Are COVID-19 Business Losses Covered By Insurance?

by Toby R. Carpenter, Esq.

There is no question that the COVID-19 pandemic has adversely affected the American economy, and that businesses had little time to prepare and react. Many business owners have questions regarding whether their existing insurance policies provide coverage for losses associated with this crisis. The short answer? “Maybe.”

An insurance policy consists of forms that fall into four general categories:

1. Declarations identify the persons and/or property that is insured;
2. Coverages state what the policy covers;
3. Conditions state the duties of the insured persons; and
4. Exclusions state the circumstances under which coverage is limited or does not exist.

So, to decide if the policy applies to a particular loss, we have to determine:     

1. whether the person and/or property is covered in the declarations;
2. whether the policy provides coverage for the loss;
3. whether the conditions have been met; and
4. whether an exclusion applies.

This requires examination of the facts of the loss, and a careful reading of the policy language.

Insurance policies are just contracts, and courts deciding how to interpret policy language will use the ordinary meaning of any disputed terms. However, insurance policies are also considered by most courts to be contracts of adhesion—a fancy term that essentially means the insurance company presents the contract to you as “take it or leave it.” In other words, you don’t get to negotiate the terms. Courts will interpret such contracts strictly, and any vague or ambiguous terms or provisions are construed against the insurer and in favor of the policyholder.            

The most common form of “business interruption” insurance coverage is provided by a commercial property insurance policy under a Business Income (And Extra Expense) Coverage Form. The typical policy language looks like this:

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. The loss or damage must be caused by or result from a Covered Cause of Loss.

Notice that there must be a “direct physical loss of or damage to property” to trigger coverage. Insurers are taking the position that COVID-19 losses do not result from direct physical loss to the property, as with a fire or flood.

That interpretation is reasonable, but it may not be the end of the discussion. Courts in different jurisdictions have reached different conclusions regarding what is a “direct physical loss,” and since insurance policies are construed according to the laws of the states where they are issued, a loss that is not considered direct and physical in one state may be direct and physical in another.

It does not appear that the Tennessee appellate courts have considered the specific question of direct physical loss or damage in the context of the Business Income coverage form, but they have required a direct loss to the insured property when construing similar policy language. In any event, to determine whether a claim is covered requires a close examination of the facts of the loss and the applicable law of the governing jurisdiction.            

Also, there are some types of specialized policies and policy endorsements that expressly provide coverage for losses caused by communicable disease regardless of whether there is direct physical loss or damage to the insured property. And some policies provide coverage for income losses that result from civil or governmental authorities restricting access to the insured premises, and these policies may or may not require that the restricted access be associated with direct physical loss or damage.            

Moreover, sometimes insurance companies are just plain sloppy or careless when they issue policies. The only part of an insurance policy that is specific to the insured persons and/or property is the declarations page(s). The remainder is simply a compilation of forms that are assembled to create an insurance contract that is, hopefully, consistent with the coverages that the insured has purchased. Mistakes happen, and sometimes key exclusions or endorsements are omitted, or forms are included that create ambiguities that are construed against the insurer.            

Finally, the highly unusual nature of the COVID-19 situation has prompted a few states to take action and require insurance carriers to cover business interruption claims. So far, Tennessee is not among them. But, in a recent news conference, President Trump expressed his approval of such actions, essentially stating that the insurance industry should bear some of the economic burden of this crisis. It remains to be seen whether this movement will gain momentum, but it certainly bears watching.            

In summary, while business interruptions caused by the COVID-19 pandemic and resulting economic shutdown are probably not covered by most insurance policies, there are exceptions. Determining whether your claim is one of those exceptions requires an examination of the facts of your particular loss, a careful reading of the policy, and knowledge of the applicable law. If you have questions about your insurance coverage, we will be happy to talk to you. Please give us a call at (865) 546-7311.

Other COVID-19 Coverage:

• CARES Act: Small Business Loans
• We've Got Your Six (Reasons for Paid Sick Leave Under the FFCRA) Covered.
• CARES Act Provides Early Access to Retirement Funds and Other Retirement Plan Relief
• DOL Provides Limited Guidance on New Families First Coronavirus Response Act
• A Summary of the Family First Coronavirus Response Act for Employers and Employees
• Leave Policy Review: Coronavirus (COVID-19)