Is There an Ability to Recover for Business Losses

Related to Property Contaminated by COVID-19

Not only has the COVID-19 pandemic impacted the health of hundreds of thousands of people globally, but the government response to this health crisis has also created a significant financial burden on businesses across the country. State and local officials issued “stay at home” orders which required the majority of residents to stay at home in states and counties nationwide. Although several states have started lifting these restrictions allowing some businesses to operate to some extent, these businesses are faced with the danger of permanently closing their doors. This article examines whether business interruption claims in this scenario have merit and if there is coverage, what damages are included.

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Not only has the COVID-19 pandemic impacted the health of hundreds of thousands of people globally, but the government response to this health crisis has also created a significant financial burden on businesses across the country.

State and local officials issued “stay at home” orders which required the majority of residents to stay at home in states and counties nationwide, including, California, Louisiana, Missouri, Georgia, Indiana, Texas, Michigan, South Carolina, Massachusetts, Delaware, Kentucky, Ohio, New York, New Jersey, Pennsylvania, Oregon, Connecticut, and Illinois. Some of these orders expressly mandate the closing of all non-essential businesses.[1] Although several states have started lifting these restrictions allowing some businesses to operate to some extent, these businesses are faced with the danger of permanently closing their doors.

Business Interruption Insurance Coverage in the Wake of the COVID-19 Pandemic

Several businesses have paid significant premiums to their carriers if their business experiences interruption in operations. Among the types of policies available are all risk policies. All risk insurance is one of the broadest types of coverage that is provided by insurance companies. Under this type of policy, all risks of physical loss or damage to property are covered, unless they are specifically excluded.

Insurance policies for business interruption generally require the interruption of business operations to be the result of a “direct physical loss of or direct physical damage to property.” The crucial issue that business owners will face when making a claim for the losses that they will undoubtedly incur will be whether or not COVID-19 can constitute a direct physical loss or direct physical damage to property.

Different Theories of Recovery for Physical Loss or Damage to Property as a Result of COVID-19

It is anticipated that carriers will deny coverage based on the argument that the virus has not caused any physical loss or damage to the business owner’s property. However, there are several possible theories of recovery for businesses who are making claims for the lost profits and other damages incurred because of the COVID-19 pandemic. Below are some possible theories of recovery.

Physical Damages Caused by Substances Not Visible to the Human Eye

Some courts have found that actual physical damage to property can be made by things such as gases, odors, and substances that are not visible to the human eye. For instance, in Farmers Insurance Company of Oregon, the Court of Appeals of Oregon found that damages caused by the odor from methamphetamine cooking constituted a direct physical loss. [Farmers Insurance Company of Oregon (1993) 123 Or. App. 6, 10.] In that case, the court found that odor is physical because it caused damage to the house. [Id.] Similarly, in Armstrong World Industries, Inc. v. Aetna Casualty and Surety Co., the California Court of Appeal found that the release of asbestos fibers constitutes physical injury to property under the terms of insurance policies. [Armstrong World Industries, Inc. v. Aetna Casualty and Surety Co.(1996) 52 Cal.App.4th 1, 90.] Insureds may make the argument that although the COVID-19 virus is not visible to the human eye, it has caused damage to the property because the virus has caused contamination to the property, thereby resulting in property damage.

At least one court has recognized this theory in the business interruption lawsuits. In Studio 417, Inc. v. The Cincinnati Insurance Company, No. CV 20-03127, 2020 WL 4692385, a district court in Missouri found that the plaintiff adequately alleged a direct physical loss of its property finding that the plaintiff’s allegations that the COVID-19 virus is a highly contagious virus that is physically “present…in viral fluid particles,” and is deposited on surfaces or objects. [Id. at *6.] The plaintiff alleged that the virus attached to and deprived the plaintiff of their property, making it “unsafe and unusable, resulting in direct physical loss to the premises and the property.” [Id. at 4.] Courts that have found that there is no direct physical loss have incorrectly interpreted the insurance policies by defining loss as damage. However, as was properly stated in Studio 417, the court must give meaning to both terms physical loss and physical damage and the defendant in that case improperly conflated the two terms to argue that the policies require a tangible, physical alteration. [Id. at *5.]

Loss of Use of Property

Other cases have held that actual physical damage does not necessarily have to be physical damage to the property; but can be damages from loss of use of property. In Total Intermodal Services, Inc. v. Travelers Property, a Federal District in the Central District of California found that total loss of use of property without physical damage constituted direct physical loss. [Total Intermodal Services, Inc. v. Travelers Property, No. CV 17-04908, 2018 WL 3829767, *1 (U.S. Dist. Cal. July 11, 2018).] The plaintiff in that case owned a shipping container that was accidently shipped to China and was eventually destroyed in China after being stored for several months when it was determined that return of the shipping container was unlikely. [Id.] The insurance company denied coverage arguing that the physical damage to the cargo in the shipping container did not occur in the United States and China was not a covered territory under the policy. [Id. at 2.] The court rejected the insurer’s argument that direct physical loss requires some damage or alteration to the property. [Id. at 4.] The court found that a total loss of use of property, even if there was no physical damage, could constitute direct physical loss of as a jury could find that the loss occurred when the cargo was loaded onto the ship bound for China. [Id. at 4.] Similarly, some courts have found that a physical condition that renders property uninhabitable is sufficient for physical loss or damage. [Travco Insurance Company v. Ward (2010) 715 F.Supp.2d 699, 709.] In Travco Insurance Company v. Ward, the insured attempted to recover for loss that was caused by Chinese drywall that was installed in the insureds home, claiming that the drywall released toxic gases thereby rendering the home uninhabitable. [Id. at 708.] The insurer argued that there was no direct physical loss because the drywall was physically intact, functional, and there was no visible damage. [Id.] The court rejected that argument, finding that the Chinese drywall rendered the property uninhabitable, causing the insured to suffer a total loss of use, which constituted a direct physical loss under the policy. In its recent decision, the Studio 417 court recognized this argument as valid. In addition to finding a direct physical loss due to the plaintiff’s allegations of the virus being physically present on surfaces, the court also found that the plaintiff had sufficiently alleged a direct physical loss of the property through its allegations that COVID-19 made its premises “unsafe and unusable.” [Id. at *6.] The court in that case found that the plaintiff alleged enough to survive a motion to dismiss.

Loss of Functionality of Property

Another potential argument that insureds might be able to overcome the hurdle of the physical loss or damage requirement is that these businesses have lost their ability to function. The court in Southwest Mental Health Center, Inc. v. Pacific Ins., found that loss of use, loss of access, and loss of functionality all constitute physical damage. [Southwest Mental Health Center, Inc. v. Pacific Ins. Co, LTD (W.D. Tenn. 2006) 439 F.Supp.2d 831.] In that case, a hurricane caused a power outage which resulted in the loss of data from the insured’s computer. The carrier refused coverage arguing that the loss was not a direct physical loss of or damage to property. [Id. at 834.] The court rejected the carrier’s argument finding that the corruption of the computer constituted a direct physical loss of or damage to property because the computer lost programming that interfered with its ability to function. [Id. at 838.] More recently, in January of this year, a district court in Maryland, granted summary judgment in favor of the insured in National Ink and Stitch, LLC. National Ink and Stitch, LLC, No. SAG-18-2138, 2020 WL 374460 [at *1 (D. Md. Jan. 23, 2020)]. In that case, the plaintiff sought coverage when a ransomware attack to their computer system slowed their system down and resulted in a loss of efficiency, although it was still functional. [Id. at 1.] The court granted the insured plaintiff’s motion for summary judgment finding that the losses sustained were covered by the policy. [Id. at 5.] The court reasoned that loss of use, loss of reliability, or impaired functionality demonstrate the necessary physical loss or damage to property as required under the policy. [Id.] A New Jersey Superior Court recognized this argument in a lawsuit against an insurance company for failure to pay for business interruption losses due to the COVID-19 pandemic. On September 18, 2020, that court found that an insured’s loss of functionality of its retail store due to certain government shutdown orders constituted a physical loss of the property under the policy.[2]

Civil Authority Provision

In addition to the broad scope that is covered by an all risk policy, generally, there are also extensions and additional coverages that may be applicable to damage caused by COVID-19. One such additional coverage is the “civil authority” extension. The civil authority provision generally refers to situations where a civil authority prohibits access to the insured premises resulting in a total loss of business income.[3] As referenced above, dozens of states and counties have enacted stay at home orders which have resulted in the temporary closing of certain businesses. Such orders may be sufficient to trigger the civil authority provisions in such policies. However, most policies specify that the order by the civil authority is a result of a covered cause of loss which is covered under the policy. This will lead policyholders back to the original problem of establishing that the stay at home orders are the result of a physical loss or damage to property. The language of some orders may be helpful in this respect. For example, some jurisdiction specifically state that the stay at home order is a result of damage to property caused by the virus.[4] Lawmakers are hopeful that this language will trigger coverage for many businesses.   

Now that the policyholder has determined that there is coverage, what types of damages are included? Under most business interruption policies, the actual loss of business income as well as payroll expenses are covered. However, the scope of coverage will always be policy specific, and is highly dependent upon the language of each individual policy. A policyholder should not rely on their broker or insurer for the answer.

The COVID-19 virus will undoubtedly have a huge impact on several business owners throughout the world. Although insurance companies will argue that COVID-19 does not trigger coverage, there are several theories that may prove to provide coverage to a multitude of policyholders, thereby ensuring their continued success.

[1] Grace Hauck, These states are ordering residents to stay home or shelter in place. What does that mean?, USA Today, March 24, 2020, 10:59 AM, https://www.usatoday.com/story/news/nation/2020/03/21/coronavirus-lockdown-orders-shelter-place-stay-home-state-list/2891193001.

[2] Graber, Nicholas et al., Client Alert: Win for Policyholders in New Jersey on COVID-19 Business Interruption Losses: “Physical Loss” May Include Loss of Functionality, September 23, 2020, 12:30 PM, https://www.nge.com/News-Events/128502/Client-Alert-Win-for-Policyholders-in-New-Jersey-on-COVID-19-Business-Interruption-Losses-Physical-Loss-May-Include-Loss-of-Functionality. 

[3] Steven Plitt et al., Couch on Insurance; Nature of Provision, Generally § 152:22 (3rd ed. 2019).

[4] Karen Relucio, Health and Human Services Agency, Public Health Division, Order of the Napa Valley County Health Officer Directing All Individuals Living in the County to Shelter at Home Except that they May Leave to Provide or Receive Certain Essential Activities and Work for Essential Businesses and Essential Government Services, March 18, 2020.

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Michael Childress has decades of extensive experience in helping insurance policyholders navigate the claims process. He concentrates his practice on protecting and enforcing the rights of the insured. Since 1981, he has negotiated, handled, and prosecuted insurance claims arising in 40 states, successfully coordinating thousands of investigations, and working with experts from many fields. Mr. Childress is admitted to practice in Illinois and Florida and handles matters throughout the United States. He represents national and international policyholders in matters that involve risk management, disaster recovery, and insurance coverage.

Mr. Childress can be contacted at (213) 217-5000 or by e-mail to mc@kbklawyers.com.

Marina R. Pacheco is a senior associate with Kabateck LLP, with expertise in several areas including personal injury, class actions, employment law, construction defect, and insurance bad faith. Ms. Pacheco has extensive experience handling all aspects of cases and has helped her clients obtain millions of dollars of compensation for their injuries.

Ms. Pacheco can be contacted at (213) 217-5000 or by e-mail to mrp@kbklawyers.com.