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Mar 18, 2020 - About the Firm by

Businesses are closed.  Stores and malls are empty.  Restaurant tables and hotel rooms sit vacant.  Sporting events and conferences are canceled.  Supply chains are disrupted or destroyed.  The ripple effects of the novel coronavirus are expected to wreak havoc on commerce worldwide for an extended period of time.  News reports already indicate that the impacts are being felt across virtually every industry.  Without a doubt, business owners will look to their insurance policies with the hope of recouping their lost profits and obtaining compensation for other damages sustained in the current pandemic.

Business Interruption/Business Income Coverage is Generally Tied to Physical Property Damage

The first place insureds typically turn is to their “business interruption” coverage.  Many companies obtain this insurance as a component of their first-party property insurance or as a freestanding policy. Business interruption policies protect against losses sustained due to periods of suspended operation due to property damage.  Although the specific language of each policy must be carefully evaluated, the ISO commercial property business income form generally states:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.”  The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations…

            In commercial policies containing language such as this, business interruption coverage is triggered when the policyholder sustains direct physical loss of or damage to insured property.  Unfortunately, courts across the country have not settled on a uniform rule to determine when insured property has suffered a “physical loss.” 

            The majority of courts interpret “physical loss” to require damage causing physical alteration to the property, such as that which occurs from fires, flooding, and storms. For example, in Mama Jo’s Inc. v. Sparta Ins. Co., 17-CV-23362-KMN, 2018 WL 3412974, at *9 (S.D. Fla. June 11, 2018), the insured claimed that construction debris and dust from nearby roadwork caused “direct physical loss” to the insured property under its policy.  The nature of the loss was the need for continual cleaning of its audio and lighting systems, awnings, roll up curtains, retractable roof and related motors, hardware and electronics together with the floors, walls, tables, chairs, and countertops.  In entering summary judgment against the insured, Chief Judge Michael Moore held that cleaning is not considered direct physical loss.  Instead, “a direct physical loss ‘contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so’.” Id. citing MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 779 (2010); see also AFLAC Inc. v. Chubb & Sons, Inc., 260 Ga. App. 306, 308 (2003). 

Similarly, in Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. CIV. 98-434-HU, 1999 WL 619100, at *7 (D. Or. Aug 4, 1999), the court ruled that “physical loss” requires a distinct and demonstrable physical change in the property necessitating remedial action. Simple exposure to high humidity, mold, and mildew was insufficient to trigger coverage. “The recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable. … The mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage.” Id.

Courts across the nation have come to similar conclusions. See Mastellone v. Lighting Rod Mut. Ins. Co., 175 Ohio App.3d 23, 40-41, 2008 Ohio 311, 884 N.E.2d 1130 (2008) (finding that mold which could be removed by cleaning was not physical damage as it did not alter or otherwise affect the structural integrity of the building’s siding); Universal Image Products v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010) (holding that intangible harms such as odors or the presence of mold and bacteria in HVAC system did not constitute physical damage to property); Tocci Bldg. Corp. v. Zurich Amer. Ins. Co., 659 F. Supp. 2d 251 (D.  Mass. 2009) (no coverage where wall did not sustain direct physical loss); Port Authority of N.Y. and N.J. v. Affiliated FM Ins. Co., 311 F. 3d 226, 236 (3d Cir. 2002) (denying coverage for mere presence of asbestos in building’s components, as opposed to actual release of asbestos into air, based on direct physical loss provision); Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass’n., No. 90-35654, 1992 WL 16749, at *1 (9th Cir. Jan. 31, 1992) (unpublished) (asbestos contamination represented was economic loss and not physical loss since the building remained physically unchanged); Newman Myers Kreines Gross Harris P.C. v. Great N. Ins. Co., 17 F.Supp.3d 323,330 (S.D.N.Y. 2014) (holding that “direct physical loss or damage” required a physical element, which is not met when power was shut off during Hurricane Sandy.)

            On the other hand, the case most frequently trumpeted by policyholders in favor of coverage is Gregory Packaging, Inc. v. Travelers Property & Casualty Co. of America, No. 12-cv-04418, 2014 U.S. Dist. Lexis 165232 (D. N.J. Nov. 25, 2014).  There, an unsafe amount of ammonia was released from a refrigeration system inside one of the insureds facilities.  The carrier denied coverage based on its determination that the insured did not suffer “direct physical loss of or damage to the Covered Property” as required by the policy.  In finding in favor of the insured, the New Jersey federal court determined that, while structural alteration (such as from fire) provides the most obvious sign of physical damage, a property can sustain physical loss or damage without experiencing structural alteration.  The New Jersey court held that a dangerous gas like ammonia which renders a building uninhabitable constituted a direct physical loss sufficient to trigger coverage under the applicable policy. See also Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co., 465 F. 3d 834 (8th Cir. 2006) (holding that an importer of beef suffered a physical loss to its insured product even though the insured Canadian beef was untainted when the US government closed the border to Canadian beef to protect against mad cow disease); Matzner v. Seaco Ins. Co., No. 96-0498-B, 1998 WL 566658, at *3 (Mass. Super. Aug. 12, 1998) (holding that carbon monoxide contamination constitutes direct physical loss even though there was no tangible damage to the insured’s property); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993) (finding physical damage where noxious odors emanated from a methamphetamine laboratory into a neighboring apartment unit); Essex v. Bloom South Flooring Corp., 562 F.3d 399, 406 (1stt Cir. 2009) (holding that an odor closing the property constituted damage to the property under Massachusetts law); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 543 (App. Div. 2009) (a property is physically damaged when it loses its essential functionality).

            Given the split in authority, it is imperative that the law of the jurisdiction be closely analyzed along with the specific language of the policy at issue.  

Since 2006, Many Policies Contain a Specific Exclusion for Losses Due to Virus or Bacteria

            As a result of the SARS outbreak in 2003, Mandarin Oriental International infamously recovered $16 million from its insurers to pay for business interruption losses.[1]  This led many carriers to update their policies to exclude certain types of disasters – specifically communicable diseases.  In ISO jurisdictions, policies now contain an “Exclusion for Loss Due to Virus or Bacteria” which provides, in pertinent part, as follows:

We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.

The exclusion goes on to state that it applies to business income – ie, business interruption.  Indeed, ISO’s July 6, 2006 circular, prepared as part of its filing of the exclusion with state regulators, makes specific reference to such viral and bacterial contaminants as rotavirus, SARS, influenza, legionella, and anthrax.  It states:

Disease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property.  When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property, cost of decontamination, and business interruption losses.

Although building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage.  An allegation of property damage may be  point of disagreement in a particular case.  In addition, pollution exclusions are at times narrowly applied by certain courts.  In recent years, ISO has filed exclusions to address specific exposures relating to contaminating or harmful substances. 

While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.

In light of these concerns, we are presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.

            Thus, the exclusion for virus-caused business interruption, even if the presence of coronavirus in a structure satisfies the “direct physical loss of or damage to” requirement, is clear. Equally clear given the massive losses sustained by insured businesses across all industries is that business interruption claims will abound.  The stakes are just too high. Clever and aggressive Plaintiff’s lawyers will develop novel theories and arguments designed to create coverage.  Therefore, carriers and their counsel must remain aggressive, consistent and well-informed in order to enforce the language and intent of their policies.

Legislative Action Is Being Considered to Shift the Burden of Business Interruption Coverage Onto Carriers’ Shoulders Despite Policy Limitations and Exclusions

New Jersey

            New Jersey Bill A-3844 is seeking to remove the ISO “virus” exclusion in order to create coverage, even under policies where coverage is expressly excluded. If enacted, the bill would cover any insured with a business interruption policy in place on the day New Jersey Governor Phil Murphy declared a public heath emergency due to the virus (March 9, 2020). In its current version, the bill would apply to NJ businesses with less than one hundred employees who work twenty-five hours or more a week. According to the proposed legislation “the bill is intended to hold harmless a certain portion of the business sector, which had the foresight to purchase business interruption insurance, for losses sustained as a result of the current health emergency, but for which no such coverage is currently offered.”

            While the proposed legislation would offer relief to insureds, it has the potential to set a dangerous precedent and upset the current relationship in the insurance industry.  Government intervention into expressly negotiated insurance contracts seems to be a violation of the Contract Clause found in Article 1 of the constitution. Under the Contracts Clause “No State shall enter… ex post facto Law, or Law impairing the Obligation of Contracts.”  If the proposed legislation is enacted, it will certainly be the catalyst for immediate litigation. Further, should the NJ legislature forces insurers to pay despite express policy exclusions, it would raise questions about the viability of any contract for insurance, or otherwise, in the future. 

United States Congress

            In a letter addressed to the leaders of the American Property Casualty Insurance Association, the National Association of Mutual Insurance Companies, the Independent Insurance Agents & Brokers of America, and the Council of Insurance Agents and Brokers eighteen members of the U.S. House of Representatives urged insurance providers to “work with your member companies and brokers to recognize financial loss due to COVID-19 as part of policyholders’ business interruption coverage.” The House members expressed their willingness to work with insurance providers in this uncertain time. Other than this letter to providers directly there is no current proposed legislation that would force insurers to provide coverage.

            Legal claims and developments from the coronavirus are occurring on a daily basis.  If you have questions or would like additional information on this or any related topic, the law firm of Mintzer Sarowitz Zeris Ledva & Meyers, LLP is available to assist you and will continue to monitor judicial and legislative changes relating to Covid-19.

Please contact:

Steven Mitchel                                                           Jeff Sotland                        

(305) 774-9966                                                           (215) 735-7200

Connor Milo

(305) 774-9966.