December 29, 2020
By: Cornelius “Con” F. Riordan
The spread of COVID-19 has severely impacted the construction industry with project delays and loss of productivity. In states that designated construction as non-essential, construction activity has ceased; in states where construction was deemed essential, contractors work under burdensome limitations and operational restrictions. Restrictions include use of personal protective equipment, social distancing restrictions, limitations to jobsite access, labor shortages, and government-imposed protocols. In addition, projects have been cancelled, job sites contaminated, employees infected, and the supply chain disrupted. As a result, contractors have lost significant income and incurred substantial additional expenses. One cure to recover some or all losses could be business interruption insurance coverage.
The key to a successful claim against the insurance company is to understand your policy and its limitations. Business interruption coverage is typically provided as part of an “all risk” property insurance policy. Many such policies provide coverage for loss of income or covered expenses. These can include rent sustained by the policyholder due to partial or total interruption of business resulting directly from loss or damage to property on the business premises. Some policies cover business income losses caused by the actions of civil authority that impair or restrict access to the business. However, most policies with that coverage require that the business losses be directly caused by damage to the property of the business caused by government orders. Some policies contain a virus exclusion that bars coverage for events triggered by a virus that induces or can induce physical distress, illness, or disease. Other policies exclude coverage for losses or damage caused by unfavorable business conditions or damage caused by delay, loss, or use of market.
Policyholders across the country have filed business interruption insurance claims asserting that the presence of the virus has caused damage to their business property. Most insurers have denied these claims because of the virus exclusion or because the virus was not the cause of a “direct physical loss” like a fire or storm. Losses resulting from business disruptions due to a health emergency have been excluded.
In response, a few states now are considering legislation that would force insurers to cover COVID-19-related claims despite any exclusionary provisions in their policies. California, Massachusetts, Michigan, New Jersey, New York, Ohio, and Pennsylvania are among them. However, the proposed legislation raises concerns about legislative interference with private contracts and potential constitutional issues. Needless to say, the insurance industry opposes the legislation.
An industry advisory group has developed policy endorsements offering limited coverage for losses caused by COVID-19-related shutdowns or restrictions. However, those endorsements have not yet gained regulatory approval in most states and, if approved, would provide potential coverage only on a limited basis and only for future losses.
Construction businesses have turned to the courts for relief and hundreds of COVID-19-related insurance coverage lawsuits have been filed across the country. Nearly half of them are class action suits. Insurers have asked courts to dismiss cases because there is no specific coverage for COVID-19-related business interruption and because businesses have not established direct physical loss or property damage. Policyholders challenging the denial of coverage generally rely on one of two theories that the virus itself causes physical damage to property: (1) that the virus contaminates surfaces and lingers in the air and (2) that the executive orders restricting access to property cause physical loss by preventing business owners from using their properties for their intended purpose.
Only a handful of the hundreds of cases filed have concluded. Lower court across the country are trending in favor of the insured, ruling that COVID-19-related shutdowns do not result in a direct physical loss to business property so that the loss is not an insured peril. The cases below are just a few examples:
- Two decisions from federal courts in Illinois have ruled that no coverage exists for COVID related business interruption losses.
- A New York federal court ruled that the policy’s direct physical property damage requirement was not met because any losses were caused by the state governor’s shutdown order and not any particular damage to the business property.
- A Michigan state court dismissed a policyholder lawsuit because the insured did not allege that any form of physical loss or damage to the property occurred as required by the policy.
- A District of Colombia court found that the policy did not provide business interruption coverage for COVID-19 losses due to the lack of any physical damage to property.
- Two California state courts separately upheld the denial of coverage to restaurants because the virus was not shown to have caused physical damage to the business property.
Despite these setbacks for insureds, there are glimmers of hope for policyholders:
- A Missouri federal court ruled in favor of the insured and the rejected the insurance company’s arguments that business interruption income losses due to COVID-19 are not covered under an “all-risk” policy because the policy did not define the terms “physical loss” or “physical damage” and did not include any explicit exclusion for losses caused by viruses or communicable diseases. The ruling was based on the allegations in the complaint and not on any evidence that property damage had in fact occurred due to the presence of the virus. This ruling was the first in which a court allowed a policyholder’s COVID-19 coverage suit to proceed.
- A New Jersey state court also ruled favorably to an insured on a COVID-19 business interruption suit. The insured alleged that governmental orders closing non-essential businesses constituted a covered cause of loss under the policy. While the policyholder did not allege the actual presence of the coronavirus on its property, it claimed such an allegation was not needed to establish coverage. The court stated that the argument advanced a novel theory of insurance coverage arising from an unprecedented, historic event that merited denial of the insurer’s attempt to dismiss the case.
- A Florida federal court ruled in favor of an insured on the basis that the virus exclusion was ambiguous in that it did not directly address losses caused by the unique circumstances that COVID-19 has had on society – a distinction which the court found to be significant.
- A North Carolina state court found coverage for business interruption losses because “direct physical loss” to property includes the inability to use the property due to governmental orders. While this decision has bolstered the hopes of policyholders, it is an order from a trial court, not a reviewing court.
A Virginia federal court ruled for the insured because its business property sustained a direct physical loss when it was rendered uninhabitable, inaccessible, and dangerous to use because of the state’s closure order.
The current situation has the potential to shape insurance law and policy coverage far into the future. One thing is clear: the cases could wind through multiple layers of appeal and will likely not be resolved quickly. We are watching for outcomes and decisions so that we can offer our best guidance to businesses.