As concerns regarding the spread and containment of COVID-19 (the “coronavirus”) grow, the specter of economic loss linked to the pandemic looms on the near horizon. Many businesses are already experiencing a loss in income and have incurred unforeseen expenses with cancellation of travel, postponement of events and work stoppages. Given the global ongoing outbreak, forward-thinking businesses may be considering whether their insurance policies cover losses linked to coronavirus. It is unlikely that such losses will trigger business interruption coverage.
Business Interruption Insurance
Commercial entities typically purchase business interruption insurance as part of their first-party property insurance. Though coverage varies (and businesses should review their policies with their brokers and attorneys) most business interruption policies protect businesses from lost revenue arising from an inability to continue normal business operations.
To be compensable, economic losses must have been caused by a covered peril. Typically, first-party insurance policies ensure either “all risks” of physical loss unless explicitly excluded, or “named perils,” wherein the policy specifically identifies covered causes. In response to past pandemics, many insurers have developed policies that exclude contagious diseases from coverage, or simply do not list contagions as covered causes. If a loss is not caused by a covered peril, business interruption insurance is typically not available. Accordingly, businesses should first refer to their business interruption policies to determine whether economic losses related to contagious diseases are excluded under the contract language.
Direct Physical Loss
To invoke business interruption coverage, a policyholder must generally have suffered a “direct physical loss” to insured property. Direct physical losses are normally tangible, such as a commercial property leveled by an earthquake or hurricane. But where economic loss is caused by the spread of a communicable disease—such as coronavirus—it is less clear whether policyholders can satisfy this threshold requirement.
Though the issue has not been heavily litigated, a 2006 decision issued by the Eight Circuit provides some guidance as to how courts might assess a “direct physical loss” caused by contagion. In Source Food Technology v. United States Fidelity and Guaranty Company, plaintiff argued that lost revenue resulting from a federal embargo related to “mad cow” disease qualified as a direct physical loss to its property. See Source Food Tech., Inc. v. U.S. Fidelity & Guar. Co., 465 F.3d 834, 835 (8th Cir. 2006). Plaintiff asserted its uncontaminated beef product—which could not be transported to the United States—was nonetheless treated as though it was physically contaminated and thus plaintiff lost beneficial use of ownership. Id. at 836. The Eight Circuit, however, determined that plaintiff’s inability to transport its product across the border did not constitute a direct physical loss to property necessary to trigger insurance coverage. Id. at 838.
This precedent suggests that economic loss caused by coronavirus is unlikely to be covered under most business interruption policies. For example, business interruption insurance would not provide coverage for losses resulting from mandatory furlough or self-quarantining of employees. But, a business may be able to argue it has suffered a covered loss if insured property is physically contaminated and rendered unusable for a period of time. Say, for example, the physical surfaces in a factory are found to be contaminated and business operations must cease to properly sterilize the factory. In this circumstance, the contagion directly impacted the physical structure and caused an effective loss of insured property while the factory was being decontaminated. Absent such physical damage, however, coverage is limited. And even with physical damage, businesses must still be wary of the aforementioned policy exclusions for contagious disease.
Civil Authority Coverage
Business interruption policies often extend coverage to business interruptions arising from orders of a “civil authority” that impair business functions. Recently, schools, cities and even countries have been locked down on government authority, resulting in severe business interruption in impacted areas. However, civil authority coverage extends no further than business interruption policy, and so the same exclusionary limits apply.
Contingent Business Interruption Coverage
Some insurance policies provide contingent business interruption coverage, also referred to as supply chain insurance. Contingent business interruption policies protect the insured against supply chain interruptions. As overseas manufacturing slows, upsetting the global market, many companies will have to contend with significant losses—even over the short term—linked to compromised supply chains. Nonetheless, such policies still require a direct physical loss to insured property that is caused by a covered peril.
Business Interruption Coverage is Unlikely to Offer Reprieve
As a result of express policy exclusions and inherent coverage limitations, businesses are not likely to be covered for the significant majority of economic losses related to coronavirus. With businesses exposed to economic risk caused by communicable disease, some insurance companies may offer specialized pandemic disease business interruption policies. Larger insurers offered such coverage in response to lost income arising from the Ebola epidemic in 2014.
Coverage for Economic Losses Caused by Covered Perils Exacerbated by Outbreak
First-party claims often involve losses resulting from two or more causes, referred to as concurrent causes. In the context of business interruption insurance, concurrent causes are independent events that combine to cause the underlying economic loss. In circumstances where financial loss is caused partially by a covered peril and partially by coronavirus, courts often find no coverage exists unless the predominant cause is a covered peril.
Consider, for example, a factory that uses a unique and complex machine to manufacture its goods. If that machine becomes damaged, the factory calls a technician for repairs, which normally take just a few days. During the period of time when the machine is off-line, the factory likely suffers economic losses covered under most business interruption policies.
If the repair company could not make the necessary repairs for at least a month because of a civil order implementing a coronavirus-related travel ban, or an internal company policy prohibiting employee field visits, what would otherwise be a relatively small loss in profits has increased substantially. This situation also raises an important question with no clear answer: is the increased loss predominantly caused by the physical damage to the machine (likely a covered peril), coronavirus (likely not a covered peril), or the civil order/repair company’s policy? As a consequence, even though the loss was—in part—caused by a covered peril, the factory owners may not be able to recoup much of the economic loss because the extended harm was predominantly caused by coronavirus.