Life and Business Interrupted – by COVID and Other Unusual Circumstances

I am pleased to share joint authorship today with my good friend, Attorney Jan Larson. Coincidentally, she and her husband, Rock Rockenbach, soon will be moving back to Montecito. Jan and I both represent policy holders against insurance companies.

In this article, we discuss how first party property insurance policies should be examined to determine whether they may cover business interruption claims and lost income in the era of the coronavirus. You may find coverage for lost income, expenses, payroll, extra operating expense and maybe even the cost of preparing your claim against the insurance company. This article is designed for the business owner to understand that their insurance coverage should be an asset in today’s world. The insurance issues are traditional; it’s the setting and context that are unprecedented.

Physical Loss of or Damage to Property

Q: How do we characterize the insurance policies in question here?

A: The insurance policies in question are all risk first party property insurance policies. While the individual terms and conditions can vary widely across different policies, a property insurance policy typically covers losses incurred as a result of all risks of physical loss or of physical damage to property that is covered by the policy. Insurance companies frequently argue that this should be interpreted to mean that the policies cover physical loss to the property and not physical loss of the property; however, the actual policy language is key here. What is physical loss of the property? The physical loss of your property means that you have lost the functional use of your property. The insurance companies protest that a policyholder needs to show some sort of tangible physical damage to its property in order for the insurance coverage to apply. In fact, in liability insurance policies, the insurance companies define property damage to mean “physical injury to tangible property.” In effect, they are trying to import that definition into their property policies where it may not exist. There is ample case law in California that physical loss means loss of function and that the policy language is at a minimum, ambiguous. The general rule of thumb is that ambiguous insurance policy language written by an insurance company is construed in favor of the policyholder. These may sound like arcane distinctions, but they can mean the difference between coverage and no coverage for your losses.

Not only are these property policies all risk policies, but once you satisfy the threshold of showing physical loss of or physical damage to the covered property, the burden of proof then shifts to the insurance company to show that an exclusion or a limitation can be used by them to try to avoid your rights to your coverage, i.e. paying you. The party charged with the burden of proof has to show that their interpretation is more likely than not. In our experience a tie typically goes to the policyholder.

In this context, coverage for business interruption and lost income often is due to an Order of Civil Authority that prohibits access to your business premises.

In California today, we are all subject to an Order of Civil Authority issued by the Governor on or about March 15, 2020, directing that we shelter in place. As a consequence, there are tremendous income losses incurred by many businesses. Some property policies have coverage extensions that are designed to cover lost business income incurred by necessary compliance with an Order of Civil Authority, but you must carefully examine the terms and conditions. Depending on that language in your policy, the insurance company may still argue that the Order of Civil Authority be connected to physical damage.

We have been down this path before. For example, after 9/11, the New York City Mayor closed downtown NYC to traffic and services. Although the attack was on the West Side of NYC, the Order of Civil Authority also included the East Side of NYC which had not been physically damaged. Businesses located on the East Side also lost substantial business as a result of the Order and had to challenge their insurance companies to recover their damages.

The coverage extension for an Order of Civil Authority often specifies that it only applies where your property is located within a specified distance of other property directly affected by the Order of Civil Authority. For example, some property policies only provide coverage for property that has lost business because of an Order of Civil Authority if they are within five miles, or adjacent to or within 1,000 feet of another property directly affected by the Order of Civil Authority. These geographic limitations raise a novel question in this context where an entire state is enveloped by the same Order of Civil Authority.

What is ingress/egress coverage?

Ingress/egress coverage is another coverage extension sometimes included in a property policy that refers to the inability to access your business premises because of some unforeseen cause. One example given by the insurance industry, believe it or not, is when the circus comes to town and an elephant parks himself or herself in front of your store and customers cannot get into your store. Clearly, you can’t get in and you can’t get out. That incident would fall under ingress/egress coverage.

This coverage extension can be a companion to business loss due to of an Order of Civil Authority. For example, if the 101 is closed and people cannot access your business. But again, beware potential arguments from the insurance company that the inability to access your property was the result of physical damage elsewhere.

What is Dependent Properties coverage?

Dependent Properties coverage is, in effect, coverage for losses caused by damage to properties in your supply chain. Generally, these are properties owned by third parties which you depend upon to provide materials necessary to run your business or to receive your product. Where these dependent properties experience loss or damage from a covered cause that then impacts your business, you may be able to recover under dependent properties coverage.

Dependent properties may seem like an elusive concept. Here are two real life examples. First, a magazine publisher hires a printer who suffers an ice storm and cannot print the magazine. The magazine publisher’s income losses due to the inability of its supplier to print and deliver the magazine are covered by the Dependent Property coverage. Second, a local private school loses tuition income as a result of the mudslides and the evacuation of its students’ homes. The homes are the Dependent Properties upon which the school relies to “supply” its students.

Do property policies contain any exclusions that get the insurance company off the hook?

Maybe – it will depend on the terms and conditions of your particular policy and the circumstances of your loss. Here are some exclusions attempted by insurance companies in the context of Coronavirus to-date.

Virus Exclusions

The most prevalent and most difficult exclusion to wrestle with is some form of a virus exclusion that specifically contains the term “virus.” We have seen many versions of virus exclusions in the policies that we have examined and they are by no means universal. There are also some insurance policies that provide specific, though often heavily sub-limited coverage for damages caused by a virus or by communicable diseases. We shall leave it to the courts to determine the extent to which these provisions expand or limit coverage.

Loss of Market

A loss of market exclusions refers to damages caused by loss of market or unfavorable business conditions. For example, if a competitor comes to town and takes away some of your business, that’s the way it goes and that lost business is not usually covered by your property insurance policy. On the other hand, a loss of market exclusion should not take away coverage because of lost business caused by a covered event such as a fire.

Pollution Exclusion

Some insurance companies may also try to rely upon a traditional pollution exclusion to defeat coverage. If your policy contains a pollution exclusion, you should carefully examine the scope of its language and whether “pollutant” is a defined term – that could be construed to include a pandemic.

The Insurance Implications are Only Just Beginning

We are aware of at least 15 coverage actions on file in various courts throughout the country raising many of the issues discussed in this article and that number is growing each week. In addition, legislation has been proposed at the Federal level and in various states to cover losses that would otherwise be paid for by insurance. When it comes to the unusual circumstance of the insurance implications of this pandemic we are at the start of a long judicial and legislative process, but the first step is to pull out your property insurance policy and read the policy language.