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Most insurers didn’t have a pandemic in mind when they wrote business interruption policies. In fact, some policies have exclusions for viral outbreaks.

With the pandemic-related closure last year of many businesses, owners have been wondering if their losses are covered under business interruption coverage in their policies.

The short answer, according to insurance experts, is no, but it’s a question that’s still being litigated.

“Businesses were forced to literally close their doors, so many of them may make claims against their insurance policy saying, ‘I’ve lost the use of my store, and therefore I’d like to be reimbursed for the loss of income the store would originally generate,’” said David McDivitt, executive vice president and COO of McDivitt Law Firm.

But a pandemic wasn’t what many insurers had in mind when they wrote business interruption coverage, McDivitt said. In fact, some policies have specific exclusions for viruses.

At least eight cases have been filed against insurers in Colorado, mostly by restaurant, casino and retail business owners, said Todd McRae, vice president and director of claims at Denver brokerage firm IMA Financial Group, but “there haven’t been any court decisions that we’re aware of yet.”

Heather McBroom, owner and commercial insurance agent at Precision Insurance Services, doesn’t expect that these claims will be awarded, since business interruption coverage is tied to physical damage to property.

But lawsuits and appeals are being filed across the country.

“This litigation is still in its infancy,” McDivitt said. “We are getting cases, but they’re tricky.”

VIRUS EXCLUSIONS

Business interruption insurance, also known as business income insurance, typically covers events like a fire or other incident that renders a business’ premises partially or entirely unusable.

According to The Hartford, business interruption insurance is bundled in business owners’ policies along with other types of coverages, such as commercial property insurance, general liability insurance and data breach insurance.

If a loss is covered, interruption insurance may pay expenses such as lost revenue; mortgage, rent or lease payments; loan payments; taxes; payroll; and relocation costs and rent if it’s necessary to move to another location temporarily.

The cost of business interruption insurance is determined by location, risk of a covered peril such as wildfire, industry, number of employees and amount of coverage.

Exclusions may include flood or earthquake damage, which require a separate policy, utilities and communicable diseases that cause a shutdown.

Specific virus exclusions are found in some policies.

“Not every policy has that,” he said, “but certainly in the policies that do have that, insurance companies have a stronger argument that they do not need to pay out anything.”

Claims being filed center on the concept that the virus might be present on a business’ physical surfaces, rendering it unusable; that an outbreak in an office forced closure; or that, even if the virus is not inside the building, government-mandated closures made the business inoperable, he said.

Even though businesses were unable to open their doors to the public, insurers are arguing that does not constitute physical damage.

“Early on, courts were favoring the insurance companies’ arguments,” McDivitt said. “That tide seems to be turning a bit.”

Many of the cases originally denied are being appealed, he said, using the argument that, although there was no physical damage, businesses’ losses were akin to a physical loss.

“There will be a long process that plays out in the court systems before a lot gets paid out,” McDivitt said. “And just because insurers may be winning in some of the lower courts doesn’t mean that they’re going to ultimately win the day.”

Much of the litigation has centered around larger entities, such as restaurant groups, because it is very expensive to pursue lawsuits against insurance companies, he said.

Many states’ insurance laws, including Colorado’s, provide that if there is ambiguity in an insurance contract, coverage is afforded to the insured.

“If we start seeing appellate decisions that overturn the lower district court decisions that were in favor of the insureds, and you see appellate courts affirm decisions that were in favor of the insurance industry, then that ambiguity starts to disappear, and the insurance company would have a much stronger claim that they’re just not going to be paying out on any of these. But this is being litigated right now.”

Depending on the outcomes of these cases, businesses might have to pay higher premiums for business interruption coverage, McDivitt said, and he thinks insurers might begin to offer virus coverage — at a premium cost.

COVERED PERILS

McBroom said she has spent a lot of time educating clients on insurance that relates to COVID-19, especially when the pandemic shutdowns first occurred.

“For the most part, my clients were really clear on the fact that there wasn’t going to be any coverage,” she said.

From the insurer’s point of view, there are two main reasons why insurers aren’t covering COVID shutdowns, she said

“First and foremost, it’s tied to the property coverage of your policy. For interruption coverage to respond, there has to be tangible damage to physical property. COVID didn’t ruin anybody’s property,” she said.

In addition, the property “has to be damaged due to a covered peril, and communicable diseases are an excluded peril. That goes back to SARS in 2003. When SARS came out, they had a bunch of claims they weren’t anticipating, and then they put those exclusions on the general liability side of the policy,” she said.

McBroom doesn’t think government-ordered shutdown is a covered peril, either, because it does not involve physical damage to property.

The COVID shutdowns differ from the kind of closure where a business is ordered by a government entity to leave its building because of a gas leak that shuts down an entire block. That could be a covered situation, she said.

McBroom said she thinks only two of about 100 lawsuits nationwide have been resolved in favor of an insured business.

“It was more because the wording in their policy wasn’t very clear — the carrier didn’t do a good job in explaining it in the policy so the judge decided to go ahead and give them the business income coverage,” she said. “But for 99 percent of those people, absolutely not.”

McBroom said she does not anticipate that insurance companies are going to start writing virus interruption coverage wholesale, “and if they did, the already expensive rates are going to go up.”

TIME LIMITATIONS

McRae said many clients reached out to his firm to ask about business interruption coverage when pandemic shutdowns were first imposed.

“Our recommendation to our clients was to file a claim if they sustained a loss due to COVID, because at that time, it was unknown how the insurance companies were going to respond,” McRae said. “And long term, it was unknown how the courts were going to respond. … It’s still unknown how the courts ultimately might look at this.”

While some companies are appealing the denials that have already taken place, “the courts were slowed down during the pandemic,” he said, “so it’s going to take some time to work its way through the system for the companies that think they have a strong case. We’re probably looking at years.”

The fact that only about eight companies have filed litigation in Colorado speaks to the challenges of these claims, he said.

“But again, a policy is a contract, and contracts are always open for interpretation,” he said.

McRae said a few of his clients are still considering business interruption claims for COVID closure.

“They’re looking at the statute of limitations for filing those claims,” he said. “The statutes can vary depending on the situation, but the general statute of limitations in Colorado is two years. Some of these companies are going to have to make final decisions by early next spring.”

Those companies will be considering how the recovery is going and whether it will be enough to save their businesses, he said.

“The other thing folks need to pay attention to is carrier relationships,” McRae said. “If they’re in a market that has limited access to insurance companies and they bring suit against their insurance company, it may make it more difficult for them to secure insurance down the road.”

In general, business interruption insurance coverage is important for businesses in case a major event causes them to lose revenue.

“There’s very few clients that don’t purchase business interruption,” he said. “It’s a matter of the amount of coverage that you can afford and how much premium you want to pay to get an appropriate level of coverage. It depends on their business.”

While it’s true that business interruption coverage requires direct physical loss or similar wording in a policy, “these policies generally do not include a definition of ‘direct physical loss’ and each state will look to its policy interpretation rules as well as case law relating to direct physical loss to determine its application,” said Laura Gregory, an attorney specializing in insurance law with Sloane and Walsh in Boston, quoted in an article in the spring 2021 issue of The Brief, a publication of the American Bar Association.

Gregory added a footnote to the business interruption controversy in an email to the Business Journal, saying that the pandemic could complicate business interruption claims for causes not related to COVID-19.

“Since 2020 was not a ‘normal’ year for most businesses, it will be hard to find a base line for future business income losses,” she said. “Some businesses were severely negatively impacted by COVID-19 and the related government shutdowns, while others’ business increased significantly over the same time period. This presents a challenge for determining a base line for calculating lost business income claims for future claims.”