COVID-19 has sickened hundreds of thousands of people and resulted in the deaths of thousands. Millions will likely be affected. Up until very recently, there was widespread belief that some countries may be spared the level of disruption seen earlier this year. Recent events have shown this is no longer a reasonable assumption. The WHO has declared COVID-19 a global pandemic, the United States designated a national emergency, and financial markets recently suffered their worst weeks since 2008, resulting in the stock market ending its lengthy and historic bull market run.

These events have brought great uncertainty, and businesses are scrambling to procure options to stay afloat and mitigate the damages. One option is pursuing coverage under commercial insurance policies. Businesses may find that this pursuit will not achieve the desired goals unless they have purchased broad coverage for pandemic-type events.

Insurance policies differ markedly and coverage grants and exclusions are not all the same. As is usually the case, the specific terms and conditions of an insurance policy will prevail over assumptions and generalizations. Thus, any analysis of whether insurance covers claims arising from COVID-19 will be a fact-based determination on an individual insurance policy basis.

In a series of blog posts, we will examine several of these coverage questions.

Businesses generally obtain business interruption coverage as part of their commercial insurance policies. Coverage under these provisions generally requires “direct physical loss or damage” to an insured property.  Although language varies from policy to policy, time element or business interruption provisions commonly include:

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…

Accordingly, one important issue is whether COVID-19 related-issues will constitute “direct physical loss or damage.”  One foreseeable event within the COVID-19 pandemic is whether losses resulting from contamination of insured property, such as cleaning an office after an employee tests positive, may result in “direct physical loss or damage.”

Can Viral Contamination Be a “Direct Physical Loss”?

Insurance policies often do not define “direct physical loss.” With experts believing that COVID-19 spreads by contact with contaminated surfaces and through aerosol droplets, the question is whether either is a “direct physical loss” to covered property. Case law addressing contamination suggests COVID-19 may not create a “direct physical loss.”

In one case, a court found that bacterial and mold contamination was not a “direct physical loss” under a property insurance policy. In Universal Image Products. v. Federal Insurance Co., 475 Fed. Appx. 569 (6th Cir. 2012), a series of heavy rainstorms created a bacterial and mold infestation in the ventilation system of a leased office building. Experts determined there was no “notable airborne contamination” and that an evacuation was not necessary, but recommended the insured move its operations from the first floor. The insured eventually vacated the building for two months. The landlord covered the costs of hiring experts and a two-month cleaning.

Notably, neither cleaning nor suffering an infiltration of dust, debris, or “possibly noxious and toxic chemicals” may necessarily result in a “direct physical loss.” In Mama Jo’s, Inc. v. Sparta Insurance Co., No. 17-cv-23362-KMM, 2018 U.S. Dist. LEXIS 201852, at **24-25 (S.D. Fla. Jun. 11, 2018), a restaurant was required to extensively clean itself to mitigate dust and debris from a nearby construction project. The court found there was no “direct physical loss” because “cleaning is not considered direct physical loss.” Additionally, the court declined to find “direct physical loss” under even an expansive definition of the term because “[t]he fact that the restaurant needed to be cleaned more frequently does not mean Plaintiff suffered a direct physical loss or damage.”

To the contrary, in a case oft-cited by policyholder attorneys, one court found contamination by an ammonia leak was a “direct physical loss” under a property insurance policy. In Gregory Packaging, Inc. v. Travelers Property Casualty Co. of America, No. 2:12-cv-04418 (WHW), 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014), a worker was injured by an ammonia leak and the facility was closed for cleaning. There was a dispute over whether the facility was closed for a week or around five days, but the court found the ammonia remained in the building “for some amount of time.” While the court held that the ammonia leak caused physical damage to the plant by rendering it unusable for a period of time, query whether viral contamination caused by COVID-19 would rise to the same level of physical damage.

Case law also suggests that physical harm must be tied to the insured loss. In United Air Lines v. Insurance Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006), the Second Circuit parsed the various causes of an airline’s losses following the September 11 attacks. The policy insured against losses caused “by damage to or destruction of the Insured Locations resulting from Terrorism . . . .” The airline had a ticket counter located in the destroyed World Trade Center. It also suffered losses as a result of the government’s temporary disruption of flight services and airport shutdown. The court affirmed the district court’s determination that the airline could recover under its business interruption policy only for those losses “attributable to the destruction of [the] ticket office,” and that it could not recover for its lost earnings attributable to the “system-wide disruption of air service.”  The court concluded, “[t]he interruption to [the airline’s] business following the attacks was, therefore, not the ‘direct result’ of damage to adjacent premises.”

Additionally, a restriction in commerce due to an order in response to a Mad Cow Disease outbreak was not a “direct physical loss.” In Source Food Technology, Inc. v. United States Fidelity & Guaranty Co., 465 F.3d 834 (8th Cir. 2006), the U.S./Canada border was closed for beef shipments after a Mad Cow outbreak in Canada. The insurer rejected coverage for business it lost due to the restriction. The court found there was no “direct physical loss,” in part, because it was not shown that the beef the insured would have imported was contaminated.

Finally, costs associated with restructuring an inventory destroyed by disease may not be covered.  In Rembrandt Enterprises, Inc. v. Illinois Union Insurance Co., 269 F. Supp. 3d 905, 906 (D. Minn. 2017), the insured owned several poultry farms that were affected by a bird flu outbreak. A response to the outbreak required extensive euthanasia of poultry stock. The insured began the process of repopulating its stock, which required extensive heating to protect the new poultry from the elements. The court declined to extend coverage for those heating costs, finding that the euthanasia of the poultry did not damage the barns themselves, and declined coverage.