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 In Business, Commercial Property

As a result of the COVID-19 pandemic, the past month has been horrible for businesses of all types across the United States, and especially in Florida. March is usually one of our busiest months with tourists coming from all over to enjoy our great weather and beaches. So, for the hotels and restaurants, this pandemic couldn’t have come at a worse time.

Over the past few weeks, our commercial team at Insurance Resources has fielded many questions from business owners about loss of income due to coronaviruses, and specifically COVID-19. Many business owners that either have a Business Owner’s Policy (BOP) or stand-alone Property coverage typically purchase Business Income coverage. The question however is, does Business Income coverage cover coronaviruses such as COVID-19?”

Business Income Coverage Issue

To answer the question, you must read each policy. The standard Business Income and Extra Expense coverage form (CP 0030 10 12) states the following in the insurance agreement:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage 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 or damage must be caused by or result from a Covered Cause of Loss.

Most insurance companies have been arguing that a virus does not cause, “direct physical loss or damage to property”. Prior court precedent mostly agrees that physical damage requires physical harm which is evidenced by changes to the physical characteristics of property. And although COVID-19 is extremely contagious, most insurance carriers have agreed that the virus has not caused a change to the physical characteristics of a business’ property.

Time Deductible Issue

Another issue with Business Income coverage is the time deductible. Most policies have a 3-day or 72-hour deductible. This means that loss is not paid out until 3 days after the physical damage occurs. If a lawyer could argue that COVID-19 did cause physical damage they might get shutdown because the virus typically dies within a few hours to days of contact.

Virus & Pollution Issue

We have also seen some carriers state that a virus is not a covered cause of loss because of the pollution exclusion that is common on most Special form policies. The ISO Special Form policy (CP 1030 10 12) states the following:

We will not pay for loss or damage caused directly or indirectly by… Discharge, dispersal, seepage, migration, release or escape of “pollutants” unless the discharge, dispersal, seepage, migration, release or escape is itself caused by any of the “specified causes of loss”.

The policy goes further on to define pollutants:

Pollutants” means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Most carriers have stated that a virus is a “contaminant”.  Therefore coverage should not exist under the standard Special form policy.

Civil Authority Issue

Another question we have seen as businesses have been shut down or restricted due to Pinellas County’s “Safer at Home” guidelines is whether or not Civil Authority coverage will come into play. The standard Business Income and Extra Expense coverage form we mentioned above, states that the following under Civil Authority coverage:

When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:  

(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and

(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.

The issue again here is that the coverage form requires a “covered cause of loss.” Again, most insurance companies are stating that viruses are not covered causes of loss. However, we expect this to be tried in courts in the months and years to follow this pandemic.

Specific Virus Exclusion Issue

Finally, many Business Owner and Property policies contain specific exclusions for viruses or communicable diseases. In 2006 after the SARS pandemic, the Insurance Services Office (ISO) released the Exclusion of Loss Due to Virus or Bacteria coverage form (CP 0140). After releasing the form, ISO noted that the ISO Special Form policy was never intended to cover viruses due to the “pollution” exclusion; however, this new form would help prevent future unnecessary lawsuits.

Current COVID-19 Legal News

At the time of writing this article, there are already 2 major lawsuits against insurance companies as a result of COVID-19 business income losses. Thomas Keller, who owns the widely known restaurants, French Laundry & Bouchon Bistro in Napa Valley is suing his insurer, the Hartford. Also, the group that owns Ocean Grill in New Orleans is suing their insurer, Lloyd’s. We are expecting that many similar lawsuits will be filed relating to COVID-19 business income losses.

The state of New Jersey also has a draft bill drawn up by some Assembly members which would require all insurance carriers that provide Business Income coverage to pay out due losses relating to COVID-19. The bill states that all policies that include business interruption, “shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic.”

The issue then is, where does the claim money for loss come from? If all insurance companies had to write checks to most of their commercial policyholders, we would see many insurance companies go out of business. Even some of the bigger carriers (i.e. Liberty Mutual, Hartford, Travelers, State Farm, etc.) would be in serious financial distress. Insurance works when losses are both non-catastrophic & statistically predictable. This pandemic however is neither.

Where Does the Insurance Industry Go From Here?

Most insurance experts are relating the loss due to COVID-19 to those after September 11th. Before 9/11 many in the industry had not thought of terrorism as a serious cause of loss to US businesses. However, after 9/11 many businesses were left without coverage. Those that had terrorism saw their premiums rise drastically, and carriers added specific terrorism exclusions to their policies. Then with the Terrorism Risk Insurance Act of 2002, the Federal Government agreed to act as a back-stop for insurers if losses exceeded certain amounts. We believe that in the future, virus or communicable disease coverage may be underwritten by insurance companies but backed (or re-insured) by the US Government.

What to Do If Your Business Suffered Loss of Income Due to COVID-19?

If your business has suffered loss of income as a result of COVID-19 and you have Business Income coverage under your Business Owners or Property policy we recommend that you file a claim with your insurance company, regardless of the policy forms or exclusions. First of all, if you are apply for state or federal aid, this may be a requirement. Secondly the circumstances regarding every loss is different and so is the insurance policy wording your business has.

If you have any questions relating to your business insurance please feel free to reach out to the author of this blog and our own insurance agent,  Brian Ford, CPCU, CIC at bford@insuranceresources.com or 727-345-0242.

*Please note the agents at Insurance Resources are neither claims adjusters or lawyers.*

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