Miller Barondess Client Alert: Insurance Coverage in a Pandemic

Miller Barondess Client Alert:  Insurance Coverage in a Pandemic

As the world rapidly adjusts to the “new normal” in the wake of the COVID-19 pandemic, many businesses have been left to figure out the best next steps.  As of this writing, current cases have surpassed 700,000 globally.  In the United States, stock markets have been throttled, widespread closures are affecting businesses, events have been canceled, travel restricted, supply chains disrupted, and tens of millions of citizens are under “shelter-in-place” orders or are likely to be soon. Major cities like New York and Los Angeles have seen shut down except for essential services, while school systems across the country are expected to remain shut until the next school year.

As the dust settles on the economy, it is clear that the pandemic has impacted all industries, including especially travel, hospitality, health care, entertainment, and education, as well as the manufacturing, retail and service industries.  In light of these broad societal adjustments, it’s time for businesses to assess their insurance coverage and determine whether existing policies may offset the losses incurred by COVID-19.  In fact, there are several types of policies that could potentially cover the impacts associated with the pandemic.

Business Interruption Insurance

Due to the threat of contamination from COVID-19 (or actual exposure to the virus), business property may be quarantined or otherwise have access closed or restricted to consumers voluntarily or by governmental order.  Already the actual or perceived presence of the virus in public places has forced public-gathering-type businesses to close.  These scenarios could lead to coverage claims for damages flowing from such business interruption.

“Business Interruption” (“BI”) coverage is a common part of commercial property insurance or a freestanding policy that permits recovery of sustained losses due to suspended business operations.  “[T]he purpose and nature of ‘business interruption’ … insurance is to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business, industry, or other commercial establishment.”[i]

As relevant to a pandemic scenario, BI coverage almost always has a threshold requirement that the covered business disruption result from “direct physical loss of or damage to” insured property.  It is unclear whether a viral pandemic constitutes “physical loss or damage” to business property.  Certainly, an argument could be made that if employees or customers become infected at the workplace, then COVID-19 was presumably present at the business and that contamination constitutes property damage.  But this is not the typical trigger for business property insurance coverage, such as a fire, hurricane or tornado.

Court decisions on the scope of what falls under the “physical loss or damage” language are highly varied and fact intensive.  Some courts say that for loss to be covered, there must be an external force that causes “distinct, demonstrable, physical alteration” of the property at issue.[ii]

Contagious diseases, which are transmitted from person to person, do not physically alter or damage property.  Rather, the virus consists of microscopic organisms that cause no detectable damage to property.  Contamination of actual business property, however, may satisfy the physical loss or damage requirement.  For example, contamination in air conditioning systems and the presence of the gas ammonia, which made a business physically unfit for normal human occupancy, has been held to constitute covered property damage.  In ruling in favor of policyholders, those courts have rejected insurers’ argument that business property must experience structural alteration to be covered as physical loss or damage.

The current science on COVID-19 suggests that it can remain on certain surfaces for days, resulting in ongoing physical contamination of property and loss of use of the property because the virus can transmit from the property to people.  And many governmental authorities have concluded that all non-essential businesses are not fit for human occupancy while this pandemic is spreading.  Accordingly, policyholders have an argument that being forced to shutter and thus unable to use affected property due to actual or potential viral contamination is entitled to BI coverage.  Insurers can be expected to argue that BI coverage should be denied where the business interruption is due to “social distancing” or a generalized fear of infection, rather than actual viral contamination on the business’s property.

Courts, however, may find BI coverage for losses associated with COVID-19 without a showing of physical property damage.  The issue will undoubtedly turn on the wording of the particular policy and precedent in the particular state where the challenge is brought.  The standard Insurance Services Office Businessowners Special Property Coverage Form, which is incorporated in many business property policies, uses the phrase “direct physical loss of or damage to property …”  At least one court has held that the use of the disjunctive “or” after the phrase “physical loss of” implies that a loss of use of the property triggers BI coverage.[iii]  Other courts have applied BI coverage for loss of use of property absent physical damage.[iv]

These decisions comport with longstanding California law on business interruption insurance that “the purpose and nature” of the “insurance is … ‘to indemnify the insured for any loss sustained by the insured because of his inability to continue to use specified premises …”[v]  The COVID-19 pandemic has, in many cases, rendered businesses completely unable to continue using their property.  In such cases, BI coverage could be available.

Pollution Exclusions

Even if direct physical loss is demonstrated, insurers could rely on broad “pollution” or “contamination” exclusions to avoid coverage for losses from infectious incidents.  These pollution exclusions are often coupled with mold and bacterial exclusions, which insurers began adding to policies after new environmental laws increased potential liability for pollution and insurers saw an ever-increasing number of mold claims.

In later years, these exclusions have been expanded and invoked to include a broad array of “pollutants” defined as “any solid, liquid, gaseous, or thermal irritant or contaminant.”  The courts, however, are unlikely to uphold denials of COVID-19 coverage based on broadly worded pollution exclusions.  In California, these exclusions have been interpreted narrowly against insurers and limited only to the “common connotative meaning of irritants and contaminants commonly thought of as pollution and not every possible irritant or contaminant imaginable.”[vi]  California courts are unlikely to apply this pollutant or contaminant exclusion to a viral pandemic.[vii]

Communicable Disease or Virus Exclusions

Business Interruption coverage may also be affected by specific policy exclusions that contemplate viral contamination and/or pandemics.  In fact, many recent policies exclude specific viruses and bacteria in the wake of the outbreaks of SARS, H1N1, and Ebola.  If a policy contained, for example, a specific SARS exclusion, the insurer is likely to argue that the COVID-19 pandemic qualifies as SARS because the COVID-19 virus is actually “SARS-CoV-2” and is thus exclude by the policy.  Whether COVID-19 is affected by an infectious disease exclusion will thus depend on the specific policy language.

Other disease exclusions are worded more broadly, for example excluding coverage for loss or damage “arising in whole or in part, directly or indirectly out of, or which is in any way related to any communicable disease.”[viii]  Businesses would be well-advised to determine whether their policies contain exclusions for viral outbreaks or communicable diseases.[ix]

Insureds could argue that the business income suffered was due to societal shutdowns rather than the actual spread of COVID-19 and thus are not included in any specific virus or communicable disease exclusions.  Again, the policy language is important.  In fact, some policies actually provide coverage for communicable diseases, as opposed to exclude coverage for them.

“Civil Authority” Coverage

Many Business Interruption policies include “civil authority” coverage for losses incurred if access to the insured business property is restricted or closed by government order or by other “civil authority.”  In California, for example, the Governor, as well as pubic health departments of many counties, have shut down all non-essential service businesses by executive order.

For example, courts have denied coverage under civil authority provisions where no “physical loss or damage” to insured property could be shown and the “civil authority order had only the indirect effect of restricting or hampering access to the business premises.”[x]

On the other hand, courts have awarded civil authority coverage even if there is no physical damage or loss to the insured property, depending on the language of the policy.  Courts have awarded coverage for business interruptions due to prohibited access stemming from civil authority orders in some cases.[xi]

Certainly, businesses that have been forced to shutter due to government orders can claim civil authority business interruption coverage.

“Ingress and Egress” BI Coverage Riders

Like “civil authority” extensions, some policies also include coverage for interruptions resulting from restricted ingress or egress to/from the business property (e.g., if citizens are prohibited from accessing malls, sidewalks or roads leading to commercial property). Ingress/egress coverage, like BI coverage in general, usually requires physical loss or damage to property of the type covered by the policy.

However, the loss or damage does not necessarily need to be at the insured’s location in order to claim ingress/egress coverage.  For example, if access is restricted due to COVID-19 contamination in adjacent businesses or access points, then an insured may have a plausible claim for ingress/egress coverage depending on the policy language.[xii]

Commercial General Liability Insurance

By now, most consumers have likely received emails from retailers, restaurants, or other service providers detailing the various steps that have been taken including reduced hours and changes in operations to address safety in public accommodations.  The scope of the pandemic may lead to claims by consumers against businesses claiming that they were infected or unreasonably exposed to the virus while on the business property.  Businesses are sure to face claims such as alleged failure to keep the business property free from contamination, failure to adopt adequate precautionary measures against the spread of the virus, or failure to warn after an employee was infected, for example.  These claims could include damages for actual bodily harm as well as emotional distress damages resulting from the fear of exposure.

Most commercial general liability (“CGL”) policies provide coverage for “bodily injury” and “property damage” resulting from the unintentional acts of the insured business.  Accordingly, CGL policies will likely prove invaluable for businesses faced with third party liability claims as they will usually provide a legal defense for such claims and indemnify the policyholder from any settlement or judgments.


Best practices dictate that businesses: (1) review their insurance policies; (2) promptly provide notice to insurers of any claims; (3) track their losses and mitigation efforts; and (4) engage and work with coverage counsel.

[i] Pac. Coast Eng’g Co. v. St. Paul Fire & Marine Ins. Co., 9 Cal. App. 3d 270, 275 (1970); see also Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App. 4th 434, 443 (2002).

[ii] MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779 (2010) (declining to extend coverage to MRI machine that was rendered inoperable due to unrelated building repairs because the machine itself did not suffer any direct physical damage)

[iii] Total Intermodal Servs. Inc. v. Travelers Prop. Cas. Co. of Am., No. CV 17-04908 AB (KSX), at *3 (C.D. Cal. July 11, 2018).

[iv] See, e.g., Datatab, Inc. v. St. Paul Fire and Marine Ins. Co., 347 F.Supp. 36 (S.D.N.Y.1972) (BI coverage could reasonably be construed to cover losses arising from damage to portions of a building other than insured’s floors, and which impeded the actual use of, not merely physical access to, covered property).

[v] Buxbaum v. Aetna Life & Cas. Co., 103 Cal. App. 4th 434, 445 (2002) (emphasis in original).

[vi] MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 639 (2003).

[vii] See, e.g., Johnson v. Clarendon Nat. Ins. Co., No. G039659, 2009 WL 252619, at *13 (Cal. Ct. App. Feb. 4, 2009) (unpublished) (broad pollution exclusions seeking to “bar coverage for every biological material ‘introduced any time, anywhere or any way’ would lead to absurd results. … Does a policyholder pollute the environment by sneezing and passing a virus to their neighbor? A layperson would not reasonably interpret the exclusionary language to apply to the above scenario”).

[viii] Chale v. Allstate Life Ins. Co., 353 F.3d 742, 749 (9th Cir. 2003).

[ix] See, e.g., Khatchatrian v. Cont’l Cas. Co., 198 F. Supp. 2d 1157, 1163 (C.D. Cal. 2002) (chronic high blood pressure, hypertension and renal cancer fell squarely within disease exclusion so as to deny accident coverage); Ingle v. Metro. Life Ins. Co., 947 F. Supp. 2d 1163, 1170 (N.D. Okla. 2013) (denying accident coverage on disease exclusion grounds where insured died due to hemorrhagic colitis caused by E. coli infection); Fe-Ma Enterprises v. James River Ins. Co., No. CV M-08-373, 2009 WL 10693571, at *3 (S.D. Tex. Nov. 30, 2009) (typhus is a communicable disease for disease exclusion coverage purposes).

[x] S. Hosp., Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1140–41 (10th Cir. 2004) (denying civil authority coverage to hotel chain who claimed business interruption due to FAA’s flight closures after 9/11 because the hotels remained open and accessible); see also, e.g., Source Food Tech., Inc. v. U.S. Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (no “direct physical loss to property” within meaning of “action by civil authority” coverage provisions where Department of Agriculture embargoed Canadian beef over fears of “mad cow” disease and rendered insured wholesaler’s beef unshippable to the United States; beef product in question was not psychically contaminated or damaged); Syufy Enterprises v. Home Ins. Co. of Indiana, No. 94-0756 FMS, 1995 WL 129229, at *2-3 (N.D. Cal. Mar. 21, 1995) (unpublished) (no coverage where theater access was never specifically foreclosed by civil authority order imposing dawn-to-dusk curfews in response to rioting following Rodney King verdict); United Airlines, Inc. v. Ins. Co. of State of Pa., 385 F. Supp. 2d 343, 353 (S.D.N.Y. 2005) (denying civil authority coverage where government aviation shutdown in the wake of 9/11 was not due to any property damage suffered by United Airlines); Roundabout Theatre Co. v. Cont’l Cas. Co., 751 N.Y.S.2d 4, 4–5 (2002) (denying civil authority business interruption coverage where there was no underlying “physical loss or damage” to the insured’s property); St. Paul Mercury Ins. Co. v. Magnolia Lady, Inc., 1999 WL 33537191, at *3 (N.D.Miss. Nov.4, 1999) (unpublished) (no coverage when state authorities hampered access to claimant’s casino-hotel by closing damaged bridge, because “casino-hotel was accessible during the period of time the bridge was under repair”).

[xi] See, e.g.,  Zurich Am. Ins. Co. v. ABM Indus., Inc., 397 F.3d 158, 171 (2d Cir. 2005) (noting potential civil authority coverage where service provider was prevented from servicing buildings in downtown Manhattan after 9/11 because the area was shut down by government order); Altru Health Sys. v. Am. Prot. Ins. Co., 238 F.3d 961, 963 (8th Cir. 2001) (noting potential civil authority coverage where hospital was closed by city order due to flooding to adjacent properties, but denying coverage due to policy’s specific “flood” exclusion); S. Hosp., Inc. v. Zurich Am. Ins. Co., 393 F.3d 1137, 1141 (10th Cir. 2004) (“courts have found that” where access was prohibited by “the order of a civil authority” which “required the insured’s premises to close … coverage for business losses” could be invoked) (compiling cases); Southlanes Bowl, Inc. v. Lumbermen’s Mut. Ins. Co., 46 Mich. App. 758, 208 N.W.2d 569, 570 (1973) (awarding civil authority coverage where governor mandated closure of all places of amusement, including plaintiff’s bowling alleys, restaurants, taverns and motels, due to rioting after assassination of Dr. Martin Luther King, Jr. though none of the insured properties suffered damage); Sloan v. Phoenix of Hartford, Inc. Co., 46 Mich. App. 46, (Mich.App.1973).

[xii] See, e.g., Fountain Powerboat Indust. v. Reliance Ins. Co., 119 F.Supp.2d 552 (E.D.N.C. 2000) (holding that losses sustained due to lack of access to insured property were covered under the policy’s “ingress/egress clause” which provided coverage for “loss[es] sustained during the period of time when … ingress to or egress from real and personal property … is thereby prevented.”)