As the coronavirus (COVID-19) outbreak continues to evolve, more businesses are feeling the impact. Earlier this week, Apple announced that it does not expect to meet its quarterly revenue forecast due to interruption of its Chinese manufacturing operations and decreased demand from Chinese consumers. In a previous post, we outlined how business interruption insurance coverage may help offset financial losses in a health emergency like the coronavirus outbreak.
Business interruption coverage is usually purchased as part of a commercial property policy. As we explained, business interruption coverage typically applies when a policyholder suffers “direct physical loss of or damage to” covered property, and insurers may dispute whether a disease outbreak like coronavirus constitutes “physical loss” or “damage.” Likewise, contingent business interruption coverage, which insures losses due to suspension of operations by a supplier, typically applies if the supplier suffers “physical loss” or “damage” that would be covered if sustained at the policyholder’s property. And civil or military authority coverage, which insures losses when a government order restricts access to insured property, usually applies if that order is the “direct result” of physical loss or damage of the same type insured by the policy.
However, we noted that some courts have held that covered “physical loss” encompasses incidents analogous to disease-caused disruption, such as environmental contamination, that render property unfit for its normal use. Thus, we concluded that companies concerned about coronavirus-related losses should review their property insurance policies carefully.
This post looks at specific policy language that may grant (or exclude) coverage for business interruption losses caused by the coronavirus outbreak. First, we discuss the significance of whether a company has named peril or “all risks” commercial property coverage. Second, we address an exclusion for “loss due to virus or bacteria” that is commonly included in commercial property policies. Finally, we examine a coverage extension that specifically insures losses resulting from communicable or infectious diseases like coronavirus.
Named Peril vs. “All Risks” Policies
There are two basic types of property insurance—named peril and “all risks.” Named peril policies cover property damage and business interruption losses caused by specific perils that are listed in the policy. Disease outbreaks are usually not specified as covered perils, so coronavirus-related business interruption losses are unlikely to be covered by traditional named peril policies.
“All risks” policies cover property damage and business interruption loss resulting from any fortuitous cause, unless it is specifically excluded in the policy. Thus, coronavirus-related business interruption losses may be covered if: (a) there is no applicable exclusion in the policy, and (b) an insurer or court decides that “physical loss” has occurred at covered property (or a supplier’s property, in the case of contingent business interruption coverage).
Exclusion of “Loss Due to Virus or Bacteria”
Many commercial property policies contain a standard-form endorsement that excludes “loss due to virus or bacteria.” This common exclusion says that the insurer “will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” Companies whose property policies contain this exclusion are unlikely to get coverage for coronavirus-related business interruption losses.
Coverage Extension for Communicable or Infectious Diseases
Some commercial property insurers offer a specific coverage extension that covers losses caused by communicable or infectious diseases like coronavirus. The extension is most often sold to companies in the hospitality and health care industries, but it is also available to companies in other industries.
This coverage extension is generally triggered when: (1) there is “actual not suspected presence of communicable disease” at insured property, and (2) access to that property “is limited, restricted or prohibited” by “an order of an authorized governmental agency” or “a decision of an Officer of the Insured.” There is usually a waiting period—e.g., 48 hours—before coverage kicks in, which operates like a deductible or self-insured retention.
When this coverage extension applies, three types of costs may be recoverable. First, the extension covers traditional business interruption losses—lost income or profits and “extra expense” incurred—due to the presence of disease at insured property. Second, the extension covers the “cleanup, removal and disposal” of the presence of disease. And third, the extension covers fees paid or costs incurred for “reputation management” necessitated by the presence of disease at insured property.
As with most coverage extensions, the amount of coverage available for losses due to communicable or infectious disease is typically subject to a “sublimit” that is lower (sometimes much lower) than the full limit of your property policy.