So Much for Peace of Mind: Limitations of Business Interruption Insurance During COVID-19

While many businesses reopened in June from the government shutdown caused by the pandemic, many business owners are still trying to recover from months of lost profits that they cannot get back.  Naturally, many of these business owners have looked to their insurance companies for relief from this economic hardship.  However, getting an insurance company to payout has shaped up to be the latest uphill battle in the aftermath of COVID-19.  Insurance companies have been denying such claims, many times relying on an exclusion from coverage for loss caused by a virus found in some policies.

But the lingering question remains: Are insurance companies correct, and just because these exclusions exist, does that provide a legitimate basis to deny coverage? Before we dig into the answer to that, it is important to provide background on how these insurance policies function.

Business Insurance Basics

In simple terms, insurance policies require some kind of "direct physical loss or damage" to trigger coverage.  In other words, a policyholder must be able to show a "direct physical loss" or "damage" to their property for the policy to apply.  It is not entirely obvious what the distinction between the two terms is, however, some courts have construed "physical loss" somewhat more broadly than "physical damage."

So, to answer our question, we must first ask: Could the presence of COVID-19 on or inside of an office building qualify as direct physical loss or damage?  Unsurprisingly, insurance companies will argue it could not, and policyholders will argue it could.  The reality is there are interesting arguments on either side, but the policyholders probably have the stronger position.

For example, other harmful substances such as mold and asbestos have qualified as "direct physical loss or damage."  And, even though they likely would not admit it, insurers likely agree that the presence of COVID-19 on or inside an office building would qualify as direct physical loss and damage, and in such a situation, the insurer would likely attempt to deny coverage on other grounds, such as a "virus exclusion" in the policy. Therefore, there is a stronger chance of recovery if a policy does not contain a virus exclusion. But, what if the policy does have a virus exclusion?

Virus Exclusions

If a policyholder can stomach giving their insurance company's claim denial letter a close read, they would likely see a justification for the denial, explaining that the policy contained a virus exclusion.  It seems too perfect, how could an insurance company seemingly predict COVID-19, and take steps to insulate itself from millions of dollars in payouts?

Recall the SARS coronavirus pandemic in 2003 - while the West was relatively unaffected by that wave of  coronavirus, many Asian countries were not so lucky.  In one highly publicized case, a hotel conglomerate was able to secure $16 million in coverage due to the economic loss it sustained from the spread of SARS.  That level of exposure is risky for an insurance company, so to prevent an event like that€”or worse€”from happening again, insurers began including these virus exclusions into their policies.

In effect, these exclusions are saying "no matter how strong of an argument a policyholder can make, the presences of coronavirus on a building's structure or surfaces inside the building, will not qualify as €˜direct physical loss.'"  In a policy with this type of exclusion, the advantage in the coverage argument shifts from the policyholder to the insurer.  But, the existence of one of these exclusions does not mean there is no hope for recovery.

If one of these exclusions is in a business' insurance policy, then there are two paths forward: going around the policy (i.e., making an argument that it is valid but does not apply), or going through the policy (i.e., arguing that it is invalid and therefore does not ever apply).

Validity of Virus Exclusions

Short of some legislative intervention, there are two ways these exclusions could be ruled unenforceable: (1) the exclusions are shown to be ambiguous, and pursuant to basic contract law, ambiguities are interpreted in favor of the non-drafting party (i.e., the policyholder); or (2) the exclusions could have been valid, but because of impropriety on behalf of the insurance company when the exclusions were added, the exclusions cannot be enforced.

The concept of ambiguity is fairly straightforward, but the second option is not.  The idea behind this is that courts will not allow insurance companies to use exclusions if a policyholder can show some misrepresentation made by the insurer regarding the exclusion back when the exclusion was adopted.  Typically, this would be a misstatement regarding how much such an exclusion would limit a policyholder's scope of coverage.  Essentially, an insurer might present an exclusion as a "clarification" that there is no coverage for loss caused by a virus. However, that may not be true because before they added the virus exclusion, the policy may very well have provided coverage for such losses.  In such a case, the policyholder may very well prevail against the insurer.

Currently, it is unclear how this issue will be resolved.  However, what is clear is that there are already hundreds of cases being filed across the country trying to invalidate these exclusions.  If the insurers are found to have misrepresented why these virus exclusions were added to the insurance policies, courts may and should find in favor of the policyholders and invalidate these exclusions.