In North Carolina, bars, restaurants, and most retail businesses are suffering large financial losses due to COVID-19. Many will seek insurance coverage under the business interruption provisions of their commercial property policies, and their claims will be denied.
Last week, four insurance conglomerates –American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, Independent Insurance Agents and Brokers of America, and Council of Insurance Agents & Brokers – issued an official statement that “[b]usiness interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”
Many insurance companies have issued bulletins stating that COVID-19 business interruption claims are not to be paid in most circumstances.
Famous restaurateurs in Louisiana and California have already filed lawsuits against their insurance carriers for denying their COVID-19 business interruption claims.
More lawsuits are certain to follow. Indeed, if insurers were required to pay such losses, it would significantly diminish their profit margins.
Can the insurance industry get away with not paying these claims?
Most commercial insurance policies cover lost revenue resulting from:
- damage to the policyholder’s own property (traditional business interruption coverage);
- damage to the property of a customer or supplier, or someone further out in the supply-chain (contingent business interruption coverage); and
- government orders flowing from property damage within an authority’s jurisdiction (civil authority coverage).
Traditionally, for any of these coverages to be triggered, the legal analysis of most such policies required physical damage to property, somewhere.
Under this legal construct, the relevant inquiry is whether COVID-19, legally, causes physical damage to property.
At least some of our local officials believe it does. In line with other municipalities and counties, Durham’s Stay-At-Home Order states that “existing conditions [from the virus] have caused or will cause, widespread or severe damage, injury, or loss of life or property.”
Governor Cooper’s State-Wide Stay-At-Home Order references the risk of property loss at least four times, although it is not explicit in saying that the virus can or does cause property damage.
According to the CDC, COVID-19 can be contracted “by touching a surface or object that has the virus on it.”
The New York Times has also reported that COVID-19 remains on metal, glass and plastic for several days.
These, and other scientific facts, lend support to the notion that virus-particles on bars, restaurant tables, desks, merchandise, and office equipment results in physical damage to property.
Although there are no known North Carolina appellate decisions on-point, cases from other jurisdictions are instructive on whether COVID-19 causes physical damage to property.
In Gregory Packing, Inc. v. Travelers, a federal court in New Jersey held that covered property had been physically damaged, sufficient to trigger business interruption coverage, when ammonia was released into a facility, making the building unsafe for habitation. The Court stated “property can sustain physical damage without experiencing structural alteration.” The presence of the molecules of ammonia upon the covered property was enough to count as physical damage to the property and trigger business interruption coverage.
Likewise, in Motorists Mutual Insurance Co. v. Hardinger, a published opinion by the 3rd Circuit Court of Appeals, E. Coli in a residential water-well, which made the inhabitants sick, counted as physical damage to the property, triggering the applicable homeowners coverage. The Court wrote that what mattered was “whether the functionality of the property was nearly eliminated or destroyed, or whether the property was made useless or uninhabitable” by the presence of the bacteria.
In North Carolina, when a provision of an insurance policy is vague, it is to be interpreted in favor of coverage for the policyholder. (See e.g. Williams v. Nationwide Mutual Insurance Co., 269 N.C. 235, 152 S.E.2d 102). Courts in other States have found the meaning of “physical damage” in insurance policies to be ambiguous, and they have therefore expanded the definition in favor of covering losses. (See e.g. Wakefern Food Corp. v. Liberty Mutual, 976 A. 2d 385). Such could be the case with COVID-19 and business losses in North Carolina.
What does this mean for my business interruption claim?
Strong legal arguments can be made that COVID-19 causes physical damage to property. In our view, the presence of the virus upon property should be sufficient to trigger business interruption coverages under many commercial insurance policies.
If COVID-19 is present upon covered property (i.e. an infected person comes into a restaurant and coughs on a table), and a resulting financial loss occurs (i.e. the restaurant must shut-down), traditional business interruption coverage should be triggered.
If COVID-19 is present on the property of someone in a business’ supply line, and a resulting financial loss occurs (i.e. an airline shuts-down due to virus exposure, and goods or people cannot move in the stream of commerce), contingent business interruption coverage should be triggered.
With respect to civil authority coverage, policies commonly provide this coverage for business losses when “an order of civil authority limits, restricts or prohibits partial or total access to an insured location provided such order is the direct result of physical damage at the insured location or within [a specified distance of the insured location].” For example, this coverage should apply to many of the restaurants and bars that have been shut-down in this State due to COVID-19 being present upon property elsewhere in the State, and therefore constituting “physical damage.”
Insurance policies are different. The language and coverages in insurance policies are not identical. There may be exclusions in your specific policy that prevent you from making the arguments outlined above; however, do not let the language of your policy stop you from speaking with a lawyer.
For example, there are commonly exclusions in commercial insurance policies for physical damage caused by “contamination” or “pollution.” Viruses, specifically COVID-19, may or may not fall under the meaning and definition of these words. Remember, if there is any ambiguity in your policy language, it is to be construed in favor of coverage.
Also of note, in response to large losses from the SARS outbreak in the 2000’s, insurance companies began adding “pandemic” exclusions to commercial policies, in an attempt to void coverages for business interruption losses. If your policy does, or purports to, incorporate such an exclusion, there are still arguments to be made, among others, that the business interruption is not being caused by the pandemic but by the government action taken to prevent its further spread.
If you have a business interruption claim that has been denied by your insurance carrier, you are not alone. Don’t give up. There are strong arguments to be made in favor of coverage and payment.
We’re here to help. Contact me (Robby Jessup) with any questions at (919) 821-7700 or [email protected] Remember, you should not wait to call a lawyer, as there are important time limitations on asserting your legal claims.