Intro by Larry Neilson, CEO, Neilson Marketing Services/ProgramBusiness.com:
The coronavirus has created a scary and sometimes bleak outlook for us all. My career is defined by providing marketing services to the property and casualty insurance industry. The professional insurance people with whom I have had the pleasure to serve and work with through the years have taught me how the industry works from the inside out. I’m grateful for that. I have been wondering about the potential of a BI claim as a result of the current coronavirus environment.
Lets look at both sides. To start, if too many businesses have coverage and valid claims, may carriers would be on the brink of collapse. On the other hand, the insureds pay a lot of money in premiums, specifically for a time of need due to an unforeseen loss. Seems like a classic insurance definition. If we have no coverage, many of us will go out of business. The insurance companies aren’t left with many options, popular or not.
They could:
- Deny the claims, creating a PR nightmare and ensuing lawsuits;
- Provide coverage (possibly straining the finances of many carriers); or
- Defer to the Federal Government with hope that they provide a backstop and then provide coverage.
My attorney, Joe Wilbert, wrote the following article discussing arguments in favor of coverage. Joe represents policyholders against insurance companies, so this is written from the perspective that argues for the insured. I wanted to share it with all of you so that you could get a closer look at the other view.
Two Potential Theories of Coverage
COVID-19 stopped many businesses in their tracks. With doors closed and losses mounting, business owners now wonder whether insurance will cover economic losses stemming from the coronavirus pandemic and government shutdown orders.
Many lawyers and insurance professionals have written on this question. Some simply say “no,” there’s no coverage, but such answers miss important nuances. Other publications astutely discuss the issues involved in seeking coverage, including this and this from the firm Jones Day, and this article on civil authority coverage by Jared DeJong and Kelby Van Patten of Payne & Fears. This article builds upon those publications and identifies two theories that businesses should consider.
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First, a brief summary of core concepts. A few policies specifically cover economic losses from pandemics or infectious diseases. For example, assisting living facilities, hotels, and medical clinics often obtain policies that expressly covers communicable diseases. Absent specific coverage, businesses must look elsewhere in their insurance policies to recover lost income and extra expenses. The best possibilities are, if a policy has them: business interruption coverage, contingent business interruption coverage, and civil authority coverage. With many exceptions, these coverages generally require three things.
First, suspension: there must be a “suspension” of business “operations.” Businesses forced to shut down will typically meet this element. And importantly, some policies promise coverage if there has been an impairment, not a complete suspension.
Second, “loss” or “damage”: the suspension must be caused by “direct physical loss of or damage to property,” either at the business premises (for business interruption coverage), or the premises of another on whom the business depends (for contingent coverage), or at certain other locations (for civil authority coverage, although the Payne & Fears article notes some policies can be even broader).
Third, “Covered Cause”: the loss or damage must result from a “Covered Cause of Loss.” Some policies are limited and expressly identify “specified cause[s] of loss” that are covered. Such clauses include “fire, lightning, explosion, … falling objects, [etc.]” (I haven’t analyzed it, but perhaps “falling objects” includes virus particles falling through the air.) Most policies, however, define “Covered Cause of Loss” broadly, such as “risks of direct physical loss to property.” This article focuses on the broader clause. Under either narrow or broad language, a covered cause must also not be excluded by other policy language. For example, some policies specifically exclude losses from viruses—such exclusions may present significant hurdles to coverage.
The second and third elements will be hotly contested in COVID-19 insurance litigation, as will many policy exclusions. The next section discusses two potential theories of insurance recovery, and the section after that analyzes how the second and third elements apply to those theories. For now, think of the elements as follows. The third element (covered cause) requires a certain cause, while the second element (loss or damage) requires a certain result of that cause that, in turn, causes suspension.
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The lengthy, dense, and sometimes-vague language of insurance policies—combined with the unprecedented nature of this pandemic—leaves ample room for insureds to present creative arguments. Many theories for coverage may exist depending on each business’s specific policy language. At least two possibilities should be considered.
Direct Presence. The first theory is “direct presence.” Under this theory, to trigger coverage, a business must show presence of COVID-19 on physical property. It could be the business’s own property (for business interruption coverage), or another’s property on which that business depends (for contingent coverage), or another qualified location or property (for civil authority coverage). The presence of COVID-19 on such property arguably constitutes “direct physical loss of or damage to property.” If so, and no exclusion applies, such presence meets the second and third requirements for coverage.
The core legal issue for this theory is whether the actual presence of a virus on property constitutes physical loss or damage. This is fertile grounds for legal analysis. Results may vary by state law and specific policy language, and the Payne & Fears article includes a helpful starting point. Recent tests by the CDC have confirmed that the virus stays on physical property for weeks.
Insurers may also argue that, even if presence of COVID-19 counts as damage/loss, businesses cannot establish physical damage without confirming the presence of COVID-19 on qualified property. This could be difficult since it requires testing and the virus may disappear after some time. A reasonable response, however, is that businesses need not show presence with 100% certainty. Rather, says my former law partner (and brilliant insurance lawyer) Brian Bark of Lopez Bark & Schulz LLP, a scientific expert could credibly testify that COVID-19 was present on qualified property to a high degree of certainty. A medical expert could show that several persons connected with the property became sick. Such testimony might defeat insurers’ summary judgment motions, giving businesses a chance to recover on an “direct presence” theory at trial.
Importantly, language is key. Some policies are broad enough that any government shut-down order (or even action) could potentially implicate coverage even without a direct connection to COVID-19. Indeed, one older case found insurance coverage for a governor’s order to shut down all theaters due to rioting even though the theater was neither close to nor directly impacted by the riots. Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46 (1973). While modern policies might often be narrower than in Sloan, this shows the importance of specific policy language.
Threat of Damage. The second coverage theory is “threat of damage.” Under this theory, businesses could argue the harm was inevitable and, as a result, they were forced (often by government order) to shut down. If viable, this removes the hurdle of showing actual presence of COVID-19. But a different hurdle arises. As discussed below, the “threat of damage” theory requires a broader interpretation of the third element (covered cause) than an “direct presence” theory.
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So will these theories succeed? State laws govern insurance, and different states may interpret policy terms differently. So there might be no uniform answers to the core questions. Further, specific policy language is important, and many policies contain varying language. Thus, success will depend on state law, specific policy provisions, and the facts of the case. Nevertheless, it’s worth exploring the potential interpretations of frequently-appearing policy language.
The second element (loss or damage) is arguably ambiguous. The second requirement—”direct physical loss of or damage to property”—is arguably ambiguous. Namely, it’s unclear what the words “direct physical” modify. Do they modify only “loss of”, or do they also modify “damage to”? In other words, does the phrase mean this:
[direct physical loss of] or [damage to] property
… or this:
[direct physical loss of] or [direct physical damage to] property
This ambiguity is important for both “direct presence” and “threat of damage” theories. The words “direct physical” require a physical alteration of property. For example, a California case states:
“The requirement that the loss be ‘physical’ … is widely held to exclude alleged losses that are intangible or incorporeal, and, thereby, to preclude any claim against the property insurer where the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.”
Simon Mktg., Inc. v. Gulf Ins. Co., 149 Cal. App. 4th 616, 623 (2007) (quoting 10A Couch on Insurance § 148:46 (3d ed. 2005)).
Under cases like this, the stricter interpretation requiring “direct physical damage to property” would potentially preclude coverage for a “threat of damage” shutdown. It would also make the “direct presence” theory more difficult , since insurers will argue the mere presence of a virus on property is not “a distinct, demonstrable, physical alteration of the property” itself.
Policyholders, however, can respond that the more lenient interpretation is correct, requiring only “damage to property”—not “direct physical damage to property.” If the meaning of policy language is not clear from context, courts interpret it broadly and protect the policyholder’s “reasonable expectation of coverage.” Powerine Oil Co. v. Superior Court, 37 Cal. 4th 377, 391 (2005). And if no such expectation exists, many courts interpret ambiguities against the insurer, and in the policyholder’s favor. Id.
Policyholders can argue that these rules favor the more lenient interpretation. The more lenient reading is arguably more natural, as the stricter reading requires mentally copying-and-pasting the modifier “direct physical” in front of “damage to property.” Further, many policies do not define “damage to property.” But separate policy sections state that “property damage” includes not only “physical injury,” but also “loss of use of tangible property that is not physically injured.” So a policyholder would reasonably expect “damage to property” to mean the same thing. Moreover, some policies use language that expressly requires “direct physical loss of or physical damage to property,” which shows that insurers can use stricter language if they want to.
This is not a slam dunk. But businesses can persuasively argue that the second element does not require “direct physical” damage. That, in turn, improves the odds of meeting the second element for both “direct presence” and “threat of damage” theories.
The third element (covered cause of loss) is ambiguous too. As stated, many policies define “Covered Cause of Loss” to be “risks of direct physical loss.” Another ambiguity arguably exists here: the word “risks.”
If “risks” is given its common meaning—i.e. “threats”—then a covered cause of loss will include not only direct physical loss, but also “threats of direct physical loss.” Applied to COVID-19 shutdowns, businesses could argue that they suspended operations due to the threat that COVID-19 would damage qualified property.
This still requires a court to believe that presence of a virus would qualify as “physical loss.” But it removes the need to show actual presence. Instead, businesses would need to show only the threat of such presence. That should be doable. Governments are ordering businesses to stop operations due to the “risk” of COVID-19 spreading throughout the businesses. For example, Mayor De Blasio of New York City ordered many businesses to close or limit service “because of the propensity of the virus to spread person to person and also because the virus physically is causing property loss and damage” (emphasis added).
Insurers will disagree. They will argue that “risks” is an insurance industry term that simply means “causes of loss,” and thus it neither broadens coverages nor changes the requirement of “direct physical loss.” However, some courts have rejected similar arguments in the context of building collapse. See, e.g., Doheny W. Homeowners’ Assoc. v. Am. Guarantee & Liab. Ins. Co., 60 Cal. App. 4th 400, 405 n.4 (1997) (“We must reject [the insurer’s] argument that ‘risk’ means ‘perils’ or causes of loss, although the word can have that technical meaning. ‘Risk’ is commonly defined to mean ‘the chance of injury, damage, or loss; dangerous chance; hazard’ or ‘exposure to the chance of injury or loss; a hazard or dangerous condition.'”) (citations omitted); Jordan v. Allstate Ins. Co., 116 Cal. App. 4th 1206, 1222, 11 Cal. Rptr. 3d 169, 181 (2004) (“[T]he promise of coverage for a ‘risk’ of loss was broad enough to embrace the threat of loss from an imminent collapse.”); see also Stack Metallurgical Servs., Inc. v. Travelers Indem. Co. , No. CIV. 05-1315-JE, 2007 WL 464715, at *7 (D. Or. Feb. 7, 2007) (“the ‘covered cause of loss’ … was vaguely defined as ‘risks of direct physical loss'”).
The Pennsylvania Supreme Court reached a similar conclusion, ruling that “risks” was ambiguous and favored the policyholder. 401 Fourth St., Inc. v. Inv’rs Ins. Grp., 583 Pa. 445, 456 (2005). Interested readers should study this case. It discusses similar opinions from other states and persuasively (in my opinion) analyzes the issue. It also contains a dissenting opinion that coherently asserts the position that insurers will take.
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Conclusion
In short, businesses seeking insurance coverage for COVID-19-related losses should check the language in their policies in light of the particular facts of their case. If helpful language exists, they should consider asserting at least two theories of coverage. First, the suspension of business resulted from “direct presence” to qualified property, which expert testimony could arguably prove to a reasonable degree of certainty. Second, suspension occurred due to the “threat of damage,” which is a viable theory when policy ambiguities are resolved in the policyholder’s favor.
To be sure, insurers will assert many counterarguments. They could write an article (or legal brief) twice as long as this, attempting to explain why these theories fail to establish coverage. If policies have favorable language, though, business owners have a colorable argument to defeat any counterarguments.
At the time of publication, at least two lawsuits have been filed seeking coverage for income losses due to COVID-19. Ultimately, courts will decide who is right, and results will vary depending on specific policy language, the insurance laws of different states, and the circumstances of each case.
About Joseph R. Wilbert
Joseph R. Wilbert is an attorney licensed in New York and California, and founder of the Law Office of Joseph R. Wilbert. He represents clients throughout the country. His practice focuses on helping businesses and individuals obtain insurance coverage, as well as technology and media transactions. He can be reached at joe@jwilbert.com.