As we all know, many states, including New York, Pennsylvania and New Jersey, have ordered “nonessential businesses” to shut down. As of this writing the order in New York extends until May 15; in Pennsylvania and New Jersey, the orders are in effect until further notice.
It can be expected that many claims will be filed by insureds seeking payment under their business interruption coverage. In our view, if the policy has the standard forms, coverage should be denied.
Out of the many ISO forms in our library, we examined three commonly used business coverage forms: BP 00 03 01 10; CP 00 30 04 02; and a free-standing business income loss form, MP T1 02 02 05. They are functionally similar. (For simplicity’s sake we will cite only to the first form.) One of the “additional coverages” is “business income” due to “necessary suspension of your ‘operations’ during the ‘period of restoration’”. (¶f, p. 5) However the loss “must be caused by direct physical loss of or damage to property at the described premises”. This clear and unambiguous clause means that suspension of operations is not covered if the insured premises are not physically damaged or lost. Such is true of shutdowns due to COVID-19.
Coverage is afforded for loss due to “action of civil authority that prohibits access to the premises” (¶i, p. 7), but again, the policy language requires physical damage, either to the insured premises or to the surrounding area. Further, in most cases the shutdown orders do not actually prevent business owners from accessing their places of business.
There is also a relevant exclusion for loss due to “the enforcement of any ordinance or law” regulating (among other things) the “use” of property (¶B.1.a, p. 15).
BP 00 03 01 10 also specifically excludes loss due virus or bacteria (¶j, p. 17). Sometimes a standalone endorsement asserts this exclusion (see, e.g., form CP 01 40 07 06). This exclusion should of course be cited so as to avoid possible waiver.
As might be expected, there has not yet been any case law generated as to coverage of loss due to COVID-19. However principles of law in New York, Pennsylvania and New Jersey support the above straightforward reasons for noncoverage. The general rule, tracking the language of the policies, is that business loss due to lack of access (for example, due to a snowstorm) is not covered because there was no damage to the covered property. (See cases cited in Roundabout Theatre Co. v. Continental Cas. Co., 302 A.D.2d 1 (1st Dept. 2002), and the multi-state review in Phibro Animal Health Corp. v. National Union Fire Ins. Co., 446 N.J. Super. 419 (2016).)
Even if there were no disqualifying language, to recover under business interruption coverage one must show a total cessation of business (Broad St. LLC v. Gulf Ins., 37 A.D.3d 126 (N.Y. App. Div. 1st Dept. 2006); Somerset Industries v. Lexington Ins. Co., 639 F.Supp. 532 (E.D. Pa. 2009); Arthur Andersen LLP v. Federal Ins. Co., 416 N.J. Super. 334 (2010)). Many businesses will not be able to show total cessation. They can continue some types of activity despite a shutdown order. For example, restaurants are still offering take-out.
In recent weeks insurers have issued blanket disclaimers on the above grounds, prompting declaratory judgment actions by restaurants affected by COVID-19 shutdown orders. Let us look at one, brought in the Northern District of Illinois, Big Onion Tavern et al. v. Society Insurance. From the allegations one gathers that the coverage forms at issue are those discussed above, or very similar. Plaintiffs allege that Society Insurance issued “blanket denials” of coverage related to any closure order based on the absence of any “direct physical loss”. The insureds claim that there is no relevant exclusion, and that there was physical loss due to the presence of a “dangerous substance”. In support they cite Board of Education of Township High School v. International Ins. Co., 720 N.E.2d 622 (Ill Ct. App. 1999), but that was an asbestos case. The taverns and theaters in Big Onion were not shut down because of the presence in the insured premises of COVID-19. To the contrary, they were shut down so that the virus could not enter.
Therefore we do not believe that the Big Onion case provides support for coverage. Nor do the similar actions by restaurants that have been brought (as of this writing) in New Jersey, Pennsylvania, Florida and Washington, D.C. The New Jersey suit, Truhaven Enterprises, Inc v. Chubb, filed in federal court, was brought after an insurance trade group rejected a request by a group of Congresspersons to provide coverage. It was also brought despite a specific virus exclusion in the Truhaven policy. The main argument made is that the term “physical loss” is to be construed broadly. As can be seen from the discussion in the Phibro case, above, this is true; “loss” can mean “alteration”. However a restaurant shut down due to COVID-19 concerns cannot be said to even be “altered”.
In short, as a matter of contract, if the policy forms are the standard ones, business loss due to COVID-19 shutdown should not be covered. Of course, the facts of each case are different, and the first step is to consult the insurance policy in question. But insureds seeking to recover losses should instead look to the governmental programs which are being put into place.
Perhaps in acknowledgement that there is no coverage under the standard forms, legislation is being introduced to require insurers to cover COVID-19 business losses, despite any restrictive or exclusionary language (New York Assembly Bill A. 10226; New Jersey Assembly Bill A-3844; Pennsylvania House Bill HB2372.) Under these bills, the insurers can recover the payments upon application to the state Superintendent of Insurance. No doubt the Superintendent will require a showing that the losses would not have been covered by the existing insurance policy. Therefore the above analysis would still be relevant in making the case to the Superintendent.
This is the kind of work we do. If you need assistance, or have any questions, please call Alan Russo at our office at (212) 482-0001.