Lilias M. Gordon

Lilias M. Gordon
Associate

Mark D. Loftis

Mark D. Loftis
Principal

All restaurants and recreational businesses were partially or fully shut down by Governor Northam’s Executive Order 53, issued on March 23, 2020. Many of these businesses are now wondering if their insurance will cover income lost during this shutdown. Although every insurance policy must be analyzed individually, there are factors that will determine whether a business may be entitled to claim coverage under common types of insurance.

Business Interruption Insurance

Many commercial business insurance policies include a provision protecting against business interruption (also called business income loss insurance). Generally, this insurance is triggered when there has been some direct physical damage or loss to the insured premises caused by a covered cause of damage.

While appearing straightforward, there are questions as to whether this insurance will apply to shutdowns caused by COVID-19.

Checklist for reading your policy

Individual policies may vary greatly, but here are some common provisions:

  • Determine the “covered causes of loss.”
    The policy will limit the causes of lost income for which the insurer will provide coverage. It is common for insurance policies to cover all causes of loss other than listed exclusions.
  • Check the exclusions.
    The insurance policy may exclude from coverage damage caused by or resulting from a virus or bacteria. If so, the business will have a difficult time recovering lost income because of COVID-19. Other exclusions such as those for pollution, bacteria, or an act of civil authority may also provide the insurer with a basis to deny coverage.
  • Check the definition section to see if “physical damage” or “physical loss” is defined.
    If these definitions are written narrowly, the policy may not cover damage caused by COVID-19.

Issues Courts Have Yet To Resolve

1. Do insurance policy exclusions for harm caused by pollution extend to COVID-19?

Most pollution exclusions are written broadly. (For example: pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.) Insurance companies may argue COVID-19 is a “pollutant” by comparing it to other contaminants. This argument has been successful in other jurisdictions. For example, Florida courts have ruled that microbial populations and viruses fit the definition of “contaminant” and are excluded from coverage under pollution exclusion clauses. It is unclear whether Virginia courts will agree that exclusions for pollution will prevent businesses from recovering lost income because of virus contamination.

2. Does the COVID-19 cause property damage or loss?

This topic will be hotly debated across the country in the coming months, but Virginia businesses may be better off than most based on precedent in this jurisdiction. The difficulty is that business interruption policies were written to cover obvious physical damage, such as the destruction caused by a fire or hurricane. It is unclear whether a virus—which can easily be killed by wiping down a surface with disinfectant, yet renders a business’ premises entirely unusable for months—will be held to be property damage.

The premises of many businesses have been rendered unusable (in whole or in part) for months most obviously because of Executive Order 53. However, some policies may explicitly exclude from coverage property damage caused by an act of civil authority. As a result, insured businesses may be left trying to prove their premises were contaminated by COVID-19 and this contamination has caused property damage.

The arguments that will likely be advanced by an insured business and an insurance provider denying coverage of COVID-19 related losses are remarkably similar to the debate seen in TRAVCO Ins. Co. v. Ward, in which the insured’s premises was constructed with a type of drywall that released sulfuric gas over time. The plaintiff there argued there was no physical damage because the drywall was physically intact, functional, and there was no visible damage. The defendant argued that because he had been forced to leave the premises because of the toxic gas being released, there had been a direct physical loss as defined by his insurance policy. The court agreed with the insured, holding the premises indeed suffered a direct physical loss because the building was rendered unusable.

Even if courts decide COVID-19 does cause property damage, businesses will face an additional hurdle of proving their premises has in fact been contaminated. Fortunately, other types of insurance require the insured to prove only that the surrounding area has been damaged, not the insured premises itself.

Civil Authority Insurance

Generally, Civil Authority Insurance coverage is intended to apply when access to the insured premises is prohibited by an act of civil authority. The order must be given as a direct result of physical damage (other than to the insured premises) from a peril of the type insured by the policy. Although Executive Order 53 qualifies as an act of civil authority, courts will have to decide whether the Order was in fact issued as a direct result of physical damage so as to trigger coverage under this type of insurance.

Checklist for reading your policy

  • Determine the “covered causes of loss.”
    The policy may use the same definition of covered causes of loss for both Civil Authority Insurance and Business Interruption Insurance.
  • Determine whether the policy requires the property damage to be within a certain distance of the insured premises.
    Some policies state the property damage must occur within a number of feet or even miles from the insured premises. It may help to check the Virginia Department of Health webpage to see how many confirmed COVID-19 cases are in your area. Even without an explicit proximity requirement, a business is more likely to be covered if there were confirmed cases in the vicinity when Executive Oder 53 was issued.
  • Check the definition section to see if “prohibits access” is defined.
    If this definition is written to require a complete prohibition, the policy may not cover damage caused by COVID-19. This is particularly important if the business has only been partly shut down.

Issues Courts Have Yet To Resolve

1) Has Executive Order 53 “prohibited access” to restaurants and bars?

Most Civil Authority Insurance requires the act of civil authority to “prohibit access” to the premises. Executive Order 53 required the “[c]losure of all dining and congregation areas in restaurants” but restaurants “may continue to offer delivery and take-out services.”

Whether closing a part of a restaurant “prohibits access” is a new question that has not been addressed by courts. Insurance companies likely will emphasize that restaurants have remained open and employees as well as customers ordering takeout can in fact still access the insured premises. Technically, there has been at least a partial prohibition on access but courts are reluctant to extend coverage when access to a premises has merely been made inconvenient.

2) Is there a causal connection between Executive Order 53 and the property damage needed to trigger coverage?

Most insurance policies require a causal connection between property damage and the act of civil authority. Courts tend to find there is no causal connection when (1) an act of civil authority is taken in response to a fear of future harm not a present danger, or (2) no damage to property occurred near the insured premises.

Executive Order 53 states, “COVID-19 presents an ongoing threat to our communities. Information from the Virginia Department of Health reveals occurrences of the virus in every region of the Commonwealth. Indeed, the data suggests that in several regions there may be community spread of the virus.” Insured businesses thus likely have a good argument that Executive Order 53 was taken because of a present danger throughout the Commonwealth based on this language.

Particularly in more rural parts of Virginia, insurance companies may attempt to deny coverage because there had not yet been reported cases of COVID-19 in the insured business’ county or city at the time the order was issued. The insurance company’s argument will be strengthened if the policy requires the property damage be within a certain distance of the insured premises. Although, from a practical perspective, the difference between Virginia cities in present danger from COVID-19 and cities merely facing a fear of future harm may be a meaningless distinction given how little is known about the presence and spread of COVID-19 in the United States.

Ingress / Egress Insurance

Ingress/Egress extensions cover business interruption losses caused when a company cannot access its own property (other than because of an order of civil authority). The insured would need to establish it cannot enter the premises because the premises have been contaminated by COVID-19 or otherwise rendered unusable.

Given that Virginia has a statewide order in effect, arguing for coverage under a civil authority provision may be easier. However, Ingress/Egress insurance is another option to consider.

Filing Your Insurance Claim

Check your insurance policy for any steps you are required to take to file a claim, sometimes called “duties in the event of loss.” For example, you may be required to give the insurance company prompt notice of the loss your company has experienced as well as how and when it occurred. You may also be required to provide a signed, sworn proof of loss containing information the insurance company requests to investigate the claim.

Business insurance and income loss is a complicated issue made even more so by the COVID-19 pandemic. If you have questions about your business insurance coverage, the Business & Corporate attorneys at Woods Rogers can help you review your policy.

Read more legal updates on COVID-19 from Woods Rogers attorneys.


If you have questions about your business insurance policy:
Contact Lilias Gordon at lgordon@woodsrogers.com.
Contact Mark Loftis at loftis@woodsrogers.com.