April 17, 2020 - Insurance Recovery Group News: Coronavirus and Business Interruption Insurance: What Does The Physical Loss Or Damage Requirement Mean?
By: Benjamin H. Nissim
Many businesses forced to reduce or pause their operations as a result of the Coronavirus pandemic have turned to their insurance carriers for the support their insurance policies promised. Unfortunately, all that these businesses have received in response is a resounding – and nearly uniform – rejection of their claims. The question then is, is pursuing a claim and the potential resulting fight with the insurer worthwhile? For some, the answer is yes.
Although there are many possible routes to insurance coverage for losses arising out of the Coronavirus pandemic, one of the major avenues for recovery will be under Business Interruption insurance. Typically found as part of a commercial property insurance policy, Business Interruption coverage generally provides for the recovery of lost income and related “extra expense” in connection with a “direct physical loss” or “physical damage” to insured property.
The meaning of “direct physical loss” or “physical damage” to insured property has already become a flashpoint in Coronavirus related claims. Carriers have made clear their view that these terms require actual physical harm – destruction, damage, etc. – to property.1 But this broad, self-serving proclamation is just that: a position, not the law. What this argument ignores is that many courts across the country have determined that “physical loss” includes odors, bacteria, airborne contaminants, and other such intrusions into a property – and that coverage is not limited to structural building damage or similar loss. Success on a claim for Coronavirus injuries will likely depend on the individual state law applicable to the claim.
The importance of individual state law to this inquiry is aptly illustrated by court decisions interpreting the “physical
The dispute in Yale centered on coverage for alleged property damage arising out of asbestos and lead paint in the University’s buildings. On summary judgment, the carrier sought to frame the property damage issue as involving the mere existence of asbestos and lead paint in the school’s buildings – a condition, it claimed, did not in and of itself constitute a physical loss or damage to property. In contrast, Yale and the Court framed the issue as whether Yale’s buildings were “contaminated” with friable asbestos and non-intact lead-based paint. In rejecting the carriers’ view, the Court emphasized the difference between the mere “presence” of a material as compared to “contamination” caused by material. The Court further found that the carrier “fail[ed] even to consider, let alone distinguish, the substantial body of case law in which a variety of contaminating conditions have been held to constitute physical loss of or damage to property.” To that end, after reviewing case law from a variety of jurisdictions, the Court concluded that “Yale has sustained its burden of demonstrating that it has suffered ‘physical loss of or damage to property’ as required under the all risk policies for the presence of asbestos or lead contamination in its buildings.”
While Yale is not necessarily on all-fours with coverage disputes arising out of the Coronavirus, it plainly supports an expansive interpretation of the “physical loss” or “physical damage” requirement found in many Business Interruption coverage provisions.
Given this precedent, Massachusetts policyholders should be able to use these cases in support of coverage under their Business Interruption policies.
Even with this more narrow interpretation of “direct physical loss” or “physical damage” in mind, the analysis of future claims must be made based on the unique language and factual situations involved. Accordingly, each insurance contract should be assessed individually within the context of the state’s laws to determine whether coverage is available.
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Insurance carriers have positioned the direct physical loss or physical damage requirement contained in many Business Interruption insurance provisions as a complete gatekeeper, precluding coverage for losses arising out of the Coronavirus pandemic. The truth is there is no such clear cut rule. Courts that have considered analogous situations across the country have come to different conclusions regarding the import of the physical loss or damage requirement. Policyholders and practitioners alike must give careful attention to these issues as they consider potential claims.
Ultimately an insurer’s coverage obligation to its policyholder is contingent upon the terms and conditions of the individual insurance contracts. If you have questions about whether your current insurance policies provide coverage for losses arising out of the Coronavirus, do not hesitate to contact us.
1 This purported requirement has also been echoed in some respects by regulators with, for instance, the Connecticut Insurance Department providing in its FAQ on Business Interruption insurance that “coverage typically can only be triggered if you have property loss that leads to the business interruption.” (See https://portal.ct.gov/CID/Coronavirus/Coronavirus-Business-Interruption-FAQs).
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