Business Interruption Insurance and COVID-19
By: Stephen B. Smith
Given the financial dislocation caused by the national shutdown in response to the Covid-19 epidemic, it is no surprise that insurance companies immediately received calls to step in and help soften the impact of losses resulting from the pandemic. However, most of these claims are routinely denied. See “These North Texas Businesses Bought Insurance Coverage Only to Learn that Coronavirus Claims Weren’t Covered,” Kevin Krause, Dallas Morning News (May 10, 2020). The primary vehicle is the “Business Interruption” coverage, which is a “loss of use” coverage found in most commercial property polices, and the primary bar to business interruption claims is that any such coverage must be the result of physical loss or damage.
Attorneys for insureds have filed a number of cases attempting to get around this hurdle by claiming that, because of the virus, they were physically unable to access their properties, resulting in a total business shutdown. Additionally, they have cited to medical information and argued that the coronavirus attaches itself to personal property.
While the Covid-19 pandemic is unique, a line of cases has addressed the issue of property contamination, including asbestos and other disease processes. Courts generally have interpreted direct physical loss as the actual destruction of property, affecting its structural integrity or its function; but, some courts have developed a more expanded definition, which includes a finding of property damage in the event of an actual, demonstrable contamination so pervasive that it renders the property uninhabitable and unusable.
Expanded Definitions of Property Damage
For example, in Mama Jo’s, Inc. v. Sparta Insurance Co., No. 17-cv-23362-KMM, 2018 WL 3412974 (S.D. Fla., Jun. 11, 2018), the court concluded there was no “direct physical loss” after a restaurant underwent extensive cleaning to remove dust, debris, and “possibly noxious and toxic chemicals” from its floors, walls, tables, chairs, and countertops because of a nearby construction project. The court noted that “direct physical loss” meant “an actual change in insured property” so it is “unsatisfactory for future use or requiring that repairs be made to make it so.” There was no “direct physical loss,” as cleaning is not considered direct physical loss. Id. at *9; see also Universal Image Prods., Inc. v. Fed. Ins. Co., 475 Fed. App’x 569, 573 (6th Cir. 2012) (“[Plaintiff] seeks coverage for cleaning and moving expenses ... as well as lost business income. These are not tangible, physical losses, but economic losses.”).
A direct physical loss “contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property, causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.” MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779 (2010); see also AFLAC Inc. v. Chubb & Sons, Inc., 260 Ga. App. 306, 308 (2003). The court quoted from Couch on Insurance:
The requirement that loss be “physical,” given the ordinary definition of that term, is widely held to exclude alleged losses that are intangible or incorporeal and, thereby, to preclude any claim against the property insurer when the insured merely suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property.
See 10A Couch on Ins. § 148.46 (3d Ed. West 1998).
However, the Mama Jo’s court also concluded there was no “direct physical loss” under even “a more expansive definition” of the term that would include circumstances where the insured property becomes “uninhabitable” or “substantially unusable.” Mama Jo’s, 2018 WL 3412974 at *9. The court pointed to Port Authority v. Affiliated FM Insurance Co., 311 F.3d 226, 236 (3d Cir. 2002), an asbestos case where the Third Circuit had opined that “direct physical loss” also could occur when a premises was rendered “uninhabitable” or “unusable.” Port Authority reviewed a number of asbestos cases to determine whether asbestos contamination could trigger property damage coverage.
While the Port Authority court determined it was possible for contamination to trigger coverage in the right situation, in Port Authority, the appellate court held the damage in that claim was not severe enough:
“[The District] court reasoned that “physical loss or damage” could be found only if an imminent threat of asbestos release existed, or actual release of asbestos resulted in contamination of the property so as to nearly eliminate or destroy its function, or render it uninhabitable. The mere presence of asbestos, on the other hand, was not enough to trigger coverage.
Even under the expanded interpretation of “direct physical loss,” the Mama Jo’s court also still declined to find coverage, stating, “[t]he fact that the restaurant needed to be cleaned more frequently does not mean Plaintiff suffered a direct physical loss or damage and thus, summary judgment is appropriate.” Mama Jo’s, 2018 WL 3412974 at *9.
In Mastellone v. Lightning Rod Mutual Insurance Co., 884 N.E.2d 1130 (Ohio Ct. App. 2008), the court declined to interpret mold staining on the exterior of the house as “physical loss.” The court “construe[d] the term ‘physical injury’ to mean a harm to the property that adversely affects the structural integrity of the house.” Id. at 1143. It opined that mold staining on the exterior of the house “did not rise to the level of ‘physical injury’ to the siding, because it was only temporary and did not affect the structure of the wood.” Id. at 1144. The court also cited an expert witness, who opined that the wood would not be “structurally altered such that it would need to be replaced.” Like mold, the presence of the novel coronavirus is temporary and will not affect the physical structure of a building.
In Columbiaknit, Inc. v. Affiliated FM Insurance Co., No. 98-434, 1999 WL 619100 (D. Or. Aug. 4, 1999), a clothing manufacturer developed a mildew infestation after prolonged exposure to high humidity created mildew on its garments. Although the court denied partial summary judgment to the insurer on whether mildew exposure was “direct physical loss,” the court’s language strongly suggests that microscopic contamination would not be “direct physical loss.” The court stated:
The recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable. . . . The mere adherence of molecules to porous surfaces, without more, does not equate physical loss or damage.
Id. at *7.
Echoing Columbiaknit, other courts have held that “direct physical loss” requires material structural damage. For instance, in Universal Image Productions v. Federal Insurance Co., 475 Fed. Appx. 569 (6th Cir. 2012), the court decided that bacterial and mold contamination was not “direct physical loss.” Heavy rainstorms had caused a bacterial and mold infestation in the ventilation system of a leased office building. Experts found no “notable airborne contamination” and that an evacuation was not necessary; but, they still recommended the insured move its operations from the first floor. The insured eventually vacated the entire building for two months.
In Universal Image, the court held no coverage under both interpretations of “direct physical loss” examined in Mama Jo’s. First, it concluded there was no “direct physical loss” because “not a single piece” of the insured’s property “was lost or damaged as a result of mold or bacterial contamination.” Id. at 573. The court commented that the insured wanted coverage for “cleaning and moving expenses,” which were not “tangible, physical losses.” Id. Second, the contamination did not render the building “uninhabitable” or “substantially unusable.” The court stated:
Certainly, there is evidence in the record indicating that working in the Evergreen building during remediation was difficult. Through no fault of its own, Universal was forced to work in a hot and crowded space. However, Universal has not put forth any evidence indicating that such temporary conditions rendered the building “uninhabitable” or substantially “unusable.”
Id. at 574-75.
In Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010), an employee had been infected with bacterial pneumonia after a heavy rainfall created mold, there were “high levels of bacteria” on the premises, and an independent air quality expert recommended that employees wear respirators. Even then, the court held the mold contamination did not constitute “direct physical loss.” The insured “has not shown that it suffered any structural or any other tangible damage to the insured property.” Id. at 710.
Coverage for Property Damage
While the cases agreeing it is theoretically possible for contamination to constitute “property damage” have mostly failed to hold that a direct physical loss exists, some courts have done so. For example, in Cooper v. Travelers Indemnity Co. of Illinois, No. 01-2400, 2002 131 Fed. Appx. 198 (N.D. Cal. Nov. 4, 2002), and Motorists Mutual Insurance Co. v. Hardinger, 131 Fed. Appx. 823 (3d Cir. 2005), courts evaluated whether E. coli contamination constituted “direct physical loss” in analyzing the loss of use provision in homeowner’s policies, denominated as “Additional Living Expense” coverage.
In Cooper, the court held that E. coli contamination found in a well was “direct physical loss.” In Motorists, the court reversed summary judgment for the insurer over whether similar E. coli contamination in a well was “direct physical loss.”
The Cooper court commented that the E. coli contamination was extensive and difficult to remove, and it noted that the policyholder made “repeated, but ultimately unsuccessful, efforts to disinfect the well.” The affected facility, a bar, was closed for six months. In Motorists, the court did not actually hold that E. coli contamination was “direct physical loss,” but, instead, reversed summary judgment for the insurer, concluding a fact issue existed as to whether the contamination was extensive enough to warrant coverage. In contrast to these cases, the novel coronavirus can be eliminated from surfaces with common, inexpensive cleaners, such as washing hands with soap and water or wiping a non-porous surface down with bleach or another disinfectant.
While in the past courts have been unwilling to hold that certain types of contamination was extensive enough to constitute “direct physical loss” to property, it seems likely in the current environment that coronavirus contamination will be considered extensive enough, given the seriousness of the Covid-19 pandemic. The coronavirus will present different questions, including what constitutes sufficient presence of the virus to constitute contamination. Also, it is not yet clear how other portions of the policy, including provisions relating to governmental action and excluding coverage for microbes or diseases, will interplay. And, ultimately, results in each case will depend on the laws of the particular state, as well as the precise language of the policy at issue.
 “WHEREAS, this Emergency Order is necessary 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.” Dallas County Amended Emergency Order, April 26, 2020, P.28; see also Plaintiff’s Original Petition, Lombardy’s Inc., et al v. Indemnity Insurance Company of North America, No. DC-20-0571, filed in the 14th District Court of Dallas County, Texas, on April 16, 2020.