Business Interruption Insurance Claims in PA and the COVID-19 Virus
In light of the COVID-19 virus pandemic and the resultant massive business closures which our country is experiencing, many businesses have filed claims with their commercial property insurance carriers seeking recovery for business interruption losses due to the COVID-19 virus. The applicability of coverage to these losses will hinge on how a business’s commercial policy defines “direct physical damage”. Historically, most claims under these policies relate to losses from fire, wind or hail damage because these claims almost uniformly fall within every definition of “direct physical damage” to the insured property. The applicability of this language to business interruption due to COVID-19, however, will vary depending on how the term is defined in each individual policy.
In 2006, in response to the 2003 SARS epidemic, the Insurance Services Office (ISO) introduced an exclusion in the standard ISO policy for loss due to virus or bacteria that applies to property damage to buildings or personal property. The ISO exclusion also extends to endorsements covering business income, extra expense, or action of civil authority. The ISO language specifically excludes coverage for loss or damage resulting from any virus or microorganism that includes physical distress, illness or disease. The ISO Business Income and Extra Expense Coverage Form CP 00 30 10 12, 2011 provides as follows:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:
(1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
(2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.
Civil Authority Coverage for Business Income will begin 72 hours after the time of the first action of civil authority that prohibits access to the described premises and will apply for a period of up to four consecutive weeks from the date on which such coverage began.
Civil Authority Coverage for Extra Expense will begin immediately after the time of the first action of civil authority that prohibits access to the described premises and will end:
(1) Four consecutive weeks after the date of that action;
(2) When your Civil Authority Coverage for Business Income ends; whichever is later.
We are watching with great interest the case of Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al., No. 2020-02558, (La. Dist. Ct., Orleans Parish Mar. 16, 2020). In that case, the owners of Oceana Grill are seeking a declaration that their Lloyd’s of London commercial all-risk policy must cover lost sales and costs of cleaning. Most significantly, however, the Lloyd’s policy does not have an exclusion for losses due to a virus or bacteria. Oceana Grill is seeking coverage because Governor Edwards entered an Order on March 13, 2020 banning gatherings of over 250 people. Oceana Grill is arguing a closure by civil authorities is covered under the policy. We anticipate that plaintiffs’ attorneys will file a multitude of claims arguing that closure by civil authorities is covered under commercial insurance policies.
Similar cases by restaurants and bars have been filed in Texas, Illinois, Oklahoma, California and Florida. In Pennsylvania, the Plaintiffs’ bar is advertising for these types of cases and we anticipate there will be a flood of litigation in the near future. The plaintiffs in these cases are taking the position that COVID-19 is a direct physical loss which should be covered under the policy. Resolution of these cases will depend on how the various states have interpreted the “physical loss or damage” provision and whether the mere presence of a dangerous substance on a property is sufficient to trigger coverage.
We anticipate Pennsylvania courts will follow some well-settled appellate decisions in the asbestos line of cases for guidance on how to interpret these commercial policies as they apply to interruption related to COVID-19. In the case of Port Authority v. Affiliated FM Ins., 311 F.3d 226 (3d Cir. 2002), the Third Circuit Court of Appeals affirmed the District Court’s holding that the mere presence of asbestos on plaintiff’s property was not sufficient to trigger coverage. Instead, the court found that the “physical loss or damage” requirement was met only if there was an immediate threat of asbestos release or actual release resulted in contamination of the property so as to nearly eliminate or destroy its function, or render it uninhabitable. Since COVID-19 is believed to live on surfaces for somewhere between several hours and several days, as opposed to asbestos, which is permanent, COVID-19 arguably does not cause direct physical damage.
Fortunately, for insurers, the Supreme Court of Pennsylvania has held that courts are required to give effect to clear and unambiguous language in an insurance policy. Standard Venetian Blind Co. v. Am. Empire Ins. Co., 469 A.2d 563 (Pa. 1983). Supreme Court also stated in Standard Venetian Blind that a “court may refuse to enforce a contract or any clause of contract if [the] court as a matter of law deems the contract or any clause of the contract to have been unconscionable at the time it was made.” However, there is nothing obviously unconscionable with a clause requiring direct physical damage in order to trigger coverage.
The law continues to evolve on a daily basis in response to this crisis as some states, including Pennsylvania, have introduced legislation which would void any virus exclusion clauses in commercial policies. We believe the proposed legislation is unconstitutional and will be monitoring the issue closely on behalf of our clients.