For business owners, the void between closure and the as-yet-unknown time that they can resume operations will be a painful and expensive one. Although politicians are promising all sorts of government aid packages, it remains to be seen who and what those aid packages will cover. Businesses are also wondering where else they may be able to recoup lost income due to the COVID-19 crisis. And many are thinking that they may find relief in their insurance policies, through business interruption coverage, contingent business interruption coverage, and/or civil authority coverage.
What is Business Interruption Insurance?
Business interruption insurance is intended to return to an insured the amount of profit it would have earned had an intervening event not occurred. Often, businesses procure business interruption insurance as part of their commercial property insurance coverage. Commercial property insurance is designed to make policy holders whole when they suffer losses from designated causes of loss, such as fires, theft, vandalism, etc. Business interruption policies typically require “direct physical loss” to property. While the requirement for a direct physical loss to property may raise questions as to whether business interruption coverage is available following business closures due to COVID-19, some jurisdictions have case law in support of the conclusion that physical contamination of a building rendering it useless would constitute physical loss.
What is Contingent Business Interruption Coverage?
Contingent business interruption insurance is an extension to other insurance that reimburses lost profits and extra expenses that result from an interruption of business at the premises of a person that the insured depends on for its business, such as a customer or supplier. Contingent business interruption insurance is also typically purchased as an extension of commercial property insurance. Again, coverage is typically triggered by physical damage to customers’ or suppliers’ property or to property on which the insured company depends to attract customers.
What is Civil Authority Coverage?
Losses that have occurred due to state and local government mandated shutdowns may be covered by civil authority coverage, contained in some commercial property policies. This insurance covers loss of business income, rental value and extra expenses incurred because of denied access or forced evacuation by a government order, although it too may also require physical property damage to trigger coverage. To the extent that such losses are not otherwise excluded from their policies, many of our clients may be able to utilize this coverage to recover lost income as a result of being ordered by state and local governments to close their doors to the public.
Direct Physical Loss
The question of whether loss of business income attributable to COVID-19 will be covered is largely dependent on the terms of your policy, the circumstances that surround the loss and the applicable law. It is unclear whether the requirement for direct physical loss to property may be met if an infected person has been inside of a business and contaminated the space, causing business operations to cease. The policy may specifically exclude loss attributable to virus or bacteria. So, an examination of your policy will be critical to determining whether business interruption losses resulting from this pandemic are covered.
As the proverb goes, necessity is the mother of invention. With the full impact of the COVID-19 pandemic still unknown, we encourage you to keep lines of communication open with your legal counsel at Klehr Harrison, so that we are accumulating information you need to submit a well-presented claim, or to negotiate or litigate with your insurance company. Please do not hesitate to reach out to us with any questions.
Please note, on April 5, 2020, the Pennsylvania Secretary of Health issued an Order mandating enhanced cleaning and disinfecting requirements for owners of large buildings. The Cleaning Order applies to owners of buildings of at least 50,000 square feet used for commercial, industrial or other enterprises, including but not limited to facilities for warehouses, manufacturing, commercial offices, airports, grocery stores, universities, colleges, government, hotels, and residential buildings with at least 50 units.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Co-author Stephan Cutler is co-chair of the Real Estate & Finance Department at Klehr Harrison. Co-author Augusta O’Neill is an associate in the Real Estate & Finance Department at Klehr Harrison.
 See Gregory Packaging, Inc. v. Travelers Property Casualty Company of America, 2014 WL6675934, United States District Court, D. of New Jersey.
 For instance, in 2006, the Insurance Serv ices Office (ISO) submitted, and New Jersey state regulators approved, ISO Form CP 01 40 07 06, titled “Exclusion for Loss Due to Virus or Bacteria.” This exclusion bars first-party property coverage for loss or damage caused by or resulting from any virus that induces or is capable of inducing physical distress, illness, or disease. The form specifically states that it applies to, among other things, “business income,” or business interruption. The New Jersey Legislature is now considering legislation that would undo this exclusion to cover business income loss attributable to COVID-19. Bill No. A-3844 was introduced on March 16, 2020, in order to provide a mechanism by which to force insurers of certain businesses to provide business interruption coverage for COVID-19 issues, even though policies may have a “virus” exclusion that had been approved by regulators. Notably, the bill would apply to businesses covered by such a policy with less than 100 eligible employees in the State of New Jersey.