Insurance policyholders file lawsuits seeking coverage for virus-related business interruption losses

by | Apr 20, 2020 | Articles, COVID-19, Insights, Insurance Law

The below information is current as of the publication date listed. Because COVID-19 response measures on all fronts are continually evolving, clients should stay alert to new developments and consult with counsel on any critical questions.

Businesses across virtually every industry are facing devastating financial losses resulting from governmental closure orders and restrictions. As previously noted, many commercial property loss policies contain civil authority provisions, business interruption coverage and contingent business interruption provisions. Some businesses are insured under an “all risks” policy and there are numerous industry and individual business endorsements, some even specifically designed to cover “pandemic events.”

Insurance coverage relief for COVID-19 business interruption losses

Lawsuits against insurers

The past few weeks have witnessed a growing number of lawsuits filed against commercial property insurers seeking recovery for the economic fallout of governmental closure orders and effects of the pandemic. Most of these lawsuits seek declaratory relief, requesting that the Court make a determination that the losses associated with business interruption secondary to the COVID-19 pandemic are covered losses under the respective policy(ies). Many lawsuits have been filed even though the insurer has not formally denied the claim. Industry sectors where such actions are common include restaurants, theaters, entertainment complexes, professional services, rental companies and various retail establishments.

Typical business interruption provisions require “physical property damage or loss” to trigger the business interruption coverage. Recent litigation has challenged the definition of what constitutes “physical property damage,” contending that:

  1. Barring access to a premise constitutes a “physical loss;” and
  2. The ability of the virus to remain on surfaces for up to four days and to require extensive and repeated efforts to disinfect is per se physical damage.

In addition, the “Civil Authority” provision has increasingly been referenced in claims and lawsuits. This coverage generally provides compensation for economic losses when access to a business premise is prohibited by order of civil authority. A survey of lawsuits filed against commercial property insurers across the U.S. reveals that businesses are asserting claims and citing this provision of the policy in litigation, contending that the governmental closure orders have resulted in denial of access to the business premise and resulting physical damage or loss.

Friends of DeVito v. Commonwealth of Pennsylvania

The Pennsylvania Supreme Court’s opinion in Friends of DeVito v. Commonwealth of Pennsylvania may prove helpful for insureds as coverage actions rapidly multiply. The case involved a challenge to Governor Tom Wolf’s March 19 Order closing all non-life-sustaining business. While the focus of the opinion addresses whether Governor Wolf possessed the statutory authority to enter the order, the court undertook an extensive discussion as to whether the COVID-19 pandemic is sufficiently comparable to other statutorily identified “natural disasters” to grant emergency executive powers to the Governor.

The court’s correlation of COVID-19 to other types of “natural disasters” is helpful to the argument that the pandemic has caused significant “physical property damage or loss.” Indeed, the court concluded that the risk of spread of the virus is significant, even in areas where contamination is not confirmed. The court rejected the argument that the actual presence of the disease in a particular location is a prerequisite to the statutory authority to have the business shut down. Rather, this risk of contamination justified the use of emergency executive authority to address the “natural disaster.”

While the context of our Supreme Court’s conclusion is arguably confined to the issue of the power of the executive branch to close non-life-sustaining businesses under the provisions of the Emergency Code, its reasoning that the risk of contamination is analogous to other natural disasters, (i.e. hurricane, tornado, flood, etc.) portends that courts may be receptive to an argument that the risk of contamination constitutes actual physical damage or loss.

Seek legal counsel

Businesses need to be proactive in these unprecedented times and review their commercial property policies to determine the nature and extent of potential coverage. Businesses should keep detailed records of expenses incurred to secure and comply with governmental directives. If a claim has been submitted, the insurer’s investigation and evaluation of the claim should be monitored. If the insurer has denied or stalled the claim, businesses should seek legal counsel to weigh their options.

Saxton & Stump attorneys Craig Black and Matt Rappleye are available to further discuss your business insurance policies and how our Insurance Law Group can partner with you to develop a proactive approach to recovering losses due to COVID-19.

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