Over the last few months there has been significant discussion regarding business interruption insurance coverage and whether it will apply to businesses forced to shut down due to the COVID-19 outbreak. In April and continuing to present day, plaintiff’s attorneys are filing suit across America to seek recovery under policies that contain business interruption coverage.
A quick reminder what we are talking about. The Insurance Services Office (ISO) policy language is:
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….
The ultimate dispute is over whether or not there is “physical" loss or damage, without it, industry experts argue, there is no coverage. Business income coverage is written as part of a property package, it is not a stand-alone coverage. To have a business income loss, the insured must first have a covered property loss necessitating a suspension of operation.
Over the last few weeks, courts are beginning to return the first opinions in the initial lawsuits. Last week, a Michigan state court ruled that the owner of two central Michigan restaurants can’t recover revenue lost during the coronavirus lock down under a business interruption policy because the properties did not sustain a direct physical loss. The judge ruled that under the wording of the policy, the restaurants would have to suffer “direct physical loss or damage” as a result of the coronavirus for coverage to apply. Direct physical loss must be something “with material existence, something that is tangible, something … that alters the physical integrity of the property,” the judge said.
In another ruling in New York earlier last month the court held that a magazine publishing firm could not recover, again because there was no direct physical loss to the property.
These cases and others like them will now wind their way through the appeals process while small businesses and insurance industry officials watch and wait to see if the higher courts agree with the outcomes.
For the insurance industry it remains a significant concern. Because viruses are generally outside the scope of business interruption coverage due to the absence of any physical damage, the policies do not cover this exposure and, accordingly, premiums were never collected for it.