Finding coronavirus coverage under the property insurance policy
Businesses affected by the pandemic are looking for insurance coverage wherever they can find it.
Could a lack of insurance coverage push a company into bankruptcy? Of course. The remains of the once financially powerful manufacturers, distributors and suppliers of products containing asbestos, that lacked coverage, make that very clear.
Today, as a result of the COVID-19 pandemic and the ensuing government-ordered shutdowns, many otherwise financially sound entities are filing for bankruptcy. Indeed, the bell has already tolled for Hertz, J. Crew, Gold’s Gym, Tuesday Morning and CMX Cinemas, among many others. Is there any insurance coverage that might stave off any part of the ongoing business meltdown? There is; civil authority coverage under the business interruption part of a property policy.
Coronavirus circumstances
Apart from Antarctica and certain other remote areas, the coronavirus pandemic covers the world. In response to the threat posed by the virus, state and local governments across the country issued orders closing some businesses deemed non-essential, limiting others and directing non-essential persons to stay home. “Shelter-in-place,” “safer-at-home,” and “lockdown” orders brought economic activity to a standstill. For many businesses, that economic shock has been fatal.
Recognizing the specific terms of a policy are essential to determining its application, some generalizations may be made.
All risk
The insurance industry makes no bones about it. Property policies cover “all risks.” Policies use exactly those words; sometimes, they even title the policy an “all-risk” policy. However, no policy covers all risks. It is accurate to say that an all-risk insurance policy covers any fortuitous loss not resulting from an excluded risk.
Property damage
As its name implies, a property insurance policy covers loss or damage to property. All kinds of property can be covered, and some are specifically excluded. One thinks typically of buildings, fixtures and furnishings, but coverage can also be granted for “valuable papers” or accounts receivable, for example. Often a policy will exclude “land” and “water” and infrequently, there will be an exclusion for “air.”
Very frequently, the policy will require “direct physical loss of or damage to” property. These are rarely, if ever, defined terms. In some cases, insurers have been successful arguing that “direct physical loss” requires “structural” change, but in other cases, insureds have prevailed by establishing a loss of functionality or loss of use constitutes physical damage.
Business interruption
Business interruption will pay for both loss of income and the extra expense of dealing with the covered peril. The interruption almost always will be tied to property damage. If there is no covered direct physical loss or damage, then a carrier will assert there is no business interruption coverage.
Exclusions
As noted earlier, the insurer may take away coverage with an exclusion. It can exclude the property, or the loss, or the cause, from coverage. Sometimes it will include language that excludes coverage even if the excluded cause is only part of the cause. In coronavirus coverage, claims insurers are pressing their “contamination” exclusions, their “microorganism” exclusions and their “virus” exclusions.
An exclusion is only needed if, without the exclusion, coverage would otherwise exist. Thus, the presence of a contamination, microorganism or virus exclusion establishes that these would be covered causes of loss causing covered property damage but for the exclusion.
Civil authority
Civil authority provisions vary, but generally, they require damage to property away from the insured location and an order issued as a result of that damage “prohibiting access” to the insured location.
Communicable disease extensions
Many policies include an extension of coverage for events like the pandemic. They cover communicable disease at the facility, but usually for a reduced limit and for only certain types of loss.
Finding coverage under a property policy
So, how to weave all that together? Here is one possible path to full limits coverage.
- Establish through personal affidavit, sampling or modeling, or a combination of the three, the presence of the disease at the insured property.
- Recognize that disease at the property requires viral particles to be expelled into the air, landing on surfaces at the property. Surfaces may also be affected by physical contact with infected persons.
- The affected surfaces incur costs as they require frequent cleaning.
- Thus, a covered loss is incurred and should be paid under the communicable disease extension.
- Further, any contamination, pathogen or virus exclusion must be read to not apply to contamination, pathogens or viruses that require cleaning to prevent disease.
- The presence of viral particles constitutes covered “direct physical loss or damage” to the surfaces.
- There is also “direct physical loss or damage” to air at the insured property, as well as at neighboring properties.
- To prevent infection, the government issued orders preventing contact between persons since they caused individuals to get sick from the viral particles being spewed into the air. The orders were issued to prevent sick persons from contaminating the air in stores, office buildings, gymnasiums, etc., which would sicken others.
- The orders prevented access by many people to insured and neighboring properties. It should not matter that all access was not prevented. Policies do not say all access must be prevented.
An entity facing a potential bankruptcy should consider whether there is available coverage. It should not rely on blanket statements from brokers or insurers. All coverage depends on the specific terms of a policy applied to specific facts. In the time of coronavirus, one size certainly does not fit all, and a careful review is in order. The same rule applies if a bankruptcy is filed. Debtors, trustees, creditors, and other interested parties should still investigate whether all applicable coverage was sought. As seen here, an applicable property policy must be considered as a potential asset, and perhaps a valuable one.
J, Wylie Donald is a partner in the Insurance Recovery Group at McCarter & English, LLP. Contact him at jdonald@mccarter.com. Kate Roggio Buck is a partner in the Bankruptcy and Commercial Litigation Group in the firm’s Wilmington office. Contact her at kbuck@mccarter.com. The views expressed are those of the authors and are not intended to speak for the firm or its clients. Reprinted with permission from McCarter & English, LLP.
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