Most commercial property insurance policies include insuring agreements that require direct physical loss or damage to covered property as the triggering event. Without establishing direct physical loss or damage, a policyholder traditionally cannot meet its burden to trigger coverage for the economic loss of business income as a result of closing its doors. Today, with the spread of COVID-19 and the ensuing shelter-in-place orders, government restrictions on “non-essential” businesses, and efforts at social distancing, insurance companies are facing a demand for coverage of these losses, regardless of the commonly-understood interpretation of the physical damage requirement. And, as each day passes, more state legislatures are taking drastic measures by introducing bills aimed at forcing insurance companies to provide coverage for COVID-19 business losses, despite the absence of physical damage to trigger coverage.
The most common and recent examples of the struggle for coverage in the absence of physical damage are in the context of post-9/11 business closures and government-ordered hurricane evacuations. Specifically, civil authorities coverage – which provides coverage for losses sustained as a result of closures ordered by civil authorities – was closely examined as a result of a proliferation of claims made after 9/11 and a rash of hurricanes in 2004. Numerous airlines filed suit against their insurers, arguing that the FAA’s ground stop in the immediate aftermath of the 9/11 attacks was the result of damage to the World Trade Center towers and the Pentagon. But the courts disagreed, finding instead that the ground stops were designed to prevent future terrorist attacks, not as a result of property damage. Consequently, the civil authorities provision was not triggered. See, e.g., United Airlines, Inc. v. Ins. Co. of the State of Penn., 439 F.3d 128 (2d Cir. 2006); City of Chicago v. Factory Mut. Ins. Co., 2004 WL 549447 (N.D. Ill. Mar. 18, 2004); U.S. Airways v. Commonwealth Ins. Co., 2004 WL 1637139 (Vir. Cir. Ct. 2007).
Courts around the country have also analyzed this issue in relation to evacuation orders in advance of hurricanes making landfall. For example, a mandatory evacuation of New Orleans was ordered before Hurricane Gustav made landfall, resulting in the closure of an insured’s restaurants. Dickie Brennan & Co., Inc. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011) (applying La. law). The insured argued that the “property damage” requirement was satisfied because of damage in the Caribbean, but the court rejected this contention, noting that the order did not reference earlier property damage as the reason for its issuance. Accordingly, the court held that coverage was not triggered in the absence of physical injury to property.
Policyholders have already begun to argue that COVID-19 is different from the 9/11 and hurricane cases because the virus can invade premise and make them unsafe. The argument has some facial appeal, but insureds have two major problems in making – and succeeding on – a claim that mandated closures were caused by COVID-19. The first, as previously discussed, is the absence of property damage. In Texas, the Supreme Court has concluded that the best reading of standard-form policies is that “physical injury requires tangible, manifest harm…” U.S. Metals, Inc. v. Liberty Mut. Group, Inc., 490 S.W.3d 20 (Tex. 2015).
The problem with applying U.S. Metals to COVID-19 contamination is that the court was not dealing with something as ethereal as a virus in that case. While the specific language used by the court seems to require some change in the tangible form of the property – which would not be the case with COVID-19 contamination – the court did so only to distinguish “physical injury” from the “incorporation theory” of injury followed by some courts. The general theory applied by the court, that some change in form is required, could be argued to encompass a change in “condition,” even though that is not specifically mentioned in the opinion.
But even if it is “physical loss,” what is the claim? Most business closures were not caused by contamination by a person infected with COVID-19. The true reason for the shutdowns is to enforce social distancing, which has nothing to do with whether a building actually suffered physical loss. And, even if a shutdown was caused by such exposure, the remedy is to disinfect the premises. Thus, the period of restoration should merely be the time it takes to disinfect or, at the most, the time it takes the virus to die.
Things are changing rapidly in this new environment, however, and several states have introduced bills in an attempt to create coverage for business losses where it historically did not exist. For example, bills have been introduced in Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina. While the legislation differs in certain respects, the stated goal is to provide coverage for business losses even when no physical damage to property has occurred. Then, on April 13, 2020, the Pennsylvania Supreme Court issued an opinion in which it opined that business losses during this pandemic are indistinguishable from those caused by earthquakes, fires, and other casualty events for which property insurance has always been intended to provide coverage. And in Texas, the most recently issued shelter-in-place order goes so far as to include the following as reasons for the increased restrictions: “because of the propensity of the virus to spread person to person and also because the virus is physically causing property damage due to its proclivity to attach to surfaces for prolonged periods of time.” Whether these proposed bills and court opinion will change the landscape of property insurance coverage is yet to be seen.