COVID-19 Commercial Property Insurance Coverage Issues
The COVID-19 pandemic forced the Governor to take drastic measures to slow the spread and “flatten the curve”. Those drastic measures included prohibitions against public gatherings, shutting restaurant eat-in services, and ordering 100% of non-essential workers to work from home thereby shuttering all non-essential storefront business operations. The financial impact of these measures may not be totally realized for months. All businesses should review their commercial property insurance policies to determine if they potentially have coverage for any of the actual, or anticipated, losses.
The coverage for lost income often covers loss resulting from:
- Damage to the policyholder’s own property (business interruption)
- Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
- Government action (order of civil authority)
- Damage to properties that attract customers to the policyholder’s business (lead property)
Business Interruption Insurance
Business interruption insurance protects against economic losses resulting from a business’s inability to use the insured property. Business interruption insurance generally pays for (i) loss of revenue that would have been earned had there been no business interruption, and (ii) the continuing normal operating expenses incurred the damaged property is restored.
Typical business interruption policies generally require the following in order for a business interruption to be a recoverable loss: (1) physical damage to insured property, (2) which damage is caused by a covered peril, (3) which results in quantifiable business interruption loss until the time the damaged property is restored.
Because Business interruption coverage is part of a commercial property policy, physical damage to the insured property is generally required to trigger coverage. Thus, business interruption by itself, without property damage, is typically not enough to trigger coverage.
Thus, the critical issue is, did Covid-19 cause “property damage” resulting in the loss of income? While the virus clearly does not cause physical damage to property as a hurricane, for example, does, it nevertheless is, presumably, present in the covered property. In similar circumstances, some courts have found that the actual presence of harmful substances at or on a property can constitute “property damage” that triggers first party property coverage, even though those substances do not physically harm the property.
As such, an argument can be made that property damage has occurred in New York City and Long Island where the virus is essentially omnipresent.
Civil Authority Coverage
Commercial property policies may include coverage for losses caused by forced closure of property by civil authority. There are two important elements that must be present for coverage to apply: (1) the denial of access must be due to an incident of physical damage to property nearby, and (2) damage to that property nearby must be due to a peril covered under your insurance policy.
An example of a covered loss would be if a major fire in the heart of the city which requires the civil authorities to close off major streets leading to and out of a 4-block area around the fire site. Access to your business on a side street closed due to the fire is denied for a month.
Thus, civil authority coverage typically requires physical damage to some adjacent or nearby property to trigger the coverage. Once again, the issue will be whether or not the actual presence of Covid-19 at or on a property can constitute “property damage” that triggers coverage, even though those substances do not physically harm property.
Contingent Business Interruption Coverage
Contingent business interruption coverage protects against economic losses resulting from damage to the property of a person on whom the insured depends for its business, such as a supplier or a customer. Terms of the coverage vary from policy to policy.
There are obviously a range of defenses that insurers are raising to avoid, or limit, payment for losses stemming from the Covid-19 pandemic. It is important that businesses not only review their insurance policies immediately to determine if they potentially have applicable insurance, but not accept an insurer’s denial of coverage as absolute and unassailable. If you are unsure, reach out to us and let us review your policies to determine if you may have such coverage. Most importantly, if you believe you have a potential claim under your policy, notify your insurer immediately; every policy imposes a timely notice requirement on the policyholder.