Unprecedented business disruptions caused by the COVID-19 crisis have shuttered many non-essential businesses including retail stores, restaurants, office buildings, and other commercial premises. These are extraordinary times and the government has heightened protections relating to transmission of the virus during this pandemic by taking extraordinary measures. As the impact of the COVID-19 pandemic continues to evolve, businesses should carefully consider the issues that are likely to play a significant role in the short and long term which may be the subject of disputes and litigation to come. Early retention of counsel to assess these issues may help to reduce litigation risk.
The COVID-19 crisis has undermined stock markets, dropped bond markets to historically low yields, and threatens to undermine the world economy in ways not seen since the Great Depression. It is fair to foresee our society undergoing devastating economic dislocation both in the commercial sector and to consumers. As a result, some state and local governments have imposed emergency measures intended to separate people in an effort to mitigate transmission of the virus. Many businesses in the “non-essential” service sector have shifted from office based business operations to remote home based work environments. Though this creates a safer environment for our society to work through this crisis, it nevertheless will result in contractions throughout the economy generally. Thus, businesses may face threats to their very existence and in such times, this crisis may lead struggling businesses to make first party claims for business interruption under their existing policies.
Business interruption coverage is added to a commercial property policy when an ISO form endorsement, is annexed. That form states:
“We will pay for the actual loss of Business Income sustained during the necessary ‘suspension’ of your operations during the ‘period of restoration’.” The ‘suspension’ must be caused by a physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.”
Importantly, this language reveals that business interruption coverage is only available during the suspension of business caused by the “direct physical loss of or damage to” the insured property.
The existence of potentially devastating risks surrounding the COVID-19 crisis does not define the factual basis for claiming physical loss or damages to covered property unless there is proof of same. Thus, when confronted with Business Interruption claims, insurers will likely analyze the standard business interruption form based strictly upon what direct physical loss or damage to the insured property can be shown. It is expected that such claims will result in issuance of disclaimers and those disclaimers in turn may lead to declaratory judgment actions commenced by policyholders. Defensive declaratory judgment actions by insurers are not recommended.
In a social crisis as significant as the COVID-19 pandemic, insurers must be cautious to not simply disclaim coverage on a knee-jerk reaction. Rather, every claim presented to an insurer must be taken as a possible pathway to appellate decisions which will bind carriers now and in the future. Similarly, insureds presenting such claims must develop a sufficient factual basis to conform to the terms of the business interruption endorsement. Insureds must be scrupulous in their investigation and documentation of the factual basis for the claim and the financial consequence of necessary “suspension” of operations during the “period of restoration.” Regardless of the underlying facts, some trial Courts will likely view such insurance provisions in favor of affording insureds coverage under the reasonable expectations of an insured reading the policies. Such decisions will ultimately lead to New York Appellate Courts considering the strict construction of the policy wordings and those decisions will likely affect the analyses utilized in other jurisdictions.
The insurance industry is fighting attempts in a few states, in Congress and in courts to force insurers to pay for these business income losses that most policies were never intended to cover.
Ohio and Massachusetts have now joined New Jersey as states considering legislation to force carriers to cover losses for businesses closed or restricted because of social distancing and shutdowns to combat the coronavirus. The New Jersey proposal states that every insurance policy for loss or damage to property, which includes business interruption, in force from March 9 will be understood to include coverage for business interruption due to a global virus transmission or pandemic. “This bill is intended to hold harmless a certain portion of the business sector, who had the foresight to purchase business interruption insurance, for losses sustained as a result of the current health emergency, but for which no such coverage is currently offered,” according to the proposed legislation.
Under today’s extraordinary conditions, many insureds will make business interruption claims due to the COVID-19 crisis. Pillinger Miller Tarallo, LLP stands ready to analyze business interruption claims for our clients.
Pillinger Miller Tarallo, LLP sincerely hopes that you and yours remain well during the COVID-19 crisis.
Should you have any questions, please call our office at (914) 703-6300 or contact: