Business Interruption Insurance and COVID-19

In March, we reported on the issues for businesses considering invoking “force majeure” contractual provisions to excuse performance obligations because of COVID-19. Today we explore a sister topic; businesses, including nonprofits, who want to make claims under their business interruption insurance policy for COVID-19 related losses.

What is business interruption insurance?

Business interruption insurance is most commonly designed to replace lost income in cases where a business premise is physically damaged or where access to the insured’s property is prohibited by closure orders from a civil authority because of damage to property surrounding the insured’s business. BI insurance typically covers losses related to lost business income, extra expenses incurred in restoring a property, and losses incurred from business interruption to a continent business, such as a key supplier. Although most policies require “direct physical loss or damage” to property, some insured entities who have been denied coverage are filing lawsuits under the premise that the coronavirus “physically infects” the business premise.

COVID-19 disputes over business interruption insurance coverage. 

In a recent suit over insurance coverage denied by the Chubb Group, the Simon Wiesenthal Center argued that Los Angeles Mayor Eric Garcetti’s stay-at-home orders constituted a civil authority action that triggered coverage under its business interruption policy. The Wiesenthal Center, widely known for its work towards combatting anti-semitism and promoting human rights, specifically argued “The word ‘physical’ has been defined by California courts as ‘having material existence’ or ‘perceptible through the sense and subject to the laws of nature.’ The coronavirus, like a bacterium, clearly has a material existence and is something that exists in nature that physically damages tangible property by rendering it unusable as it adheres to surfaces creating a dangerous property condition.” Chubb, in its motion to dismiss the suit, argued that civil authority coverage is only triggered if access to a premise is prohibited because of physical damage to another nearby property. Still, in other cases, plaintiffs have also filed suit on the proposition that in the absence of a specific exclusion, their claims should be covered; their premise is based on the adoption of specific viral exclusions to BI policies in the wake of the SARS outbreak.

Despite the conflagration of lawsuits spurred by business interruption coverage denials, the New York Times notes that for many nonprofits, battling insurance denials via litigation is simply too expensive. Instead, smaller nonprofits are relegated to pushing for a legislative solution. Several states have taken an activist approach, with legislators in New Jersey, Ohio and Massachusetts introducing language that would require business interruption policies to cover pandemic-associated losses. Lawmakers at the federal level are taking a less controversial approach in proposing legislation to establish a federal reimbursement program, similar to the Terrorist Risk Insurance Act (TRIA). 

Your nonprofit’s business interruption insurance coverage.

It’s still too early to tell how the cards will fall for those fighting BI coverage denials. Both litigatory and legislative efforts will be a long time in the making. Likewise, each business and the circumstances surrounding their losses are unique and the particular language of an individual policy will ultimately determine the scope of coverage. In the meantime, nonprofits should not assume that all hope is lost. Given the extraordinary nature of the pandemic, the possibility exists that coverage and other relief may come available as litigation and legislative responses unfold. It’s important to take steps now to understand your coverage and exercise claims options to the fullest extent. If and when you hit a roadblock, it may be time to seek legal help to best understand your options and next steps. 

Ellis Carter is a nonprofit lawyer with Caritas Law Group, PC. To contact Ellis, call 602-456-0071 or email us at info@caritaslawgroup.com.

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