Litigation Alert: Business Interruption Insurance and COVID-19

Currently, a number of different jurisdictions across the country are analyzing whether insurers are legally entitled to disclaim business interruption insurance claims filed in response to the Covid-19 pandemic. More than 1,000 business interruption insurance coverage lawsuits have been filed since March, 2020. Generally, insurance coverage is determined premised upon the contract between the insurer and the insured. However, in unusual instances, such as a global pandemic, court’s will look beyond the exact language in the contract and consider other factors.

While many insurance companies started incorporating exclusion language for viral epidemics into their business interruption polices after the SARS epidemic, there are a number if insurance carriers seeking to disclaim business interruption claims on an alternative provision within their policies. A key provision being interpreted by the courts is “direct physical loss of, or physical damage to, covered property.” The insurance industry largely interprets that language only applies to claims involving physical property damage, and a number of courts across the country, including New York, Washington DC, and Michigan have adopted this interpretation.

Business owners have put forth a number of different legal arguments for why the coverage applies to the Covid-19 pandemic, however thus far, there seem to be two leading arguments for coverage. One argument that has seen some success in Missouri is that Covid-19 is a physical substance that “lives on” and is “active on inert physical surfaces” as well as being “emitted into the air.” On that basis, the virus is causing physical damage to the covered property in that the physical nature of the virus “renders physical property…unsafe and unusable.”

Most recently, North Carolina’s Durham County Superior Court adopted an alternative theory for how to interpret “direct physical loss,” finding that the plaintiffs were covered for Covid-19 shutdown losses under their business interruption insurance policies. The plaintiffs in the case North State Deli, LLC et al. v. The Cincinnati Insurance Company et al,; Case No. 20-CVS-02569, were a group of restaurants that filed a declaratory judgment action seeking lost business income and expenses incurred during the state’s government ordered shutdown of businesses. The restaurants argued that the state-mandated physical shut down of their businesses caused their businesses to suffer “direct physical loss.”

The North Carolina Judge granted the restaurants partial summary judgment, noting that the language “direct physical loss” was ambiguous, which under North Carolina state law, generally works in favor of the insured seeking coverage. The court further reasoned that the insurance policies at issue did not define “direct physical loss,” or “physical damage,” allowing for the court to adopt its own interpretation of the language. The court interpreted “direct physical loss” as including “ the inability to utilize or possess something in the real, material, or bodily world, resulting from given cause without the intervention of other conditions.”

Finally, the court was not persuaded by the insurance carrier’s argument that “direct physical loss to property requires some form of physical alteration to property,” finding that the carrier’s interpretation conflates “physical loss with “physical damage.” In absence of any definition of the terms within the policy, a reasonable insured could interpret “physical loss” and “physical damage” as two separate types of events that trigger coverage.

These cases represent the current divide in the interpretation of insurance policy language as applied to Covid-19. As the pandemic continues to negatively impact business operations, the question becomes whether jurisdictions will develop some consensus on how to interpret business interruption policies going forward. The ongoing litigation drives home the importance of filing timely claims in accordance with the policy requirements and conferring with counsel to discuss your options.