COVID-19 Update: Business Interruption Coverage for Government Ordered Shutdowns

We are living in a state of uncertainty. As the COVID-19 coronavirus pandemic spreads, many state and local authorities are issuing orders to limit social gatherings, temporarily close schools and some businesses — particularly those in the hospitality industry. More significant orders are coming. Yesterday evening, California’s Governor Newsom ordered the entire state to stay at home, effectively shutting down businesses and activity outside of certain critical/essential sectors. Other states likely will follow suit in the coming days. Those decisions are causing significant disruptions to businesses that are trying to make sound decisions in the midst of this uncertainty.

One source of financial relief for businesses could be insurance coverage. Most commercial property insurance policies include business interruption coverage, which is intended to cover losses for lost profits, operating costs, and other expenses. For business interruption coverage to apply, policies typically require the interruption to be caused by “direct physical loss of or property damage to” covered property. Relevant to the current uncertainty with COVID-19, some business interruption policies also provide coverage for losses when a civil authority prohibits access to covered property—like California’s governor ordering the entire state to effectively shut down. Slightly different from business interruption coverage, civil authority interruption coverage usually requires “direct physical loss of or property damage to” nearby property.

With COVID-19 causing no obvious signs of property damage, one might ask how business interruption coverage could help. This is where the precise language of the insurance policy becomes very important.

The words to focus on are “direct physical loss.” Many courts across the country, including in Oregon, have interpreted “direct physical loss” broadly to include circumstances where the presence of particles, like odor, smoke, or gasoline vapors, make a space unusable or uninhabitable even though there is no observable damage to the property. That reasoning has the potential to apply to COVID-19 because the virus reportedly can live on surfaces for many days and spreads by touch, according to the Centers for Disease Control and Prevention. Businesses have the potential to recover under civil authority interruption coverage if a government order prohibits access to or forces the closure of their premises to stop the spread of COVID-19.

Undoubtedly, there will be litigation about these issues. A restaurant in New Orleans has already filed suit against its insurance carrier seeking a declaratory judgment that its “all risk” insurance policy covers any civil authority shutdown of the restaurant due to the coronavirus, including coverage for business income losses. Insurance carriers are going to push back and argue there is no coverage because there is no observable property damage. It is important that businesses not be deterred by those arguments and delay tendering a claim for losses.

Businesses evaluating potential coverage should be mindful that some policies include an exclusion for communicable diseases. The specific language in the policy matters. Not all exclusions are worded the same. It is important to read the entire policy carefully to understand what exclusions and other conditions could apply.

Notice requirements for interruption coverage may include short windows for tendering a claim to the insurance carrier—often well before it is possible to assess losses related to an interruption. It is never too early to give notice to the insurer about a claim or potential claim.