Even before the recent news of the first confirmed cases of COVID-19 (coronavirus) here in Montgomery County, MD, local businesses both large and small had already felt, in one way or another, the virus’s impact. As an insurance agent specializing in small to mid-sized business property & casualty coverages, I’m fielding more and more questions from concerned clients wondering how their insurance policies may respond to various related exposures. Unfortunately, for most the answer is not favorable. Having been hit by similar outbreaks in the past – namely Severe Acute Respiratory Syndrome (SARS) in 2002-2003 — insurance carriers have taken action to specifically exclude or limit coverage for viral/bacterial outbreaks. I’ll break down different coverage parts over a series of posts, starting with the most common inquiry: Business Income & Extra Expense. Why is it that these claims related to coronavirus are likely to be declined by insurance carriers?
Coverage Overview
Business Income & Extra Expense is designed to cover lost profit and continuing expenses after a covered property loss. For example, if you own a retail store that has a fire, not only do you need to repair/rebuild your store, but you’ll also likely close down for a period of time resulting in lost business while many of your expenses remain. Insurance policies also often extend coverage on a limited basis for losses resulting from a covered loss (e.g. fire) at a “dependent” property (perhaps a nearby anchor store you depend on for foot traffic) or resulting from “civil authority” (the road providing access to your store is closed down by the local fire department because of a large fire down the street). When it comes to coronavirus, we’re talking about a business shutting down operations because of a local outbreak or the threat of a local outbreak.
Coverage Analysis
Once you find the business income & extra expense coverage section within your property insurance policy, you don’t have to look far to find some hurdles. The first paragraph probably looks like this:
We will pay for the actual loss of Business Income you sustain due to the necessary suspension of your “operations” during the “period of restoration.” The suspension must be caused by the direct physical loss of or damage to property at the premises which are described in the declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. (CP0030 06/07, Insurance Services Office) [emphasis mine]
Both the Dependent Property and Civil Authority endorsements will have similar language to the underlined above.
Whether we’re talking about a confirmed case of coronavirus within the four walls of an insured property or we’re talking about a mandated civil authority shutdown or restriction, there are a few bars that need to be cleared:
- It must be a “necessary suspension of your operations”
- It must be “caused by the direct physical loss of or damage to…” and
- It must be “caused by or result from a Covered Cause of Loss”
“Necessary Suspension”
If a business is voluntarily suspending operations as a mere precaution, it’s unlikely that the carrier will view this as “necessary”. If the suspension is mandated by the federal, state or local government, that would likely be considered necessary. In the scenario where a business has had a confirmed case of the virus among its employees or within its property, a good argument can be made that a suspension is necessary as well. In that case, move on to the next test…
“…caused by the direct physical loss of or damage to…”
In the event of a precautionary suspension of operations, whether its voluntary or government mandated, insurance carriers may argue that there is no “direct physical loss of or damage to property.” If there is a confirmed case of the virus among employees, employees are not considered “property”. If an insured building, product, inventory, or other business personal property is potentially contaminated, there may be a chance of clearing this bar.
There actually is relevant case law here… In Source Food Tech., Inc. v. U.S. Fidelity & Guar. Co., No. 06-1166 (8th Cir. Oct. 13, 2006), a beef distributor sued its insurance carrier for business income coverage when the Mad Cow Disease scare closed the US/Canadian border, blocking the transport of beef from its sole supplier. The supplier had product loaded on a truck and ready to go, but it was never sent. There was no proof that the beef in question was contaminated. The 8th Circuit Court ruled that there was no “direct physical loss to property”. The US Court of Appeals, however, eventually overturned the circuit court’s decision, ruling that the product’s functional impairment qualified as direct physical damage. Two things to note in this case: First, the policy’s Civil Authority coverage, which is ultimately the coverage that responded, did NOT limit coverage to a specific radius from the insured’s location. Many policies will limit Civil Authority coverage to shutdowns in the “immediate surroundings” or “within x miles of a listed location. Second and more importantly, we do not know what exclusions the policy contained. The claim was filed in 2003, likely before carriers had adapted to these types of claims…which brings us to the third and biggest hurdle…
“…caused by or result from a Covered Cause of Loss”
Even if a business suspension is necessary and is caused by direct physical damage to property, the “covered cause of loss” language is sure to be referenced in a carrier’s declination letter. As a result of prior outbreaks, a la SARS in the early 2000’s, insurance carriers began adding specific exclusions to their property forms related to bacteria and viruses. The Insurance Services Office (ISO) came out with CP0140 “EXCLUSION OF LOSS DUE TO VIRUS OR BACTERIA” which was quickly integrated into most standard property policies. The meat of this endorsement states:
“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
The endorsement also confirms that the exclusion applies to all first party coverages:
“…applies to all coverage under all forms and endorsements that comprise this Coverage Part or Policy, including but not limited to forms or endorsements that cover property damage to buildings or personal property and forms or endorsements that cover business income, extra expense or action of civil authority.” (CP0140 06/07, Insurance Services Office)
The inclusion of this endorsement or similar language means most business income claims caused by or resulting from coronavirus will not fulfill the requirement that a suspension be due to a Covered Cause of Loss. If you’re still reading, you’re probably wondering why I even bothered with the analysis of the “necessary suspension” and “direct physical loss” language. If your policy has a version of this exclusion, the rest is just academic. Well, yes, but…
Potential Exceptions…Read Your Policy(s)!
The analysis above does not and cannot apply to ALL property insurance policies. Insureds in certain industries such as healthcare or manufacturing often have terms that differ from those described above. For example, many manufacturers have coverage for “contamination” and/or “adulteration” of their product which, depending on the circumstances, may play a role. Even businesses outside of those industries may have broader coverage. Larger insureds with some bargaining power over underwriters may have negotiated broader terms. If they haven’t already though, negotiating broader terms to potentially encompass coronavirus-related exposures now will be near impossible.
Insureds may also have additional policies that need to be reviewed. Many environmental liability policies have business interruption coverage. These policies have completely different language and are less standardized.
There’s no substitute for actually READING your own policy(s) and discussing with your agent!
If you have any questions about any of this, send me an email at cliff[at]veirsinsurance.com.
Thanks for reading.
-Cliff
Filed Under: Commercial Insurance | Tagged With: #businessincome, #commercialinsurance, #coronavirus