Will My Business Insurance Policy Cover Losses Resulting From a Mandatory Covid-19 Closure?

We have been receiving calls from business clients wondering if their insurance will provide any relief from the losses they have sustained. The conversations all start similarly. “The governor’s order closed my business down and although the expenses continue, there is no income and no end in sight. Will my business or property insurance cover any of these Covid-19 related losses?” The answer is a definite maybe.

In Maryland there are generally three types of commercial property policies: (1) Basic Form, (2) Broad Form and (3) Special Form. Basic coverage covers losses resulting from fire, lightning, wind, hail and explosion. Broad form covers everything in Basic plus coverage for other perils such as snow or ice damage and coverage for damage during a riot or civil commotion. Special form includes basic and broad coverages as well as direct physical losses not specifically excluded. Business interruption coverage can be a part of any of the above and will provide payment of expenses associated with running the business together with lost profits. Each policy must be examined to determine the nature of the losses covered, the relationship between the peril and the loss, the losses specifically excluded, and the proof required by the insurer to substantiate the amount claimed.

A business interruption policy provision may contain language such as:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations.

There are many judicial opinions interpreting the “direct physical loss of or damage to” provisions as a requirement that there actually be destruction of or physical damage to the insured property. However, there are also opinions wherein the court has found that conditions on the property such as mold, radiation or permanent foul odor constituted “physical damage”. Currently, property owners are filing claims with their insurers claiming that the presence of the Covid-19 virus on the property or in the community constitutes direct physical loss of or damage to the property. How those claims will ultimately be determined remains to be seen.

In addition to business interruption claims, business owners are also claiming coverage for corona-related losses under the “civil authority” (government mandated shut-down), “dependent property” or “extra expense” (damage by a covered cause to property of another business on which the insured depends to purchase the insured’s goods or services or to supply materials or services to the insured) provisions of their policies..

Insurance companies have already begun denying these claims and it will be up to the courts to decide whether there is coverage under a specific policy for pandemic related losses. Nonetheless, an insured who has sustained losses should submit the claim to their insurer with substantiation of continued business expenses and lost profits (based upon historical earnings). If the claim is denied, consult with your counsel who can review the specific language of your policy and the latest judicial precedent.

Finally, even if your claim is finally denied, all hope is not lost. The Federal government is considering additional legislation - The Pandemic Risk Insurance Act - which would void insurance policy exclusions if the loss is covered under the Act.