More than two and a half years into the COVID-19 pandemic, businesses around the world have developed new and innovative ways to resume operations, even though the virus remains an ever-present threat. However, it took some time for businesses to pivot their operations in order to provide a safe atmosphere for both their customers and employees. During that downtime, especially at the outset of the pandemic, many businesses were forced to temporarily cease operations due to government orders. Other business owners made the choice to close temporarily for myriad reasons.
While the federal government eventually provided some financial assistance to businesses that were affected by COVID-19 in the form of PPP loans and other programs, many businesses looked to their insurance carriers to help shoulder the blow by filing business interruption claims. While court decisions initially varied by state as to whether COVID-19 losses were covered under the business interruption provisions of commercial insurance policies, a clear body of law is emerging that excludes coverage for such claims.
The claims filed by insureds for COVID-19-related business interruption claims typically cite to two main provisions of the policy: business interruption and civil authority. Most business interruption provisions include language, such as that quoted in the Cincinnati Insurance Policy considered in Brown Jug, Inc. v. Cincinnati Insurance Company, which provided as follows:
[Cincinnati Insurance] will pay for the actual loss of “Business Income” [plaintiffs] sustain due to the necessary “suspension” of [plaintiffs’] “operations” during the “period of restoration”. The “suspension” must be caused by direct “loss” 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” must be caused by or result from a Covered Cause of Loss.
How the Courts Have Ruled on Business Interruption Provisions
To date, there have been 46 federal circuit court cases decided since 2021 on this issue, and in nearly every case the court has been tasked with evaluating similar language to determine whether an insurance policy provides business income interruption coverage. While the opinions vary slightly, the overwhelming consensus is that COVID-19 does not constitute a “direct” or “physical” loss as required by the policy language. Instead, courts have held that a physical loss of property requires a tangible alteration or deprivation to the property itself.
There are several examples of courts repeatedly rejecting these claims over the last two years with variances to their rulings related to policy language. Two circuit courts held that direct physical loss of or damage to property requires “tangible damage.” Another ruling held that loss of use of the premises due to COVID-19 did not constitute direct physical loss, and another held that “physical loss” or “physical damage” language in policy only covers losses caused by or relating to material destruction or material harm to the property.
In Brown Jug, Inc. v. Cincinnati Insurance Co., the court held that a plaintiff must demonstrate “either destruction of the property or the owner’s dispossession to show ‘loss’ and a direct physical alteration of the property to show ‘damage.’” One court held that mere loss of use due to COVID-related closures does not constitute “direct physical loss” when unaccompanied by any physical alteration to property.” In the Eighth Circuit, the court found “Insurance provisions covering ‘direct physical loss of or damage to property’ are not triggered unless ‘there [is] some physicality to the loss or damage of property.’”
In 2021, one court held that there must be a “distinct, demonstratable, physical alteration” of the property for a loss to be covered. Another court found “direct physical loss” encompasses only tangible destruction or deprivation of property. Finally, another court sided with Certain Underwriters at Lloyd’s London in holding there is no coverage for loss of use based on intangible and incorporeal harm to the property due to COVID-19. In fact, the Third Circuit is only federal appellate court that has not yet decided a case regarding COVID-19 and business interruption.
How the Courts Have Ruled on Civil Authority Provisions
The other common claim asserted in these cases is that business income losses should be covered pursuant to the civil authority provision of a policy, which generally provides coverage for the actual loss of business income sustained when access to the insured property is specifically prohibited by an order of a civil authority as the direct result of a covered cause of loss to property in the immediate area of the insured premises. In the case of Q. Clothier New Orleans, LLC v. Twin City Fire Insurance Co., the court held that the civil authority provision did not provide coverage because the city, state and federal orders restricting access to businesses were issued to mitigate the spread of COVID-19, not as a direct result of a covered cause of loss to nearby property.
Similarly, the plaintiff in Henry’s Louisiana Grill, Inc. v. Allied Insurance Co. of America argued that its business income losses sustained as a result of the governor’s orders restricting access to nearby businesses to prevent the spread of COVID-19 should be covered because it caused damage to nearby properties. However, the court disagreed and held that because there was no tangible physical change on the nearby properties, the civil authority provision did not apply. Specifically, the court noted the mere presence of the virus in other restaurants or businesses did not destroy or ruin those properties.”
Virus Exclusion Provisions
In addition, many insurance policies also include virus exclusion provisions. In the case of Mudpie, Inc. v. Travelers Casualty Insurance Co. of America, the court held that these provisions generally exclude coverage for “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Some insurers attempted to argue that their claims should not be affected by this exclusion where their losses were caused by other factors, such as city, state and federal orders restricting the use of the insured’s property. These arguments have also been largely rejected by the federal courts.
The Importance of Understanding Policy Provisions
While it seems like COVID-19 business interruption claims have been almost unanimously rejected in federal courts, there are plenty of instances where an insured may elect to file its case in state court. While most insurance companies will likely attempt to remove the case to federal court, removals are not always appropriate. Nevertheless, a survey of the recent state appellate court cases show that state courts are generally reaching the same conclusions as the federal courts for these types of claims. For example, the Supreme Court of South Carolina recently issued its ruling in Sullivan Management, LLC v. Fireman’s Fund Insurance Co., and held that “the presence of COVID-19 and corresponding government orders prohibiting indoor dining do not fall within the policy’s trigger language of ‘direct physical loss or damage.’” Cases heard by appellate courts in at least 17 states and the District of Columbia have reached similar conclusions.
Nevertheless, it is important to note that the analysis in these cases hinge on contractual interpretation, and at least one court has found in favor of coverage due to ambiguities in the policy. In Cajun Conti, LLC v. Certain Underwriters at Lloyd’s, London, the court held that coverage should be construed in favor of the insureds because of “multiple plausible interpretations” of the terms “direct physical loss of or damage to” and “repair” as used in the policy’s definition of period of restoration.
Therefore, while courts will generally find in favor of insurers when presented with a COVID-19-related business interruption claim, it is important to have an understanding of the applicable policy provisions in order to understand how such provisions may be interpreted by the court.