A Hurricane Named Coronavirus: Why Virus Exclusions May Not Defeat COVID-19 Business Interruption Claims
To put it mildly, many businesses continue to struggle with disruptions caused by the COVID-19 pandemic. Employees are prohibited from entering job sites and have taken federally authorized leave en masse, supply chains are disrupted, and state and local health authorities close all but “essential businesses.” Even for those businesses that nominally have remained open, many continue to operate at a fraction of their pre-pandemic levels. In response, companies have turned to their “all-risk” business interruption insurance policies. These policies typically provide insurance coverage for losses when business activities are disrupted because of unexpected events.
In response to these coverage inquiries, the insurance industry has preemptively broadcast to anyone who will listen that these policies contain “virus” exclusions sufficient to defeat COVID-related claims. The industry trumpets, “Nothing to see here, folks, move along!”
But is the coverage landscape really so simple?
This is not the first time the insurance industry cried “no coverage” in the wake of catastrophe. In the months and years following Hurricane Katrina, homeowners and businesses along the Gulf Coast turned to their insurers for funding to rebuild, and the insurance companies denied claims based on broadly written exclusions that, according to the insurance industry, barred recoveries in any way related to flood damage. In those policies, damage caused by wind and rain was typically covered, but damage caused by flooding was not. The resulting Katrina litigation informs the way insured businesses should now approach claims caused by COVID-19, a different but, in many ways, analogous disaster.
The Katrina Experience: A Flood Exclusion is Sometimes not a Flood Exclusion
The coverage litigation following Katrina resulted in a mix of outcomes – some favoring the insurer and some the insured. However, what became very clear was that superficial reliance on exclusion headings was not tenable. Each claim would require evaluation of the policy and the circumstances of the loss to determine if losses were excluded.
Policies that Exclude “Virus” May Not Provide Coverage for Global Pandemics
Insureds will have options to push back against their insurers’ representations that “virus” exclusions bar any claim remotely relating to the COVID-19 pandemic.
Some virus exclusions may simply be ambiguous. For instance, policies may speak in terms of “excluded events” but only reference exclusions for “virus or bacteria.” “Viruses” are, of course, not “events.” Courts may find poorly worded policies ambiguous and unenforceable as applied.
Similarly, some exclusions may be narrowly interpreted to only apply to harm immediately caused by infection –the coronavirus disease itself. Many, if not the large majority of, business disruptions are far removed from actual infection. While some losses suffered are caused by the coronavirus disease (for instance, ill workers not reporting to the job site) many more are caused not by the coronavirus itself but by political and cultural decisions to shut down the economy. If the exclusions could be reasonably read both narrowly and broadly, the court will generally apply only a narrow reading to the exclusion.
Many business interruption policies provide coverage for closures caused by civil authority with the understanding that, should a state, local, or federal body limit or impair the business, the insurer will reimburse the owner for losses. Where a policy includes both civil authority coverage and an exclusion that bars claims for “virus… capable of inducing physical distress, illness, or disease” courts may conclude that the causes are distinct and the exclusion does not apply.
What is an Impacted Business to do?
Evaluation of an exclusion cannot stop at the exclusion’s title. Above all, courts examine each policy and claim, on a case-by-case basis. Just as a “flood” exclusion won’t exclude losses for all damages with any relationship to water, a “virus” exclusion will not exclude losses for all loss with any relationship to a global pandemic. Insurance agents’ initial comments about “virus” exclusions should not dissuade policyholders. An insurer’s pre-analysis rejection of coverage should be independently evaluated and, in light of the Katrina experience, impacted policy holders should stake aggressive positions.
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