we go forward because it’s not in there now.

Or is it?

Your commercial policy covers business interruption losses due to a variety of insults. It most likely includes an endorsement – which Mr. Insurance says is universally boilerplate – covering business interruption due to a fungus or virus. And COVID-19 is clearly a virus. But as he maintains and David Sampson, the president and CEO of the American Property Casualty Insurance Association, said on a recent CNBC interview, “Virus and bacterial-related events are not covered under business interruption because the virus has not caused damage to the brick-and-mortar property of the business.” The business interruption coverage, except for very specific policies worked out in advance, rests in the physical property damage portion of the policy. In other words, has the virus damaged the building in which your business operates? Did that physical damage to your space cause a suspension in your business?

So, the analysis begins with (1) what does your policy say, and probably, frustratingly, (2) what exactly did the insurer mean?

Several businesses have already headed to court to find out the answer to both questions. Multiple lawsuits have been filed, primarily by restaurants, for denied claims on this very issue. So steady is the tide of lawsuits that some insurers are fighting back by seeking declaratory judgments about the interpretation of the virus clause. Travelers Casualty Insurance Co., for instance, has filed a federal declaratory judgment action in California against the well-known Geragos law firm, which sued them first in early April, hoping to curtail further lawsuits with a judicial declaration that the industry-standard business interruption clause does not include income loss due to the virus. Thus far, Travelers, and everyone else presumably, has denied such claims by arguing that coverage only pertained to business interruption due to a virus as it affected the physical structure of the insured business. The federal government has noticed as well and presently two pieces of legislation are in the works – the Business Interruption Coverage Act of 2020 and the Pandemic Risk Reinsurance Act of 2020. Both proposed acts will provide a backstop for businesses suffering losses due to a pandemic. But for now, and as Mr. Insurance said, “Physical damage is key. End of story. But we’re closely following all these cases, because that could change everything.”

So, clearly, it’s not the end of the story.

And the story certainly begs the question of under just what scenario would a virus even cause physical loss such that coverage would apply? What were insurers contemplating when including such a clause in the first place? Current information estimates that COVID-19 molecules can linger on hard surfaces for days, which is not enough time to render an office or restaurant inhospitable for very long. How does a microscopic terrorist damage any physical structure? I recently watched “World War Z,” wherein a virus causes crazed zombies to destroy people and buildings. While I highly doubt that is what any insurer imagined, that scenario would at least ensure (pun intended) coverage for business interruption, at least under the Travelers argument for denying claims.

We buy insurance to guard against catastrophic losses due to unexpected events and circumstances. Floods. Fires. Injuries. Even death. We pay incrementally today to insure we are not stuck with a big bill tomorrow should the unthinkable befall us. And while a pandemic is (or had previously) been unthinkable, it has undeniably befallen us all.

With shelter-in-place orders, social distancing, and wholesale shutdown of much of the economy, it is clear that there has been an interruption in business. Life has been interrupted. School has been interrupted. Doors are closed. Lights are off. No customers. No income. No rent. Business in general is unambiguously interrupted. It may seem untoward for an insurance company to deny a claim due to a technical or nuanced reading of a policy in light of how the world is operating right now, but that doesn’t mean they’re wrong. A contract is a contract is a contract. So, check your policy and read it carefully. If you have business interruption coverage, make a claim.

If it is denied, wait and see. Because a denial may not be the end of this story.