By: Ryan M. Arnold
During the COVID-19 pandemic, and the resulting economic shutdowns and stay-at-home orders, businesses across the country are all wondering the same thing: can we survive this? In order to make it through these unprecedented times, many businesses are going to need an infusion of capital to make ends meet and tide them over until our economy reopens. Unfortunately, there aren’t many options. The SBA’s Paycheck Protection Program has already lent out more than $190 billion of the $310 billion Congress appropriated as part of its second wave of loans, after the initial $350 billion program was exhausted in a matter of days. Interest-free loans have been put into place by some states, but the amounts available are much smaller than their federal counterpart. Many businesses have found themselves turning to a third, private option: their insurance carriers and business interruption coverage. However, getting coverage under a business interruption policy is harder than it sounds, and many businesses are discovering that business interruption does not necessarily mean this business interruption.
Typical business interruption policies require an insured to show 1) an event occurred which was insured against; 2) that event caused physical damage to property; 3) that damage resulted in a partial or total interruption in business; and 4) the business suffered a loss of profits or earnings as a result. See Prudential LMI Commercial v. Colleton Enterprises, Inc., 976 F.2d 727 (4th Cir. 1992) (unpublished). The biggest obstacle to business interruption coverage due to COVID-19 happens to be the first two prongs of this test. Unsurprisingly, since this situation is unprecedented in modern times, there is very little law, in North Carolina or any other jurisdiction, on business interruption coverage and pandemics. There have been cases where courts in North Carolina or other jurisdictions have allowed business interruption coverage without physical damage to insured property, but the lion’s share of these cases turned on specific policy language. See Fountain Powerboat Indus., Inc. v. Reliance Ins. Co., 119 F. Supp. 2d 552, 557 (E.D.N.C. 2000) (holding that business interruption coverage applied when a hurricane prevented access to the business and a “ingress/egress clause” in the policy was triggered); see also Rembrandt Enterprises, Inc. v. Illinois Union Ins. Co., 269 F. Supp. 3d 905, 909 (D. Minn. 2017) (discussing business interruption coverage for a commercial poultry farm’s losses due to the H1N1 influenza under a premises pollution liability insurance policy). But see Harry's Cadillac-Pontiac-GMC Truck Co. v. Motors Ins. Corp., 126 N.C. App. 698, 702, 486 S.E.2d 249, 251 (1997) (holding that an inability to access the business due to a snowstorm, in the absence of physical damage to the business, is not sufficient to trigger business interruption coverage). Without specific policy language, a swift resolution to virus-related business interruption claims without litigation is not very likely, especially when we look at how the industry has been responding to these claims.
Unsurprisingly, many insurers have been denying business interruption claims on the grounds that either there was no property damage, or that the pandemic is not covered. Insurance contracts typically include an exclusion that viruses and other biological agents are not covered damages. The insurance industry wants the government - local, state, and federal - to be responsible for these claims. As a result of the insurance industry’s reluctance to pay these COVID-19 business interruption claims, a number of lawsuits have already been filed, including three class action suits against Chubb Insurance, a global insurer. Additionally, the federal Treasury Department has signaled some misgivings about proposed state and federal statutes which would compel payment of these claims, as it could “introduce stability risks to the [insurance] industry.” It seems doubtless that these suits will continue to be filed as more claims are made and denied.
When evaluating a potential business interruption claim, whether for a restaurant or any other type of business, it is important to first look to the language of your policy, and which state’s law governs. Understanding what the policy covers and excludes, by its plain language, will save a lot of time and money down the road. If your policy has the standard exclusion for viral or biological contamination, then expect a fight from your carrier. Even if your policy does not have this language, your carrier will very likely fall back on arguing that your property did not suffer any physical damage as a way to deny coverage.
At the end of it all, particularly if you have a policy governed by North Carolina law, a claim against your carrier for a denial of business interruption coverage due to the COVID-19 pandemic will very likely be an issue of first impression, both for your insurance carrier and for the courts. Given how carriers have treated these claims, it seems inevitable that a claim will have to be litigated in some fashion in order to get a coverage determination. There are a number of arguments that business interruption claimants will have available that COVID-19 related losses are covered under a typical business interruption policy. The attorneys at Rosenwood, Rose & Litwak have years of experience dealing with insurance carriers on complex issues such as this and are ready to assist with your business’ COVID-19 related claims.