COVID – 19 Insurance Coverage Claims Under Commercial Property Policies
April 30, 2020
The impact of COVID-19 continues to be felt throughout all facets of American society. The need for social distancing impacts the operation of businesses across the country, and in many cases is having a devastating impact. Some businesses already have reacted by presenting claims to their commercial property insurers. Litigation concerning applicability of coverage for losses associated with COVID-19 restrictions has been filed by policyholders and insurers in a number of states. Several cases are filed as putative class actions. Applications have been made in federal court for multi-district and consolidated proceedings, and similar requests may be considered in state courts as well.

The specific terms of a particular commercial property policy will affect the type of losses for which a business may attempt to pursue compensation. Policies typically pay for “direct physical loss” of or damage to the covered property caused by or resulting from a covered cause of loss. Some property policies are “named peril” policies – that is, they cover only perils that are specifically identified. Others are “all risk” policies – that is, they cover damages caused by any peril unless the peril is excluded.

COVID-19 claims are more likely to emerge, and be contested, in connection with policies that afford coverage for economic losses for business interruption caused by direct physical loss of or damage to the property. This coverage may apply for the time necessary for the property to be repaired, or it may apply for a specified period or until the business returns to its previous financial level, whichever occurs first.  Policies also may extend contingent business interruption coverage for loss of income resulting from covered property damage to property of a policyholder’s upstream suppliers, or downstream distributors or customers. 

One critical issue that will need to be determined is whether or not the policyholder’s losses are on account of direct physical loss or damage to the specified property. A threshold question will be whether a policyholder will be able to demonstrate the physical presence of the virus in the property, and what proofs may be considered sufficient evidence of such presence. If physical presence of the virus is established, policyholders may advocate that the property has lost its function and therefore suffered physical loss or damage.  See, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. , 406 N.J. Super. 524 (App. Div. 2009) (policy covering consequential loss from power interruptions resulting from “physical damage” afforded coverage for losses from physical incidents making electrical grid physically incapable of providing electricity); Gregory Packaging, Inc. v. Travelers Prop Cas. Co. of Am. , 2014 U.S. Dist. Ct. LEXIS 165232 (D.N.J. Nov. 25, 2014) (abrupt ammonia release requiring evacuation of building constituted direct physical loss or damage to building notwithstanding lack of structural alteration to building). Questions will arise regarding whether there is direct physical loss or damage to the property due to the presence of the virus in such quantity as to make a facility unusable and whether any hazardous condition can be remedied through routine maintenance.  See, e.g., Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226 (3 rd Cir. 2002) (presence of asbestos that can be addressed through routine maintenance, and that does not render building actually or imminently useless or uninhabitable, does not meet coverage requirement); Motorists Mut. Ins. Co. v. Hardinger , 131 Fed. App’x 823 (3 rd Cir. 2005) (genuine issue of fact over whether e-coli presence on property meant that functionality of property was “nearly eliminated or destroyed”).

There will also be questions of causation, particularly where a business has been able to continue to perform services in some capacity, for instance by having employees continue to work remotely. Unless direct physical loss or damage to property directly or indirectly prevented a customer from receiving the services of the business, any losses on account of general economic events may not be viewed as having been caused by covered property damage.  See, e.g., Arthur Andersen LLP v. Federal Ins. Co ., 416 N.J. Super. 334 (App. Div. 2010) (no contingent business interruption coverage for loss of business following September 11 attacks where no proof that customers were unable to receive services as a result of property damage to World Trade Center or Pentagon).

Governmental directives restricting business activities in an effort to minimize the spread of COVID-19 also may affect potential coverage under commercial property policies. Some policies may exclude coverage for loss caused by the enforcement of laws regulating the use of property, even if the property has not been damaged. Other policies may extend coverage for loss of income for a limited time period if, on account of damage to property within a specified area of the policyholder’s property, an act of civil authority prohibits access to the policyholder’s property. Civil authority coverage may not be available if the property remains accessible, even though civil authority may have restricted the number of occupants and/or restricted certain business activities.  See, e.g., Schultz Furriers, Inc. v. Travelers Ins. Co. of Am ., 2017 N.J. Super. Unpub. LEXIS 1072 (App. Div. May 3, 2017) (no civil authority coverage following Superstorm Sandy because access to insured location more difficult, but not impossible).

If a policyholder presents proofs sufficient to bring a claim within the insuring agreement of the policy, the policy must be further examined to determine if one or more exclusions to the policy bar or restrict coverage that is afforded. Certain exclusions may expressly state that coverage is not afforded for losses caused by the excluded matter, regardless of any other cause or event contributing concurrently or sequentially to the loss.

Many commercial property policies contain exclusions for loss caused by viruses, pathogenic material, or communicable diseases. For instance, a policy may state that it will not pay for loss or damage caused by or resulting from any virus that induces or is capable of inducing physical distress, illness, or disease. The specific language of any virus exclusion must be examined and compared to the claim facts. 

These potential restrictions on the scope of coverage have led not only to coverage litigation, but also to efforts to create coverage through legislation. For example, proposed legislation pending in New Jersey (A3844) would apply to policies issued to policyholders with less than 100 eligible employees. The legislation would require that insurers afford coverage under policies issued to such policyholders for loss of business and business interruption on account of COVID-19 from March 9, 2020, the date on which New Jersey declared a state of emergency, through the end of the state of emergency. The proposed bill also would authorize the collection of funds from insurers for purposes of the mandated payments to policyholders. Insurers, in turn, would be entitled to apply for a distribution from those funds based on the amount of business interruption coverage that insurer writes in proportion to all such coverage in the state. The bill was reported favorably out of an Assembly committee, but no further votes have taken place at this time. Any legislation mandating coverage under previously issued policies likely would be subject to challenge on the basis that the legislation unconstitutionally impairs the obligations under those contracts.

HKMP’s attorneys have decades of experience litigating insurance coverage issues in state and federal courts throughout New Jersey, New York and beyond, and we are poised to counsel and represent the interests of our clients in connection with insurance coverage for claims arising from COVID-19.
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