The novel coronavirus disease, or COVID-19, is spreading rapidly across the world, with disease clusters popping up across the country and throughout the state. Beyond its potentially fatal consequences, it has already disrupted travel and the world economy, caused national and California-specific states of emergency to be declared, shuttered businesses and cratered the stock market, closed schools, cancelled sporting events and public gatherings, generated “shelter in place” orders in increasing parts of the country, and taken a significant toll on public life—with more disruption likely to come. And although the disease has a very real, and very costly, human toll, many individuals and businesses across the country are asking “what comes next?” How will businesses, many operating on thin margins, with little room for error, survive the wholesale disruption of their businesses and consumer base? Enter the Santa Ana insurance bad faith lawyers and business interruption loss experts at Bentley & More LLP.
Has as the novel coronavirus (COVID-19) seriously hurt or shuttered your business? Have you been forced to close locations, reduce workstaff, or dramatically alter your working conditions to comply with government mandates? Or have you had to close due to a suspected or confirmed case of coronavirus and paid significant sums to disinfect, clean, and return your business to working order?
Depending on your commercial property insurance, you may be able to recover for “business interruption” losses due to the novel coronavirus. This will depend on the circumstances of each business, and the policy language in your comprehensive commercial insurance, but to assist Bentley & More LLP in evaluating your potential claim, you should gather and preserve at least the following:
- A copy of your commercial insurance policy.
- Any correspondence with your insurer about your loss.
- Any orders, emails, correspondence, or other information from a governmental authority that has impacted your business.
- P/L and operating expense statements for at least the last year
- Receipts, invoices, orders, etc. to show the extent of the slowdown or cancellation in your business
- Any cancelled contracts, business, or other missed arrangements due to the coronavirus
- Any other charges, fees, issues, or problems due to the novel coronavirus commonly called COVID-19
By gathering and saving these documents, and any others you may believe document your loss, it will permit Bentley & More to take a comprehensive look at your insurance situation and evaluate the potential for business interruption coverage. Don’t hesitate to reach out to the insurance bad faith and business interruption loss experts at Bentley & More LLP to help your business get back on its feet!
COVID-19 AND THE POTENTIAL PITFALLS OF BUSINESS INTERRUPTION INSURANCE
The novel coronavirus disease, or COVID-19, is spreading rapidly across the world, with disease clusters popping up across the country and throughout the state. Beyond its potentially fatal consequences, it has already disrupted travel and the world economy, caused national and California-specific states of emergency to be declared, shuttered businesses and cratered the stock market, closed schools, cancelled sporting events and public gatherings, generated “shelter in place” orders in increasing parts of the country, and taken a significant toll on public life—with more disruption likely to come. And although the disease has a very real, and very costly, human toll, many individuals and businesses across the country are asking “what comes next?” How will businesses, particularly small businesses, operating on thin margins, with little room for error, survive the wholesale disruption of their businesses and consumer base?
Enter, perhaps, business interruption insurance, which is commonly contained as a part of comprehensive commercial property insurance coverage. But these policies can be confusing, contain many potential “outs” for the insurance company, and depending on how they are written, may not provide for a full recovery to the business. This post will attempt to review the types of business interruption coverage, the potential pitfalls, and how insureds may be able to evaluate if they should make a claim with their insurer or seek an attorney to assist them with their claim.
First, business interruption coverage can generally be lumped into one of four types/sources of damage: (1) damage to a policyholder’s own property (causing a business interruption); (2) damage to the property of a customer, a supplier, or someone farther up the supply chain (commonly called contingent business interruption); (3) government action, such as evacuation orders or potentially orders shutting down a business (order by a civil authority); and (4) damage to properties that attract or bring customers to the policyholder’s business (leader property business interruption). The purpose and effect of such insurance is “to indemnify the insured against losses arising from his inability to continue the normal operation and functions of his business … consequent upon the destruction of the building, plant, or parts thereof.” (Pacific Coast Eng. Co. v. St. Paul Fire & Marine Ins. Co. (1970) 9 Cal.App.3d 270, 275.) But whether a policy includes one, some, or all of these four coverages will depend on the specific wording of the policy, how the declarations page is constructed, and the premiums paid by the insured.
One of the first stumbling blocks to seeking coverage for this outbreak is the relatively standard policy requirement that business operations must be suspended due to “direct physical loss of or damage to” the insured’s business property. Whether the COVID-19 outbreak, and the closures associated with it, will qualify under this language is still an open question, and courts across the country have reached differing conclusions with respect to prior outbreaks. At minimum, it would seem if there is exposure in the workplace, with a virus that can survive for some time on surfaces such as metal, wood, and other common office/business decor, there should be an argument that such property is “physically damaged,” at least until it can be remedied and thoroughly disinfected. We expect this to be an ongoing source of conflict with insurers as they evaluate these claims.
An additional stumbling block for many businesses in claiming this coverage will be how the policy defines a “suspension of operations” in order to trigger coverage. Where the policy requires a necessary “suspension,” courts have interpreted that to mean a temporary, but complete, cessation of activity — meaning there might be no coverage for a slowdown or reduction in operations. This is particularly a potential pitfall for restaurants and other entities under orders to cease dine-in or other operations that involve gatherings — but are still able to continue in some fashion (through carry-out orders, distancing of chairs, or other abilities that considerably slow the business, but don’t cease operations). In contrast, some policies define a “suspension” to include a slowdown, but this will depend on the individual policy.
Next, some policies include broad exclusions against damage caused by biological agents — either as a standalone provision, or incorporated into the more common exclusion for pollutants and contamination. By way of example, many policies provide an exclusion for “pollution” with some policies going so far as to define “pollution” as follows: “Pollution means the presence, discharge, dispersal, seepage, migration, release or escape of any material, which causes or threatens damage to human health or human welfare, or causes or threatens damage, deterioration, and loss of value, marketability, or loss of use to insured property. Such material includes but is not limited to fungi, bacteria, virus, hazardous substances, or pollutants. (Roger Cleveland Golf Company, Inc. v. Affiliated FM Insurance Company (C.D. Cal., Oct. 15, 2008, No. SACV0800453CJCPLAX) 2008 WL 11338244, at *4, fn. 1.)
If insureds can overcome these stumbling blocks, and coverage applies, the amount recoverable will be dependent on the policy language as well. First, policies generally only provide benefits for the period of “restoration” — that is the time it took to repair or replace the property, or that it would have taken a reasonable insured to do so. For COVID-19, insurers may argue that the virus is only present on surfaces for a short period of time, and only requires limited disinfection, in order to limit policy benefits.
In addition, some policies provide only coverage for “net income” (net profit or net loss that would have been earned absent the damage), meaning insureds may be limited in their recovery if they were operating a new, or unprofitable business. Different policies, by contrast, will also provide coverage for “normal operating expenses,” permitting insureds to recover even if their business was not profitable at the time of loss (and assisting in retaining employees, keeping suppliers, and keeping other contracts in place). In any event, businesses must keep records of both the loss as well as their prior records–the burden of proof is on the insured to prove the scope of the loss.
As can be seen, business interruption insurance is complex, with many pitfalls and exclusions available to insurers to deny coverage. If you have a business that has been severely impacted by the coronavirus outbreak, we expect these issues to be repeatedly litigated over the coming years, and would encourage you to seek an Irvine bad faith insurance attorney knowledgeable in the realm of insurance litigation and bad faith to navigate these complex issues.