Under all of the most common insurance policy forms, business interruption coverage is only triggered if the business interruption results from “direct physical loss or damage” (e.g. hurricane or fire). Business interruptions caused by contagious or communicable diseases are not generally considered to result from direct physical loss or damage.
Moreover, while most policies have coverage extensions for a “civil authority” prohibiting access to a covered location, that coverage is often tied to physical damage to a nearby property. Thus, while every policy is different, the general expectation is that insurers are prepared to deny most COVID-19-related business interruption claims.
However, even if is no clear path to immediate coverage, most businesses should still tender a claim.
Over time, some courts have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage:
- In Motorists Mutual Ins. Co. v. Hardinger, the Third Circuit found that the bacteria contamination of a home's water supply constituted a “direct physical loss” when it rendered the home uninhabitable.
- In Essex v. BloomSouth Flooring Corp. the First Circuit found that an unpleasant odor rendering property unusable constituted physical injury to the property.
- In TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 709 (E.D.Va.2010) a federal court in Virginia found “direct physical loss” where a “home was rendered uninhabitable by the toxic gases” released by defective drywall.
Of course, there are plenty of counter-examples, and most COVID-19-affected business are still one degree removed from that argument. (The virus hasn’t made our buildings uninhabitable—the virus elsewhere has made the government declare our premises uninhabitable). But, there are arguments to be made, and tens of thousands of insureds will be testing those arguments over the next six months.
If an insured fails to tender its claim, it loses its claim forever. Tendering a claim and drawing a denial takes very little time or energy and preserves your rights for up to 10 years (depending on the limitations period in your jurisdiction). So, the prudent approach is to tender the claim, and if some early litigators prevail, you have a valuable claim to press.