In the 2008 film Wall-E, Earth is a post-apocalyptic wasteland with nothing on it but the abandoned remnants of human society, and a forlorn, trash-compacting robot. The robot’s only living company is a pet cockroach named Hal, which I guess is Pixar’s nod to the popular notion that cockroaches will outlive us all. (Or maybe it’s a tribute to Hal in 2001: A Space Odyssey.)
You know what else will outlive us all? Law firm marketers. I guarantee that if, heaven forbid, there’s ever a nuclear holocaust, the first e-mail alert from a law firm will appear within a half hour, explaining why you do or don’t have coverage for the problem, what the implications are for employers, and how you’d better tighten up your cybersecurity. (Maybe it’ll even be from me…)
The marketing barrage started quickly with respect to the COVID-19 issue, and with good reason. Many businesses, especially small and medium-sized ones, are suffering devastating economic losses as a result of the pandemic. The insurance industry is drawing a “no pay” battle line. One prominent insurance defense firm writes in a recent “Alert,” for example: “The coronavirus is contagious. The same can be said of articles, penned by coverage lawyers, addressing the potential availability of insurance for losses tied to the pandemic. We’ve lost track of how many we’ve seen.”
Ouch. That hurt. (And also, who uses pens to write articles anymore?)
Criticism of policyholder-side coverage lawyers notwithstanding, businessowners have been asking us specific and urgent questions about business interruption insurance in the context of the current public health emergency. I’m ever the optimist when it comes to coverage questions, but I unfortunately think that many business interruption claims may be a tough row to hoe.
I’ve written before about how business interruption insurance works (here, for example). Basically, business interruption insurance is insurance coverage that can replace business income lost for a period of time after a disaster. Business interruption insurance isn’t sold as a separate policy, but is either added to a property-casualty policy or included in a comprehensive package policy as an add-on or rider.
To begin with, all policies are not created equal. You must read your policy carefully, not simply make assumptions about what it says. Many policies, for example, contain a specific exclusion for losses due to viruses or bacteria (ISO form CP 01 40 07 06), reading: “We 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.” This exclusion is going to be a tough hurdle, although I know from discussions with my colleagues that there are some creative arguments being considered, especially with respect to policies that don’t have an anti-concurrent causation clause. (I wrote about those clauses here.) The argument will be that the proximate cause of loss is a shutdown by civil authority, not the virus itself.
Leaving the exclusion to one side, business interruption insurance generally requires some type of direct physical loss in order to be triggered. If you can’t show that your building (or a structure in proximity to your building, or a facility in your supply chain) was actually contaminated by the virus, then where’s the direct physical loss? I can see a (defense-oriented) Court saying, all you have here is a shutdown to prevent further spread of a virus that hasn’t directly harmed your property. (Of course, if there’s evidence of contamination within your building, or that of a supplier, or a nearby building, that may change the coverage picture considerably.)
One potentially helpful case is Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014), which you can read here. Gregory Packaging involved the release of an unsafe amount of ammonia from a refrigeration system in a juice packaging facility. The plant had to be shut down and decontaminated. The policyholder filed a claim for business interruption coverage for the downtime. Travelers denied coverage (of course), on the ground that there was no “direct physical loss.” The Court disagreed, holding that “physical damage” meant “a distinct, demonstrable, and physical alteration” of a property’s structure. In other words, you don’t necessarily need damage that you can actually see, as long as the utility of the property has been affected. The Court ultimately determined that ammonia, a dangerous gas, had rendered Gregory Packaging’s building temporarily uninhabitable, which constituted a “direct physical loss” sufficient to trigger coverage.
The key is, there was actual, proven contamination within the building, not just a fear of contamination.
Another potentially helpful case is Wakefern Food v. Liberty Mutual Fire Ins. Co., 406 N.J. Super. 524 (N.J. Super. 2009), which you can read here. That case involved a group of supermarkets and the 2003 power blackout, which was caused by problems with the electrical grid. The supermarkets suffered food spoilage during the four-day interruption in electrical service, and filed a business interruption claim with Liberty Mutual. The policy required “physical damage” to off-premises electrical equipment in order to be triggered. Too bad, so sad, said Liberty Mutual. There was no physical damage to equipment here; basically, some circuit breakers in the system simply tripped, causing a cascade effect, because some wires in Ohio had sagged and contacted trees.
Fortunately, the Appellate Division disagreed, writing: “In the context of this case, the electrical grid was ‘physically damaged’ because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity. There is also undisputed evidence that the grid is an interconnected system and that, at least in some areas, the power could not be turned back on until assorted individual pieces of damaged equipment were replaced.” (Emphasis added.)
Here again, we have physical damage in a direct causal chain to the policyholder’s premises. I suspect that the less direct the effect, the harder it will be to convince a judge to enforce business interruption coverage.
This is not to say that you won’t succeed on a business interruption claim relating to COVID-19. In fact, if you’re a business policyholder affected by the virus (and at this point, what business isn’t), you should probably file a claim and force the insurance company to take a position. Then you can decide whether to pursue the matter further.
I’m just cautioning you not to get your hopes up yet, because you’re probably in for a fight. And it’ll be awhile before we see how the Courts respond.
Update as of March 27, 2020: Two business interruption coverage lawsuits have now been filed, one in California, one in Louisiana. by the same lawyer, John Houghtaling. The California suit alleges coverage under the Civil Authority provision of the property policy. The allegations say that COVID-19 has physically damaged “public and private property, and physical spaces in cities around the world and in the United States” and that the virus “physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days.” It notes that “China, Italy, France and Spain have implemented the cleaning and fumigating of areas before allowing those areas to re-opened to the public.” The California complaint also observes that the California stay-at-home order says that it was “issued based on evidence of physical damage to property.” So, we’ll see…