Business Insurance in the Face of COVID: Pandemic Protection

By: Isabel Malmazada, Phillips Nizer Summer Associate

Since the beginning of the COVID-19 crisis in March, most states have decided to shutter non-essential businesses to stop the spread of the virus. Businesses were closed for months, leaving employers and employees with lost revenue and lost income. If the shuttering of a business was due to forces outside of the business owner’s control (as in the case of a government-ordered lockdown), may a business be covered by its insurance policy? As with so many legal questions, the answer is: it depends.

General liability insurance and property insurance do not cover forced closures due to pandemics or civil ordinances. However, if a business also had business interruption insurance or civil authority insurance, it may be protected. Business interruption insurance generally covers certain losses in the event the business suffers physical damage or loss that prevents it from operating. Businesses that had to close due to COVID-19 contamination concerns may be able to seek coverage for the period of time necessary to decontaminate the premises, dependent upon the terms of the specific policy. Civil authority coverage allows a business to recover losses in the event that a civil authority issues an order that closes the business or prevents normal daily operations. The period of coverage begins with the civil authority order that restricts access to the business and ends when the order is lifted or after a specified period of days has elapsed, whichever occurs first.

As always, the language of each policy is critical. Some policies explicitly cover pandemics. For example, the Wimbledon Tennis Tournament paid $1.9 million per year for a pandemic insurance policy since 2003 following the SARS outbreak. This entitled it to a $141 million payout following the cancellation of its tournament this year. However, many businesses are not so fortunate. Many insurers have taken the position that COVID-19 claims are not covered, even for businesses that had bought additional protection, either because there has been no physical damage to property or because the policy expressly excluded coverage for viral contamination, or because the policy did not expressly include viral contamination as a covered event.

Since the COVID-19 outbreak, members of Congress have requested insurance companies to cover COVID-related losses under business interruption policies. State legislators in New Jersey, New York, Ohio, Louisiana, and Pennsylvania have also proposed legislation that would require insurers to provide some coverage for losses due to COVID-19.  However, the National Association of Insurance Commissioners, comprised of insurance regulators from all fifty states and the District of Columbia, urged Congress not to take action that would require insurers to cover COVID-19 business interruption claims under policies that exclude coverage for communicable diseases. Legislation that tries to expand coverage obligations of insurance companies would likely be challenged as unconstitutional under the Contracts Clause of the Constitution, which prohibits states from enacting legislation that impairs contractual obligations.

Now is an optimal time for all businesses to review their insurance policies and determine what coverage is available and see if such policies expressly address losses caused by viruses.  The lawsuits have already started. A key issue being litigated is whether there is “property damage” from COVID-19 contamination and whether an insured “physical loss” includes the inability to use property safely.  The difficulty is that business interruption policies are generally written to cover obvious physical damage, like destruction from a natural disaster. Therefore, it is unclear if a virus will meet the threshold requirement of “property damage.” A business owner must establish physical damage to his or her property from a communicable disease or contamination. May this burden be met if the business is near a hospital, airport, or nursing home and the business owner shows that someone with COVID-19 was on his or her premises and thus “contaminated” the premises with said virus?

Insurance policies are contracts and are interpreted as such. Whether a particular policy will provide coverage will depend upon the actual language of the policy and the specific circumstances giving rise to the claim.