And Yet One More Thing to Add to Your List of “Uncertainties”

We’re at war. One fought from the confines of our homes. As we enter into week four of California’s “shelter in place” order, and with experts saying that we may not be able to loosen (let alone, withdraw) restrictions until May at the earliest, many are thinking about what they can do in the event of an extended period of economic inactivity. One area businesses are giving thought to is insurance, in particular, the business interruption provisions of their policies.

For companies involved in construction, most are familiar with the panoply of insurance required on construction projects including commercial general liability insurance, workers’ compensation insurance, employers liability insurance, automobile liability insurance and, if you are performing design work, professional liability insurance. Each of these types of insurance are intended to cover third-party claims. That is, claims against the insured, as opposed to claims by an insured.

Business Interruption Coverage

In addition to third-party liability insurance, most businesses also carry property insurance, intended to cover damage to property, including damage caused by business interruptions. Property insurance covers first-party claims. That is, claims by an insured.

Business interruption coverage typically comes in two flavors:

  1. Business interruption coverage for losses incurred as a result of disruptions to an insured’s business; and
  2. Contingent business interruption coverage for losses incurred as a result of disruptions to an insured’s business customers or suppliers.

Both, however, typically require “direct physical loss of or damage to” property by a covered cause of loss, for coverage to be triggered. And, this is where it gets murky.

Direct Physical Loss or Damage

First, courts have not settled on a uniform set of rules as to what constitutes “direct physical loss of or damage to”” property. Certainly, most courts are in agreement that “direct physical loss of or damage to” property includes physical damage or loss of property by a covered cause of loss that results in disruptions to an insured’s business such as by flood or fire.

However, what about the coronavirus, which, one could argue, does not cause physical damage or loss of property?

Some are already testing the waters, such as celebrity chef Thomas Keller, owner of the world-renown French Laundry in Yountville, California, who has sued his insurers in the Napa County Superior Court claiming that the coronavirus triggers coverage under the business interruption provisions of his policy because the virus while it can’t be seen does in fact cause damage to property and is therefore covered. Keller’s attorney has acknowledged that the lawsuit is a test case to establish legal precedent in California.

Virus or Bacteria Exclusion

Second, for those of you who have read your insurance policies, you know that your policy basically covers everything unless it’s excluded, and that list of exclusions is long indeed. One of the exclusions found in many policies is an exclusion for “virus or bacteria.”

Incorporated into their policies by insurance companies in the wake of the SARS epidemic nearly 15 years ago, the exclusion typically states that the carrier “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

But states may step in to override insurers. Pennsylvania became the fifth state last week, following the lead of New York, New Jersey, Ohio and Massachusetts, to introduce legislation to override the “virus” exclusion, while a group GOP Senators wrote a letter to President Trump on Friday urging him to protect insurers against state legislative intervention.

To date, California has not stepped into this debate, although the California Department of Insurance’s website has stated that it is conducting a mandatory request to insurance companies for data about the number and type of small businesses with business interruption coverage and the scale of both covered and uninsured business losses, which suggests that it might.

Disruptions Caused by Civil Authorities

Third, under the property coverage of some policies, there is coverage for losses resulting from government actions that impair or prohibit access to an insured’s business premises. California’s mandatory “shelter in place” order has clearly impacted the ability of many construction companies and project owners from accessing their businesses. However, like business interruption coverage, civil authority coverage provision often requires “physical loss” for the coverage to be triggered, which, of course, like the protagonists of Franz Kafka’s The Castle or Joseph Heller’s Catch-22,  depending on your literary sensibilities, simply leads you right back to square one.

In short, and while the term “uncertainty” has been bandied about a lot as of late, there is uncertainty on the insurance front about how courts will interpret the applicability of insurance provisions to the coronavirus pandemic and what states will do to guide those decisions.

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