Business interruption insurance claim denials during COVID-19
Claims under business interruption insurance policies from losses due to the pandemic are raising questions about policy exclusions for harm from viruses, pandemics or diseases and whether the presence or potential presence of the coronavirus equals physical damage.
Business interruption insurance normally protects a business from income loss (or sometimes business expenses) when an outside force like a hurricane, flood or tornado interrupts business operation. Many businesses have suffered financial losses during COVID-19 and those with business interruption insurance are filing claims – some with success, and some without.
Policyholders can assume their insurers will use “heightened scrutiny” of COVID-19 business income loss claims, according to Practical Law Commercial Transactions.
Is business loss from the coronavirus covered?
State law and the policy provisions govern each business interruption policy, a legal contract. These policies usually specify which losses are covered as well as which types are excluded. In this time of COVID-19-related business losses, policy coverage in the context of business closures or restrictions as well as other negative economic impacts is in the spotlight nationally, including in the courts.
The policy language should be carefully scrutinized to see how it might be interpreted in light of the unforeseen impact of the virus on business health. Virginia law says that because insurance companies write their policies (and those who buy them do not have much if any power to bargain for amendments), any ambiguity in language should be construed in favor of the insured party and against the insurer that drafted it.
Virginia courts give policy language its usual and ordinary meaning and if there is more than one reasonable interpretation, an ambiguity exists for these purposes.
Disputed policy language
In COVID-19 business income loss claims, insured businesses and insurers are hotly debating a couple of policy provisions, including in the courts:
- If losses from disease or pandemic are excluded, does that only apply to losses because of owners, staff or customers with COVID-19 or would it also exclude losses from a government-ordered shut down because of the danger of infection, even if no infected person is known to have been on the business premises?
- If coverage is limited to income loss from direct physical damage, could the impact of the physical presence (or potential for or fear of the presence) of the virus on business premises be covered as a form of physical loss or must the damage be structural?
- If a policy excludes losses from viruses, does that extend to related business closures?
- Does an exclusion of losses from governmental acts apply where there is a state or local closure or other restriction imposed on the business?
- And others
What are courts saying?
In a Dec. 29, 2020, article in The Wall Street Journal, the author described a recent North Carolina case (that is on appeal as of this Dec. 31 writing) in which the court said that “direct physical loss” includes “the inability to utilize or possess something in the real, material or bodily world.” So, if the virus keeps the business from using their premises, that could fall within this interpretation.
The article also mentions that some policyholders are finding success in court with parallel arguments that property damage for these purposes may include “wildfire smoke, gasoline vapors and carbon monoxide.”
What about Virginia?
A recent case shows promise for Virginia businesses. On Dec. 9, 2020, the U.S. District Court in the Eastern District of Virginia released Elegant Massage, LLC v. State Farm Mutual Automobile Insurance Company, where a therapeutic massage spa voluntarily closed on March 16 for two months because of the pandemic. A week after closure, the governor ordered massage parlors closed, allowing limited services to resume in mid-May.
State Farm denied Elegant’s claim for income loss and extra expense under its business interruption policy. Elegant sued for coverage and State Farm moved to dismiss for failure to state a claim.
The judge refused to dismiss, saying the claim could go to trial because, among other things, the policy requirement of fortuitous or accidental “direct physical loss” is subject to a variety of interpretations under Virginia law. Given the phrase’s ambiguity, the insured stated a “good faith plausible claim” because even though the premises were undamaged, the property was “deemed uninhabitable, inaccessible, and dangerous to use by the Executive Orders because of its high risk for spreading COVID-19, an invisible but highly lethal virus.”
Similarly, previous Virginia cases have found direct physical losses when property became “uninhabitable, inaccessible, and dangerous” from elements like ammonia, methamphetamine lab odor, asbestos or toxic gas.
(Elegant Massage, LLC v. State Farm Mutual Automobile Insurance Company is available on Westlaw at 2020 WL 7249624.)