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At its core, insurance is a product designed to mitigate risk. Some risks are obvious: the risk that a building could catch fire or collapse; the risk that a mistake might cause a product to be defective; or the risk that poor or uninformed management might result in claims by an employee. Other risks are evident only in hindsight. Where the recent Covid-19 pandemic falls is subject to dispute. Whatever its foreseeability, the pandemic has sent businesses scrambling to read their insurance policies to determine whether they offer any relief to the economic damage they have suffered.
Business interruption insurance (“BII”) is intended to provide payment for revenues lost as a result of an uncontrollable disruption to business operations. While BII may be a discrete policy, many businesses have the coverage in conjunction with their casualty coverage. Traditionally, BII policies has protected businesses that are forced to suspend operations because of a physical property loss. While policy language can vary significantly, BII policies frequently provide for payment of “the actual loss of business income you sustain due to the necessary suspension of your ‘operations’ during the period of ‘restoration.’ The suspension must be caused by the direct physical loss, damage or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.”
Another insurance product, contingent business interruption insurance (“CBII”) provides similar coverage when an insured’s business income is reduced because of loss, damage or destruction of property owned by others, such as suppliers, customers or a landlord. CBII coverage usually requires that the property damage suffered by the third party is of the same type as would have been covered under a traditional BII policy.
Both BII and CBII policies present two potential hurdles to recovery for losses incurred because of the pandemic: they traditionally have required a causal connection to property damage; and they frequently exclude coverage for bacterial and viral contamination.
Establishing property damage as a result of the pandemic can be challenging. Testing sufficient to establish the existence of Covid-19 in the air might face evidentiary challenges. Droplets of Covid-19 which remained ambient might not be deemed to impair physical property and might be treated as a transitory environmental hazard. There is some precedent for arguing that the presence of the virus on a surface constitutes physical damage sufficient to meet policy standards for property damage. For example, a New Jersey federal court recently held that the release of ammonia into a facility that rendered it unsafe until it could be cleaned constituted physical damage to a property, even in the absence of structural damage. Similarly, a New York federal court held that contamination of an HVAC system by particulate matter from the collapse of the World Trade Center could constitute property damage for insurance purposes. Such case law must be viewed cautiously. The determination of what constitutes “property damage” is one of policy interpretation and may not be applicable to other policies. In addition, insureds will have to establish that the contamination was the cause of the business shutdown. It is not clear that shutting down in response to a government mandate to encourage social distancing would establish a sufficient causal connection to support a claim under a BII or CBII policy.
Even if a connection to property damage can be established, there may be explicit exclusions to coverage that would eliminate coverage for Covid-19. After the SARS outbreak, most insurance companies excluded losses related to bacterial or viral infections from those covered by BII and CBII.
While policy holders may have little reason for optimism, recent action by the New Jersey legislature offers some hope to small businesses. New Jersey Bill A-3844 would alter multiple policy provisions currently contained in BII policies to make recovery easier for business interruptions due to Covid-19. As currently constituted, the Bill would apply to New Jersey businesses with less than 100 “eligible” employees. “Eligibility” is defined as employees who work 25 hours or more in a normal week. The Bill would apply retroactively to any policy holder with a BII policy in place on or before the date that Governor Murphy declared a public health emergency. In effect, the legislation would rewrite policies to include coverage for a “global virus transmission or pandemic” as announced in the State of Emergency implemented by the Governor’s Executive Order.
While the Bill has been criticized by segments of the insurance industry – and if passed would likely face constitutional challenges – it is noteworthy that the Bill also provides that insurers who pay claims under the policies affected by the legislation could apply to the Commissioner of Banking and Insurance for reimbursement.
While Bill A-3844 is directed at New Jersey businesses, the approach and scope of the Bill will be watched by insurers and policy holders nationwide. As businesses and government survey the full scope of the damage the coronavirus has taken on the economy, we expect to see a variety of insurance-focused strategies for assisting in the recovery.