Written by Janeen Koch, Esq. & Gary Reinhardt, Esq.
As the country reels from the devastating impacts caused by COVID-19, commercial property insurance carriers are being inundated with claims – primarily those for business interruption losses. These claims are, for the most part, being denied.
Many commercial insurance policies, including those that include business interruption coverage, do not include coverage for viruses such as COVID-19. After the SARS outbreak in 2003, Mandarin Oriental International Ltd. received $16 million from a settlement with its insurers to pay for business interruption losses due to the outbreak. Insurance carriers responded by adding endorsements to their policies excluding coverage for “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” Based upon this exclusionary language, business interruption losses due to COVID-19 would almost certainly be excluded under the clear and unambiguous language of the policy.
However, for those policies that do not contain such an exclusion, it is less clear whether business interruption claims would be excluded from coverage. To obtain coverage under a commercial property policy, the insured must demonstrate “direct physical damage” to the property caused by a covered loss. Typically, such losses covered under these policies include damage caused by fire or natural disasters such as earthquakes or hurricanes. In some instances, coverage may be afforded when the property is not accessible or habitable due to damage to properties in the surrounding area. For example, coverage has been provided for businesses that must close due to a chemical spill at a neighboring property.
Although business closures due to COVID-19 do not appear on their face to involve “direct physical damage,” many businesses are making an argument that they do. On Monday, May 4th, Legal Seafoods, a Boston-based restaurant chain, was the latest high-profile restaurant to file a breach of contract and declaratory judgment action against its insurance carrier, Strathmore Insurance Company, seeking coverage for business interruption losses due to COVID-19.
Legal Seafoods presented a claim for damages to Strathmore days after its restaurants were forced to close due to states’ stay-at-home orders. Strathmore denied the claim stating in its denial letter that Legal Seafoods’ claimed losses did “not constitute physical loss of or damage to either covered property at the described premises or damage to any property in the surrounding area which would limit access to the insured location(s).”
The allegations in the Complaint suggest that contamination of surfaces such as copper and stainless steel that are used in food preparation can constitute “physical damage.” Legal Seafoods also argues in its Complaint that its inability to access its properties due to the virus and the resulting states’ stay-at-home orders is sufficient to “trigger business income and related coverages.” Legal Seafoods further asserts in the Complaint that not only is there no specific exclusion that would apply, but the loss is specifically covered under the Civil Authority Coverage under the policy whereby Strathmore “promised to pay for losses of business income and extra expense incurred as a result of certain actions taken by civil authorities that prohibit access to Legal Sea Foods premises.”
Legal Seafoods further points out in the lawsuit that the policy went into effect on March 1, 2020, months after Strathmore knew of the existence of the virus and the fact that businesses around the world were being shuttered. Moreover, in 2006, the ISO developed a form exclusion for losses due to “disease-causing agents such as viruses and bacteria.” Yet, despite this knowledge and the availability of the ISO form exclusion, Strathmore failed to include a virus or pandemic exclusion in the policy. Even the ISO, in presenting its form exclusion to various insurance regulators around the country for approval, recognized that when disease-causing viral contamination occurs, potential claims for business interruption losses could be made. The ISO further warned that an allegation of property damage due to virus contamination may be a point of disagreement in a particular case. Although these arguments are unlikely to be legally significant, they certainly could have an impact with a jury if these cases are ultimately tried.
Given that there is very little precedent for this type of business interruption claim, it is unclear how the various federal and state courts may rule on this issue. Courts have previously found coverage for canceled performances due to smoke in a theater, have held that air-borne asbestos fibers could constitute “physical loss or damage,” and that toxic gases from defective drywall constituted “direct physical loss.” These decisions will likely be cited by plaintiffs’ attorneys to establish that virus contamination qualifies as “direct physical damage.”
In Virginia, a restaurant recently filed a business interruption claim in the Arlington County Circuit Court. A family restaurant, in business for twenty years, challenged a denial by its carrier. Reports on the lawsuit state that the restaurant insurance policy contained an endorsement that specifically covered loss from COVID (the lawsuit alleges that the endorsement stated “We will pay for loss or damage by ‘fungi’, wet rot, dry rot, bacteria and virus”). We will continue to monitor this suit, most likely stalled due to the Virginia Supreme Court’s Order Declaring Judicial Emergency.
Further, while “bad faith” is much more difficult to prove in Virginia than in many jurisdictions, every case will allege it. Many times, both in Virginia and other jurisdictions, the plaintiff/insured will claim that a quick decision by the insurer, usually something they want, constitutes bad faith as it suggests a failure of the insurer to conduct a complete and thorough investigation. However, Virginia law still requires a strong showing of factors to prove bad faith and that showing will apply to COVID-19 claims.
One more thing to keep in mind is that while cases have yet to discuss exclusionary language beyond the virus exclusion, Virginia adheres to the “total pollution” exclusion. The definition of “pollutant” includes the terms “contaminant” and “irritant.” Certainly, COVID-19 fits into the common understanding of each of those terms. The counterargument to the pollution exclusion will rely on more wordsmithing and word-twisting of the insurance policy terms and conditions, arguing that the virus itself is something beyond a pollutant and not contemplated by the exclusion.