Many businesses without virus exclusions in their BI policy are still not receiving payment for losses brought on by the pandemic.
It was a seemingly normal day in March that produced the impact we are still feeling today. When the COVID-19 outbreak became classified as a global pandemic on March 11, 2020, sectors and people across the globe had to quickly shift the way they went about their daily lives.
Schools turned to virtual learning, hospital occupancy swelled, and of course, businesses that relied on social gatherings and in-person interaction shut their doors.
These businesses lost months of revenue and, in the grimmest of cases, had to permanently close.
What could perhaps be a contributing factor to the multiple “Out of Business” signs is the fact that many insurers didn’t pay claims when their insureds assumed their business interruption policy would kick in.
This longstanding and ongoing battle between businesses and insurers stems from one core argument: Businesses expected their insurers to provide coverage under their business interruption policies, while insurance carriers claimed that because the pandemic did not inflict physical damage on those businesses, the policy didn’t cover it.
In several cases, those businesses that had virus or bacteria exclusions in their policies weren’t deemed eligible for compensation at all.
As this disagreement ground on, many businesses took their insurers to court. Now, it’s been over two years since that day in March, and much of this litigation still remains ongoing. It’s likely the issue will keep attorneys busy for quite some time.
The History of Virus Coverage for Businesses
Though the connection of virus impacts to business interruption coverage has only received widespread attention since the pandemic began, its exclusion in coverage for businesses has an extensive history.
According to Marshall Gilinsky, shareholder at Anderson Kill, the National Association of Insurance Commissioners conducted a data call at the onset of the pandemic and asked insurance companies whether they included an exclusion for a virus or communicable disease event or not.
The association reported that 83% of commercial property insurance policies sold in the United States contained a virus exclusion.
A common virus exclusion that is used for these policies was originally developed following the 2004 SARS virus outbreak in Asia, per Gilinsky.
Gilinsky also said that this debate was not born from the COVID-19 pandemic.
“For 60 years prior to the pandemic, there had been litigation over the question of whether something that impacts businesses that doesn’t structurally break anything, but nevertheless renders the business unusable, constitutes physical loss or damage,” he said.
“That history tells me that the [business interruption] policies do cover physical loss or damage covered by a virus, and the insurance industry’s response to the prospect of providing that coverage was to add an exclusion for virus to their policies, which insurance companies did 83% of the time.”
The State of the Suits
So, where does the COVID litigation between businesses and insurers stand?
While it appears that many of these cases are at a standstill, Gilinsky said that some suits currently “are at a critical juncture.”
He said, “[Some of these] issues are being presented to the state high courts, and the decisions in those cases will determine the law in those states for other policyholders with similar claims and policy terms.”
With that being said, Gilinsky noted that not many insurers are leaning towards settling these claims with their insureds.
For many businesses that have a virus or bacteria exclusion within their policies, their cases are not progressing within the legal system.
“Our position has been that there has been no physical damage to the insured’s property to trigger business interruption coverage as a result of the governmental shutdown nor evidence of the presence of the COVID-19 virus on the insured’s premises,” said Bernard Stadelman, assistance vice president, property and inland marine, AmTrust.
“Where the policy does not include the virus or bacteria exclusion, insureds have argued that physical changes to their premises as required by governmental orders has resulted in physical loss or damage which triggers coverage.”
He referred back to policy language itself, which says that in order for coverage to be triggered, “there must be ‘direct physical loss of or damage to property at premises.’”
Ultimately, Stadelman concluded that more discussion and debate surrounding virus exclusion or coverage “cannot be construed to include a pandemic such as the COVID-19 pandemic.”
However, Gilinsky believes that businesses that purchased policies without a virus exclusion should receive coverage for losses that result from a pandemic because courts largely interpreted “physical loss or damage” to cover such situations for 60 years and insurance companies never changed their policies to require “ structural alteration” — only to sometimes exclude losses caused by virus or bacteria.
These two varying perspectives are just the tip of the iceberg surrounding COVID-induced business interruption and display why this litigation is still active two years on.
The Impact on Policy Language and Future Tensions
While it appears that many of these cases will not come down in favor of scorned businesses, it’s imperative to look forward and, from a business standpoint, ensure that a similar debate does not occur again.
The COVID-19 pandemic has certainly forced many to think about future pandemics and this argument about business interruption coverage is no exception.
More importantly, the landscape around business interruption coverage will never be the same.
Businesses and their insurers are implementing what they’ve learned from the last two years to change the way business interruption coverage operates.
More than anything, COVID-19 emphasized and reiterated the true reach of business interruption coverage, and that all starts with a deep understanding of the policy language itself.
“The pandemic tested long established business interruption coverage policy language,” Stadelman said.
“The results have been consistent interpretation of the language across the industry from a claims, legal and underwriting standpoint.”
The standpoint? That for a business to trigger business interruption coverage, there must be direct physical loss or damage to the business property.
However, this could leave those businesses without a virus exclusion to wonder when coverage spurred by a virus will kick in.
Despite there still being unanswered questions about exactly what business interruption policies will cover, the pandemic provided insight as to their nature.
“I believe [the pandemic] is a good example of how remaining committed to identifying and driving out pockets of ambiguity in policy language helps everyone, most importantly the policyholder, by providing clarity at time of loss, and helps find potential coverage enhancements for which there may be a market,” Stadelman said. &