Based upon the recent outbreak of COVID-19 (coronavirus), it remains important for businesses and insurers to assess current policies, and specifically those related to pandemics and communicable diseases. We expect an increase in insurance claims relating to policies that include Business Interruption Coverage (BIC) and/or Contingent Business Interruption coverage (CBI). Accordingly, it is important to know whether policies may cover business losses related to forced quarantines, labor shortages, declines in demand for goods and services, delays in deliveries, and other issues caused by the global pandemic. The short answer is, of course, “it depends.”
Traditionally, BIC protects against economic loss that results from an inability to put insured property damaged by a covered peril to normal use. In other words, BIC policies are typically meant to cover those interruptions caused by property damage. While specific policies vary, most policies require:
- the loss must result from a covered cause of loss that is not excluded (such as a bacteria, virus, communicable disease, epidemic, or pandemic exclusion),
- there must be a “direct physical loss of or damage to” insured property,
- the loss must be quantifiable, i.e. the amount of the loss must be reasonably determinable, and
- the loss must occur during the period of time it takes to restore the damaged property.
In most cases, the “direct physical loss” requirement will be particularly relevant in determining whether losses resulting from the COVID-19 outbreak may be covered. This will depend on the facts of each claim, but at least seven of losses may arguably trigger coverage:
- Contamination—Losses resulting from contamination of covered property, e.g. when insured premises become uninhabitable after one or more employees who worked in the space contracted COVID-19. However, in Meyer Natural Foods, LLC v. Liberty Mutual Fire Insurance Company, 218 F. Supp. 3d 1034 (D. Neb. 2016), the court held that a contamination exclusion barred coverage for the contamination of beef with E. coli while in the insured’s possession.
- Civil Authority Coverage (CAC)—Unless specifically excluded, losses may be covered when a “civil authority” order prohibits or impairs access to the premises of a policyholder, e.g. when a federal, state, or local government imposes a mandatory quarantine or other order that limits access to insured premises or facilities. Coverage related to a civil authority order typically depends on the distance to the covered property, the time when losses occurred in relation to the order, and the premise that such an order is in response to direct physical damage. For example, in United Air Lines, Inc. v. Insurance Company of State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006), United sought indemnity for economic losses relating to government closure of Ronald Reagan Washington National Airport in connection with the September 11 terrorist attacks on the World Trade Center and the Pentagon. The court held that United was not entitled to civil authority coverage because the airport was shut down before the attack on the Pentagon and was not “as a direct result of damage” to adjacent property, as required by the policy. However, in Sloan v. Phoenix of Hartford Insurance Company et al., 46 Mich. App. 46, 207 N.W.2d 434 (1973), the court interpreted the civil authority provision as not requiring physical damage to property to trigger coverage. Owners and operators of movie theaters made a claim for business interruption coverage following a curfew ordered by the Governor of Michigan in response to widespread riots.
- Ingress/Egress Coverage (IEG)—Similar to Civil Authority coverage, IEC may cover business losses when access to the insured location is prohibited due to “direct physical damage of the type insured against,” e.g when an office is inaccessible because the entire building is shut down due to contamination of COVID-19, unless specifically excluded by a bacteria, virus, communicable disease, epidemic, pandemic, or related exclusion.
- Contingent Business Interruption (CBI)—This typically covers losses resulting from disruptions in a company’s supply chain, specifically, interruption in business caused by physical loss or damage to the property of a supplier or downstream customer. This coverage typically includes the same requirement that such physical damage downstream is of a kind that would be covered if it were of the insured’s property.
- Supply Chain Insurance (SCI)—This typically applies broader coverage than CBI, although specific terms vary greatly. SCI is typically meant to cover disruptions in a supply chain due to disruption or delay of products or services by a named supplier. Unlike CBI, however, it may provide coverage for insured events not limited to physical loss or damage, e.g. pandemic, regulatory action, strike, or mandatory action.
- Stock Throughput Policies (STP)—These policies are similar to other policies primarily based on physical loss of or damage to a product, and as a result typically require the same analysis regarding traditional coverage of a similar kind. However, this type of policy derives from a marine cargo policy and typically covers loss or damage to stock and inventory both on insured premises and in transit.
- Trade Disruption Insurance (TDI)—This typically covers loss of earnings, extra expenses, and contractual penalties resulting from delays or disruptions of trade, arising out of specific perils such as governmental closure of ports and borders. Unlike standard coverage derived from property or marine cargo policies, TDI typically does not require a direct physical loss to goods or their future commerce.
On the other hand, losses resulting from a loss of workers, voluntary quarantine, or decline in demand of goods or services are unlikely to meet the “direct physical loss” requirement of most policies.
It remains important for businesses and insurers to retain experienced defense attorneys to navigate this ever-changing area of law. If you are either an insurance provider or your business has been affected by COVID-19 and would like to know more about related insurance coverage, contact our office at 859.422.6000.
Article written by attorney Max Smith and law clerk Chase Bullock.
