Business Interruption Insurance in the Wake of COVID-19

Melissa Stewart- Business interruption insurance is a standard-form coverage that is part of commercial property insurance policies and is meant to compensate for income lost during times when business is halted due to physical loss or damage to the covered property. Simply stated, business interruption insurance covers income lost in a disaster. A typical event in which business interruption insurance is exercised is during a hurricane or a fire, where the property is partially or totally destroyed, and the business cannot operate until the property is repaired. Recently, the COVID-19 pandemic has caused thousands of businesses to halt operations and lose income as a direct result. This predicament raises the question of whether these businesses that are losing income due to this unprecedented virus are able to collect under their business interruption insurance policies.

Since the wake of the COVID-19 pandemic, at least 1,250 business interruption lawsuits have been filed across the United States, in both state and federal courts, by companies against their insurers for claims due to the state and local government shutdown orders as a result of the pandemic. More than a third of these lawsuits involve restaurants and bars. Insurers have consistently denied these claims. They contend that business interruption insurance is not intended to cover business interruptions due to closures as a result of COVID-19 because for business interruption insurance to apply, there has to be property loss or damage. The policyholders have filed lawsuits both individually and collectively through class actions and are claiming bad faith insurance practices and breach of contract. As of October 2020, the weekly rate of new business interruption lawsuits began to decline, but the number of lawsuits filed each month is still at an unparalleled amount.

Despite these efforts, the significant majority of these lawsuits have not ended in the policyholders’ favor, as nearly 75% of the cases have led to dismissal of the policyholders’ claims. The courts agreed with the insurers’ argument that “direct physical loss or damage,” as required under business interruption insurance policies, requires more than a mere loss or use of access to the business. Furthermore, courts have held that virus exclusions included in insurance policies are unambiguous and do apply to the results of the current pandemic.

Nevertheless, there have been two recent lawsuits that favored policyholders and provide guidance to future businesses. In Optical Services USA/JCI v. Franklin Mutual Insurance Co., No. BER-L-3681-20, the Superior Court of New Jersey found that physical loss or physical damage was not required in business interruption insurance coverage under New Jersey law. Likewise, in a North Carolina case, North State Deli LLC et al. v. The Cincinnati Insurance Co. et al., No. 20-CVS-02569, the Superior Court for the County of Durham granted summary judgment in favor of the policyholders, which were restaurants, finding that physical damage to the businesses’ buildings was not required under the policies at issue and that the policyholders’ inability to use their facilities was a physical loss under the insurance policies. Although this case has been certified for immediate appeal, this case certainly presents an argument to be used by policyholders across the country who have lost income due to COVID-19 mandatory shutdowns. Other plaintiff policyholders are contending that the government ordered closures, changing consumer preferences, and disrupted supply chains due to COVID-19 obligate the insurers to give coverage exclusive of a specific virus provision in the insurance policy.

Ultimately, the result of a policyholder’s potential claim against an insurer depends on the specific provisions in the insurance policy and the exact closure orders that resulted in the business facing losses. The insurance industry tends to exclude business interruption coverage for viruses, but each claim for business interruption coverage is unique based on the policy’s language, so whether a policy addresses government shutdowns due to medical reasons or pandemics is an issue to be analyzed by each policyholder.

One thing is certain, however: the COVID-19 pandemic is going to change what provisions are included in business interruption insurance policies to be more specific about virus outbreaks. Adding provisions that either include or exclude losses from government shutdowns or closures due to viruses will avoid the onset of spiking litigation as seen today.

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