As the economic stress of the COVID-19 pandemic continues to increase daily, lawmakers around the country are coming under increased pressure to shift economic losses onto the insurance industry, much as was done after the September 11th attacks. Many businesses carry Business Interruption (“BI”) insurance, either as part of their commercial property insurance or as a freestanding policy. BI coverage protects against economic losses resulting from a business's inability to put insured property that has been damaged by a covered “peril” to its normal use.
Because BI coverage has generally been interpreted by the courts to extend only to interruptions caused by physical property damage - such as by fire or wind - and because many policies issued since the SARS epidemic of the early 2000's have specifically excluded coverage for bacterial or viral infections, at least one state is acting to alleviate the economic toll on insureds at the expense of insurers by forcing coverage.
On March 16, 2020, New Jersey Bill A-3844 was introduced with the principal provision stating:
“Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic, as provided in the Public Health Emergency and State of Emergency declared by the Governor in Executive Order 103 of 2020 concerning the coronavirus disease 2019 pandemic.”
The draft bill applies only to insureds in New Jersey with fewer than 100 full-time employees (those who work 25 hours or more per week), and the forced coverage would still be subject to policy limits otherwise in place for business interruption. The draft bill allows liable insurers to petition the Commissioner of Banking and Insurance for partial reimbursement collected from other insurers in the state that do not provide any business interruption loss coverage, thereby potentially spreading the losses across all insurers in the state.
Even though the Oregon legislature hasn't yet announced such a bill, business owners should not despair. There are arguments to be made that BI coverage should apply to losses to Oregon businesses caused by COVID-19. Most first-party property insurance policies cover not only damage to the property itself, but also lost profits resulting from the damage. While property damage is an essential component of lost profits coverage, Oregon courts have found that harmful substances present at or on a property can constitute “property damage” sufficient to trigger coverage.
For example, in Farmers Ins. Co. of Oregon v. Trutanich, the Oregon Court of Appeals considered whether or not a “pervasive odor” in a residential home caused by a subtenant's illegal methamphetamine operation was considered a “direct physical loss.” The court concluded the odor was “physical,” because it damaged the house. Additionally, in a District of Oregon case involving garments with increased microbial counts that could develop odor, mold or mildew, Judge Hubel held that “physical damage can occur at the molecular level and can be undetectable in a cursory inspection.” Judge Hubel cautioned, however, that “recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable.” In making that determination, “courts [should] consider the nature and intended use of the property itself and the purpose of the insurance contract.”
In another District of Oregon case involving furnace contamination by lead particles, the furnace could no longer be used for treating medical devices because those devices would then also be contaminated. The defendant insurance company argued that the only “direct physical damage” sustained to plaintiff's property was the loss of the hammer that disintegrated in the furnace and caused the contamination. Because the furnace could still be used to treat materials other than medical devices, the insurer argued that the insured did not suffer “physical damage,” and therefore could not make a claim under the business income coverage provision.
The court disagreed finding that, because the lead particle contamination “prevented the furnace from being used for its ordinary expected purpose, [it] is fairly characterized as a “‘direct physical loss of or damage to' the furnace.” In so finding, the Oregon court found “extremely persuasive” a District of New Jersey case wherein the court found that an ammonia release so transformed the air within a fruit juice packaging facility that the ammonia discharge inflicted “direct physical loss or damage” to the facility because it physically rendered the facility unusable for a period of time.”
While certainly not dispositive, these Oregon cases give some hope that losses resulting from COVID-19 may be treated analogously to the sorts of microscopic damage or non-structural alteration to property that Oregon courts have found to be covered in the past. Other forms of coverage that may allow for recovery include the following:
Contingent Business Interruption (“CBI”) coverage that allows for the recovery of losses caused by damage or disruption to a supplier or customer, although proof of physical damage may still be a requirement;
Coverage based on “order of civil or military authority” that allows for recovery of losses caused by governmental order to shut down or evacuate an area. Again, physical damage within a certain proximity of the insured may still be required;
Leader Property or Event Cancellation insurance, which covers the insured's lost earnings resulting from cancellation of events and the closure of a property that attracts customers to its business, such as stadiums and arenas;
Pollution/Contamination coverage which allows for recovery of losses due to biological contaminants falling under the definition of “pollutants.”
Although insurers may assert any number of defenses to coverage, including exclusions for communicable diseases and biological agents, as well as arguments that only the short period of time required to clean the property is covered, these defenses may not prevail. Oregon law provides that, if the insured and insurer submit two or more plausible interpretations of a term such as “direct physical loss or damage,” the court must examine the interpretations in light of the particular context of that term in the policy, as well as the broader context of the policy as a whole. Moreover, where a term such as “physical damage” is ambiguous, the courts must construe the term against the insurer.
The case law outlined above not only makes a close examination of the policy at issue imperative, it is critical that businesses properly and accurately document their business interruption losses during this crisis. The methods for doing so are the same as if the business had sustained a natural or man-made disaster and include the following:
Use of budget variance reports for time period impacted by COVID-19;
Documentation of the business trends prior to the impact of the coronavirus;
Identification and documentation of cancellation of orders, deliveries or sales;
Documentation of out-of-pocket expenses related to the pandemic.
In addition to documenting these business interruption losses, policyholders are under a duty to mitigate property loss or personal injury. And when it comes time to report the loss, it is key to present the claim in a clear and timely manner, with all supporting documentation.