The influx of the new coronavirus or COVID-19 has had a major impact on businesses across the nation and around the world. As such, many companies are now reviewing their insurance policies to determine how they can recover losses due to mandated closures from stay at home orders. These times are incredibly unique, as existing business interruption policies generally do not outline pandemic or viral coverage. This is because unprecedented situations like COVID-19 have not occurred in decades and the losses sustained have been and will continue to be incredibly large.
Business interruption is a clause contained in commercial property insurance that is designed to replace income lost in the event business must be halted due to a natural disaster or other catastrophic event that results in physical damage. These business interruption policies can contain several types of endorsements and exclusions that amend existing plans and change the scope of the original policy by adding or excluding coverage.
Virus Exclusions
Business interruption exclusions related to viral events were created in the aftermath of the SARS outbreak in 2002-2003. Though many businesses affected by SARS were able to file business interruption insurance claims, a $16 million payout to hotel chain Mandarin Oriental International served as a turning point for insurers. Because of the influx of business interruption claims during and after the SARS outbreak, many carriers added exclusions for any losses caused by viruses or bacteria.
These exclusions exist because the insurance industry is not designed to address issues as widespread as COVID-19, since insurance only works by pooling risk. On the other hand, since fires are relatively rare, the insurance industry can provide fire insurance to those who need it at a low cost. With regard to the current pandemic, this is not possible, as the impacts of coronavirus are not localized; and thus, it would be impossible for carriers to pay claims to the entire country at once.
Civil Authority Endorsement
Arguably one of the most discussed business interruption endorsements during COVID-19 is civil authority coverage. Civil authority coverage applies when a civil authority within the state, local, or federal government prohibits access to certain areas or businesses following a natural disaster. As many businesses have been either partially or completely closed due to mandated stay at home orders, many assume that this coverage will apply to COVID-19 loss claims; however, this is generally not true.
Civil authority coverage can only be triggered in the event the following stipulations are met: an order of civil authority is made, physical loss or damage occurred, and the order is made as a result of the physical damage. One of the key points to remember is the physical damage stipulation. This means that the civil authority order itself – even though it mandates the shutdown of the business – will not trigger coverage unless direct physical damage is shown. In the context of COVID-19, unlike a hurricane or other natural disaster where property damage is obvious, pandemic and/or viral events do not always leave evidence of visible loss. While many have alleged that the virus’s propensity to attach to surfaces constitutes physical damage, insurance carriers can successfully argue that is not the case, as there are often time restrictions involved in business interruption coverage that affect and/or override this, including:
The period of restoration
It’s important to note that business interruption coverage does not continue for an indefinite time period; it only extends to the “period of restoration.” Most insurance policies are very specific as to what constitutes the triggering beginning point and the designated endpoint of the period of restoration.
The period of restoration begins after 72 hours of the loss occurring or after damage to the property has occurred. This 72-hour “waiting period” is a common policy feature that makes clear business interruption coverage will not kick in until the designated timeframe has passed. In most policies, the period of restoration ends when (1) the property at issue should be repaired, rebuilt, or replaced with reasonable diligence and similar quality, or (2) the business resumes operations at a new, permanent location.
Since it has been found that COVID-19 can remain active on surfaces for anywhere from several hours to a few days, a 72-hour waiting period may provide enough of a lapse such that COVID-19 would no longer be present on business surfaces once the period of restoration begins, ultimately negating potential coverage. The period of restoration would end after the business in question is repaired or rebuilt. Again, if COVID-19 were still present following the waiting period, there is likely nothing to be repaired or rebuilt, only items to be decontaminated, which does not trigger coverage.
Texas Insurance Defense Attorneys
As many continue to grapple with the ongoing impacts of COVID-19, insurance disputes are likely to rise. These disputes are incredibly complex and will require the insight of an experienced insurance defense attorney to assist carriers in defending against unfounded or exasperated claims. At MehaffyWebber, we have over 70 years of combined experience in handling these specific disputes. Contact us today to see how we can assist with your unique case.