Insurance Alert: How Do I Get Business Interruption Covered: Does COVID-19 Constitute Direct Physical Damage or Loss?

Property policies generally require “direct physical loss or damage” to property owned, leased or rented by the insured in order to trigger business interruption coverage. Does a pandemic that has contaminated nearly every state, causing sweeping “stay-at-home” orders constitute “direct physical loss”?

Insurers’ Position     

No. Insurers have taken the position that property policies were never intended to cover pandemics. Instead, “direct physical loss or damage” requires that the insured suffer actual damage or alteration to an insured’s structure or building. There are some courts that agree with insurers that property must be physically altered. For example, some courts have found that odor and mold spores are intangible harms that do not alter the structural integrity of a building and cannot be direct physical loss. See, e.g., Universal Image Productions, Inc. v. Chubb Corp., 703 F.Supp.2d 705, 709, 710 (E.D.Mich.2010) (concluding that allegations of what the court deemed to be intangible harms, such as pervasive odor, mold and bacterial contamination, and water damage, did not constitute physical loss), aff'd sub nom. Universal Image Prod. v. Federal Ins. Co., 475 Fed.Appx. 569 (6th Cir.2012).

Insureds’ Position

Yes. Some courts have found that the presence of harmful substances such as odor, toxic gases, fumes, smoke, asbestos, and ammonia may render the property uninhabitable or unusable as to constitute direct physical loss. For example, one court held that “physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell [i.e., cat urine smell] and that exist in the absence of structural damage.” Mellin v. N. Sec. Ins. Co., Inc., 167 N.H. 544, 549, 115 A.3d 799, 804 (2015). And, policyholders often cite the case in which an ammonia spill “physically transformed the air” in the facility, rendering it “unfit for occupancy until the ammonia could be dissipated.” Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America, Civ. No. 2:12–cv–04418, 2014 WL 6675934, at *2 -*8 (D.N.J. Nov. 25, 2014). In the Gregory Packing case, the court held there was “physical loss” under both New Jersey and Georgia law. And, the presence of harmful material in the air can make a facility uninhabitable. In Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002), “the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner.”

These cases stand for the proposition that an insured may suffer “physical loss” from a contaminant or condition that, like COVID-19, causes changes to the property that cannot be seen or touched. COVID-19 is present in respiratory droplets in the air, and the National Institute of Health published an article stating that COVID-19 is physically on surfaces, and is “detectable in aerosols for up to three hours, up to four hours on copper, up to 24 hours on cardboard and up to two to three days on plastic and stainless steel”.   As a result, policyholders may also argue that COVID-19’s prevalence on surfaces constitutes “physical loss or damage” including, but not limited to, actual suspension operations.  See e.g., March 22, 2020 Stay at Home Order issued by the Ohio Department of Health.    

There is the question as to whether insureds will have to prove that the contamination was actually on their property, or in their buildings, or adjacent properties in order to trigger coverage. Many policyholders, relying upon government statements, will argue that the pandemic is so wide-spread that a policyholder need not prove actual contamination on its property. This argument is further bolstered by government statements and orders that limit or prohibit the number of people in your facility on the basis they assume that it is “everywhere” for the next 14 days.

One More Thought

Government statements, legislation, orders (See March 26 “Insurance Alert: Ohio Legislature Introduces Bill Regarding COVID-19 Business Interruption Losses”), and even scientist/medical field expert statements may substantiate the insured’s argument.   Some government orders actually state that closures are due to the contamination and subsequent property damage to the facilities/community or expressly state that the virus lives on surfaces for 17-28 days and re-contamination is likely. These statements bolster an insured’s claim that there is physical damage and loss to the property that cannot be easily “wiped away”.

The Truth

Coverage will likely depend upon your jurisdiction, your specific facts, and the ever-evolving statements and orders from the government and experts.

What is clear is that insurers will issue denial letters and numerous lawsuits will be filed.