As COVID-19 continues to spread exponentially around the world, individuals and businesses alike are struggling with the social and economic fallout of this pandemic. To protect the public, governmental bodies worldwide have enacted emergency mitigation measures, up to and including complete quarantine and “shelter-in-place” mandates. Several US cities and states have ordered non-essential businesses—such as gyms and bars—to close, and limited restaurants to take-out or delivery only. As a result, businesses face losses from decreased patronage, supply chain disruptions, employees stuck at home, and an increasing frequency of voluntary and involuntary closures.
Will Business Interruption Insurance Provide Relief to Impacted Businesses?
Business interruption insurance generally reimburses the policyholder for lost income or unrecovered expense during these periods of shutdown. It is principally purchased in commercial property or all risk insurance policies. These policies sometimes include coverage for lost business income caused by government or civil authority orders that prohibit access to the insured premises. Generally, the policyholder must suffer a physical loss (such as property damage) to qualify for coverage, which is often not an issue when a fire or windstorm damages a structure. It is a tougher issue for a policyholder to prove physical loss from contamination of the premises by a virus such as COVID-19. In addition, most business interruption coverages now exclude loss when the premises are closed because of communicable diseases and/or pandemics. These exclusions were a response to the SARS outbreak in the early 2000s.
Louisiana Restaurant Hopes to Secure Insurance Coverage for Potential COVID-19 Contamination and Lost Business Income
Last week, owners of a restaurant in New Orleans, Louisiana filed a lawsuit—the first of its kind—against their insurer, the Governor of Louisiana, and the State of Louisiana, seeking a declaratory judgment that the restaurant’s “all risk” policy would reimburse the policyholders for lost business income and sanitation costs should the premises became contaminated with COVID-19 in the future. Cajun Conti, LLC et a. v. Certain Underwriters at Lloyd’s London et al., Civ. Dist. Ct. La. (2020). The policyholders allege the Louisiana Governor’s March 13, 2020 Civil Authority Order prohibiting gatherings of 250 or more people, coupled with the Mayor of New Orleans’ March 15, 2020 order that restaurants with seating cease operations by 9:00PM and limit their seating capacity, trigger the civil authority provision of the restaurant’s policy.
Could Temporary Surface Contamination by Infectious Particles Qualify as an Insurable “Physical Loss”?
Though the petition does not disclose the relevant policy language, it appears that coverage under the civil authority provision requires physical loss. To satisfy this element, the plaintiffs allege the virus “physically infests and stays on the surfaces of objects or materials” for weeks, and that the contamination would constitute “a direct physical loss needing remediation to clean the surfaces of the establishment.” In support of their position, the policyholders rely on a previous Louisiana case that held that lead paint constituted a “direct physical loss” because it rendered a home uninhabitable until it was gutted and remediated. (Widder v. Louisiana Citizens Prop. Ins. Corp., 2011-0196 (La. App. 4 Cir. 8/10/11, 3); 82 So.3d 294, 296, writ denied, 2011-2336 (La. 12/2/11)). The insurer is likely to argue Widder does not apply because the presence of lead paint that leeched into the structure of a home and required total gutting was a clearer case of physical loss to property than contamination by COVID-19.
The Cajun Conti case brings the reach of the “physical loss” requirement into focus because the viral exclusion allegedly does not apply. That exclusion in the all risk insurance policy in dispute “only exclude[s] losses due to biological materials such as pathogens in connection with terrorism or malicious use,” but apparently “does not contain an exclusion for a viral pandemic.”
While the Cajun Conti petition does not recite the relevant policy provisions, the outcome of this dispute (and any subsequent cases) will turn on the specific nature of the damage or claim at issue, and the language of the policy. Nonetheless, insurers should brace for an uptick in coverage claims and potential lawsuits regarding business interruption coverage.