Business Interruption Insurance for COVID-19 Losses

April 7, 2020

The Basics of Business Interruption Insurance

Many Wisconsin businesses suffering a catastrophic drop in revenue caused by the COVID-19 outbreak have turned to their insurance policies for relief under their business interruption coverage.  In basic terms, business interruption insurance provides coverage when a loss of income is caused by damage to covered property.  However, for a loss of income to be covered, most policies require that the loss be caused by direct physical loss or damage to an insured building.  For instance, if a restaurant suffers fire damage, business interruption coverage compensates the owner for the loss of income suffered while the restaurant is closed and undergoing repairs subject to the terms and limits of the policy.  With COVID-19 business interruption claims, there is no direct physical loss or damage to a building that results in the loss of income.  Accordingly, many insurance companies are denying coverage for such claims.

Following the SARS outbreak in the early 2000s, most insurers added exclusions for losses resulting from a virus or bacteria. The standard exclusion provides that the insurer 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.”  This exclusion will pose a significant obstacle to businesses attempting to obtain relief for business interruption losses related to COVID-19.

Nevertheless, the law interpreting business interruption insurance for virus-related losses and virus exclusions is underdeveloped. Only several courts have interpreted such exclusions since they originated more than a decade ago.  In addition, some policies contain civil authority provisions which may provide coverage for losses related to a governmental order prohibiting access to a covered location. But again, civil authority coverage generally only applies when there is physical damage to a covered building.  We expect policyholder attorneys will argue that the mere presence of the COVID-19 virus can or should be construed as physical damage to an insured building in hopes of overcoming these hurdles to coverage.

At the end of the day, it will be important for businesses and insurance companies to review the specific details of the applicable policy before a confident determination can be made as to whether coverage exists. It will also be important to monitor how the courts are interpreting these provisions in the many lawsuits that will surely follow in the future for such claims.

State Legislation to Provide Coverage for COVID-19 Business Losses

In response to the COVID-19 crisis, several state legislatures have proposed bills to provide coverage for business interruption losses, even if coverage is excluded under the policies.  Such an intervention by government to provide insurance coverage for excluded claims would be an unprecedented event.  To date, legislators in New Jersey, Ohio, and Massachusetts have proposed bills, but none have been voted on or passed.  As an example, the bill proposed in Massachusetts provides that insurer payouts for COVID-19 claims will still be subject to the monetary limits of the policy and the maximum length of time set forth in the policy for business interruption coverage. The Massachusetts law would apply policies issued to insureds with 150 or fewer full-time-equivalent employees in the state.

The insurance industry has opposed such legislation arguing that it places significant losses on insurers that didn’t price such a risk when the policies were issued.  Insurance companies would have charged higher premiums if they assumed losses relating to virus or bacteria pandemics.  The constitutionality of these laws is also questionable as it places the financial burden of COVID-19 losses on insurance companies by rewriting the terms of the insurance policy, which could be considered an impermissible governmental taking in violation of the Fifth Amendment. Substantial litigation will surely arise if any state passes legislation requiring coverage for excluded business interruption claims.

There have been some rumblings from at least one Wisconsin legislator to propose similar legislation in Wisconsin to provide coverage for COVID-19 business interruption claims.  However, the proposal does not appear to have a lot of support at this time.  That may change as the negative economic impact of the outbreak continues to grow. We will closely monitor this situation in the coming weeks and months.