Can Businesses Rely on Insurance to Cover COVID-19 Losses?
Contributed by Paula Lopez, March 24, 2020
A New Orleans restaurant, operating under the name Oceana Grill, filed the first of its kind lawsuit against its insurer, Lloyd’s London, for an order declaring that the civil authority provision contained in its insurance policy affords coverage for physical losses caused by Covid-19 (“coronavirus”) contamination and business income coverage in the event the insured premises is contaminated by the coronavirus.
Oceana Grill normally operates 365 days of the year, from 8 a.m. to 1:00 a.m, and has a seating capacity of 500 guests. At the time of filing the lawsuit, the Governor of Louisiana had issued a state-wide Civil Authority Order banning gatherings of 250 people or more and the Mayor of New Orleans had imposed restrictions on full-service restaurants directing them to operate at 50% seating capacity and to close by 9:00 p.m. Oceana Grill relied on the significant losses it would likely suffer as a result of these restrictions in bringing the action prior to filing a claim with its insurer. Since the filing of the lawsuit, New Orleans passed restrictions similar to New York, requiring restaurants to limit operations to take-out or delivery services.
Oceana Grill has an all-risk policy. Commercial all-risk policies cover risk of loss or damage to the insured’s property including related losses like business interruption losses, lost profits, and other costs, unless expressly excluded. Of note, Oceana Grill’s policy does not contain an exclusion for losses due to viruses or a global pandemic. The issue for the court to decide in the Oceana Grill case will be whether an all-risk policy extends to losses related to a business closure by order of a Civil Authority. Insurance policies typically define a “covered loss” as a direct physical loss or damage to property. Oceana Grill alleges in its complaint that the coronavirus is physically impacting public and private property and physical spaces because the virus lasts on the surface of objects and materials for varying periods of time and that contamination by the virus would require extensive remediation. While the current coronavirus pandemic and its long-term impact on businesses across all industries is unprecedented, the court’s decision in the Oceana Grill case will have a significant impact on the torrent of coverage cases likely to be filed around the country.
Cases involving coverage disputes related to civil authority orders were prevalent following 9/11 and the Ebola outbreak in 2014. While the coverage decisions were determined by the policy language and the specific facts of each case, civil authority orders issued as precautionary measures to prevent property damage or injury that has not yet occurred, generally failed to trigger civil authority coverage. In the context of the current coronavirus pandemic, insurers will likely try to avoid civil authority coverage by claiming that local, state and federal directives ordering businesses to close or to significantly reduce operations in order curtail the spread of the virus does not trigger the “physical loss” coverage requirement under general policies because such orders are intended to prevent the spread of the virus and an overburdening of the healthcare system; not because of an identifiable physical loss or damage to the property. However, if a coronavirus infected person enters the premises, resulting in contamination to the property which, in turn, results in a forced shut down, an insured may be able to establish the “direct physical loss” requirement for triggering coverage.
Generally, insureds may have difficulty establishing the existence of a “physical loss” due to the absence of a scientific consensus on the manner of transmission, and on how long the virus can survive on different surfaces and materials. However, this may change as a result of further research and testing of the virus and its transmission. While the Oceana Grill coverage dispute is focused on losses caused by civil authority orders and coverage under its civil authority policy provision, an all-risk insurance policy may afford businesses with other policy provisions on which they can base a claim for financial losses caused by coronavirus-related business closures. These include coverage provisions related to business interruptions if an insured is forced to close, or contingent business interruptions if a supplier or vendor of parts or materials necessary for the continuation of the insured’s business is forced to close. Additionally, an insured can argue that the coronavirus affected the functionality of the business property by forcing a shutdown. For instance, courts have found that insureds’ have suffered a direct physical loss or damage to property in instances where the release of dangerous gases or bacteria render an insured’s premises uninhabitable in the absence of structural damage.
Therefore, it is important for businesses to review their
insurance policies to assess whether some or all of the business losses
suffered as a result of the coronavirus can be curtailed.
 Gregory Packaging, Inc. v Travelers Prop. Cas. Co. of Am., 2014 WL 6675934, at *6 (DNJ Nov. 25, 2014).