Published: March 30, 2020
Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances. Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier.
Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments will be the subject of litigation over the coming years.
The first case involving a business interruption loss due to COVID-19 has been filed. Cajun Conti LLC, et al. v. Certain Underwriters at Lloyd’s, London, et al., No. 2020-02558 (La. Dist. Ct., Orleans Parish, complaint filed March 16, 2020). The Plaintiffs, owners of a popular restaurant in New Orleans, Ocean Grill, seek a declaration from the court that this insurer, a Lloyd's syndicate, must cover business interruption losses. New Orleans Mayor LaToya Cantrell ordered all restaurants in the city to limit operations to delivery only. That followed an order by the governor that barred any congregations of more than 250 people. Louisiana’s governor also closed bars and restricted restaurants to takeout orders until April 13 to prevent the disease’s spread. The policy at issue provides coverage for "property, business, business income, and extra expense..." The Complaint alleges that the policy is an "all risk policy" which covers all risk unless clearly and specifically excluded. The policy has only excluded losses due to biological materials such as pathogens in connection to terrorism. According to the Complaint, the policy therefore provides coverage for other viruses or global pandemics. Plaintiffs allege that Lloyd's have accepted the policy premiums with no intention of provding coverage due to physical loss and/or from a civil authority shut down due to a "global pandemic virus."
Also, according to the Complaint, the coronavirus is “physically impacting public and private property, and physical spaces in cities around the world” and “any effort by Lloyd’s to deny the reality that the virus causes physical damage and loss would constitute a false and potential fraudulent misrepresentation that could endanger policyholders and the public.”
The lawsuit maintains that the virus physically infects and stays on surfaces for up to 28 days and that contamination of the insured premises by the virus would be a “direct physical loss needing remediation to clean the surfaces of the establishment.”
It likens the coronavirus infection to cases where the intrusion of lead or gaseous fumes has been found to constitute a direct physical loss.
Plaintiffs ask the court to affirm that because the policy provided by Lloyd's does not contain an exclusion for pandemic viruses, the policy provides coverage to Plaintiffs for any future civil authority shutdowns of restaurants in New Orleans due to physical harm from coronavirus contamination.
While Lloyd's has not yet had the opportunity to respond, the CEOs of the four large insurance trade organizations sent a letter to Congress on March 18, 2020 stating, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats that are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.”
Commentators supporting the insurers have suggested that any business interruption claims may be denied because government shutdowns are usually ordered as a precaution, not because of known contamination. Coverage can also be limited by the duration of any contamination. Commentators have argued that “in some ISO forms, the period of restoration has a waiting period, such as 72 hours, before coverage begins. And the period lasts only as long as it should take to repair the physical loss or damage using due diligence and dispatch. If the ‘physical damage’ is the particles of virus on surfaces of a building, how long should it reasonably take to use soap and water, or bleach, to clean those surfaces? It seems as though the battle lines are being drawn, and that the business interruption claims will be met with a fight.