The coronavirus pandemic and the resulting efforts to minimize the spread of
COVID-19 are wreaking havoc on all of us—individuals and businesses alike.
Businesses that have purchased coverage for business income loss as part of
their commercial property insurance may well be hoping that they will be able
to recover under their policies for income loss due to the coronavirus.
Unfortunately, while a few businesses with exceptionally broad nonstandard
policies may be able to do so, a standard commercial property policy probably
does not provide coverage. Here are the key issues.
- Insuring Agreement—Direct Physical Loss or Damage from Covered
Cause of Loss
Under a standard commercial property policy that includes coverage for
business income loss, coverage must be triggered by direct physical loss or
damage from a covered cause of loss. Most, if not all, insurers would take
the position that the presence of a virus, including the coronavirus, on or
at the insured's covered property does not constitute direct physical
loss or damage to the property. (Still less, they would surely say, does the
fear of the possibility of the presence of coronavirus constitute direct
physical loss or damage to property.) Therefore, the policy's business
income coverage would not be "triggered" to apply.
- Virus Exclusion
Most standard commercial property policies include the "exclusion of
loss due to virus or bacteria" endorsement (CP 01 40). This endorsement
expressly excludes "loss or damage caused by or resulting from any
virus, bacterium or other microorganism that induces or is capable of
inducing physical distress, illness or disease." It applies to
"coverage under all forms and endorsement that comprise this coverage
part or policy, including but not limited to forms or endorsements that cover
property damage to buildings or personal property and forms or endorsements
that cover business income, extra expense or action of civil authority."
Therefore, even if coverage was otherwise triggered under the insuring
agreement, this endorsement will most likely exclude any damages due to the
coronavirus.
Attachment of endorsement CP 01 40 is "mandatory" in a majority of
states, according to Insurance Services Office, Inc. (ISO), rules for
commercial property insurance policies. That means that insurers who elect to
adopt ISO policy writing rules for commercial property insurance policies are
instructed to attach this endorsement to all such policies covering property
in states where the endorsement is approved for use.
New ISO Coronavirus Endorsements
In February 2020, in response to the coronavirus outbreak, ISO offered two
endorsements for optional use by its insurance company customers. They have no
form number designations.
These endorsements are designed to be attached to a commercial property
policy that provides business income or extra expense coverage or both. Both of
them add limited business income or extra expense coverage for loss suffered if
the insured's business is ordered closed or the described premises are
placed under quarantine by a civil authority in an attempt to avoid or limit
the spread of infection by the virus. The second endorsement also adds limited
business income or extra expense coverage for loss suffered if a civil
authority orders the closure or restricted usage of a public bus, rail, or
ferry lines, or related stations or terminals serving the area where the
described premises are located in an attempt to avoid, or limit the spread of,
infection by a coronavirus.
The two ISO coronavirus endorsements grant coverage for business income loss
due to coronavirus without imposing any requirement of direct physical loss to
covered property. However, it seems unlikely that many insurers will be willing
to attach either of these endorsements to the commercial property policies that
they issue with a declared coronavirus pandemic and multiple civil authority
orders related to the pandemic currently in progress.
Conclusion
Since the stakes are so high, there is no doubt that arguments will be made
in favor of finding coverage for business income loss due to the coronavirus
under commercial property policies that provide business income coverage. In
fact, at least one lawsuit seeking coverage for business income loss due to the
coronavirus under a commercial property insurance policy has already been filed
(Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd's London, et
al., Civil District Court for the Parish of Orleans, Louisiana). Others
are likely to follow. These arguments have a better chance of success with
respect to coverage under those commercial property polices that do not contain
an explicit exclusion of loss due to a virus. But the requirement of direct
physical loss or damage is also a serious impediment to any finding of coverage
under a standard commercial property policy.