The insurance industry is bracing itself for the large number of claims arising out of the novel coronavirus pandemic.  Depending on the coverage form involved, insurers should have strong coverage defenses to most of these claims.

Standard commercial property forms were never designed to cover pandemic-related losses.  And after the SARS pandemic, standard property forms were tightened to expressly restrict coverage for viruses and communicable or infectious diseases.[1]   Nevertheless, policyholders facing billion-dollar losses from mass shutdowns and business disruptions will first reach for coverage where it is unlikely to exist—their commercial property policies and, specifically, their business interruption, contingent business interruption, and civil authority coverages.

Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators.  Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.

Joint letter from David Sampson, president and CEO of the APCIA, Charles Chamness, president and CEO of NAMIC, Bob Rusbuldt, president and CEO of IIABA, and Ken Crerar, president and CEO of CIAB

Most standard property policies will not provide coverage for losses from viruses, such as the novel coronavirus, or communicable or infectious diseases, such as COVID-19.  Standard policies are unlikely to even be triggered, as they require a “direct physical loss of or damage to property.”  Policyholders will face an uphill battle demonstrating any such physical loss or damage from the novel coronavirus.  Shutdowns of uncontaminated properties are unlikely to constitute “direct physical loss of or damage to property.”  Moreover, the suspension of operations or business must be caused by that direct physical loss of or damage to property.  In most cases, the suspension is the result of prophylactic measures to curb the spread of COVID-19, and not the result of physical loss of or damage to property.

Even if coverage could be triggered, most standard property policies unambiguously exclude loss arising from viruses and communicable or infectious diseases.  Policyholders could have purchased specialized products and coverage extensions that would cover such losses, but most chose not to do so after internal risk and premium calculations.

Despite the plain language and intent of the policy, coverage litigation always presents some degree of risk.  Courts may attempt to find coverage where none exists, especially for sympathetic policyholders facing extraordinary COVID-19 losses.  This leaves insurers more vulnerable to unfavorable interpretations than a plain reading of most policies would support.

Policyholders have already filed suit in California,[2] Illinois,[3] Louisiana,[4] and Florida[5] seeking business interruption coverage for county and state-mandated shutdowns.  It does not appear that any of these policyholders’ properties had actual contamination.  Rather, the policyholders argue that, because the novel coronavirus contaminated some structures anywhere in the world, there is physical loss or damage.  This confuses the issues and does not comport with a plain reading of most policies.  And unlike most policies, the policies at issue in these cases may not have virus or pandemic exclusions.  The policyholders will rely on the absence of these exclusions in an attempt to create coverage and establish early, favorable precedent.

Legislative bodies have also began to advocate for policyholders.  The New Jersey, Massachusetts, and Ohio legislatures and the U.S. House of Representatives have requested insurers retroactively provide business interruption coverage for COVID-19 losses regardless of whether the policies were, in fact, triggered or contain state-approved virus exclusions.[6]  These legislative attempts raise significant constitutional issues and should fail, but they show the backdrop against which the insurers are working.

Perhaps more concerning, state agencies in California and New York have demanded that commercial insurers outline prospective business interruption coverage for each of their policyholders and explain when, if ever, such coverage would be triggered.  Insurers must copy the state agencies on their responses and any response may become part of the public record.  Insurers must carefully craft their objections and responses to these requests, as policyholders and their counsel will inevitably rely on them to build future coverage cases.

Insurers must proactively prepare for the upcoming onslaught of coverage litigation and understand the applicability of their business interruption coverages to COVID-19 losses.  Any analysis must thoroughly consider:

1. Is the policy an all-risk or specified-risk policy? If it is a specified-risk policy, is pandemic-related contamination a covered peril?  Probably not.

2. Has the policyholder proven that its loss is the result of “direct physical loss of or damage to property”? Probably not.  Absent actual contamination of the structure, the policyholder is unlikely to show “direct physical loss or damage.”  Even if actual contamination exists, case law is unclear as to whether microscopic contamination without any physical manifestation constitutes physical loss or damage.  Most jurisdictions would require structural alteration or, at the very least, physical manifestation of intangible damage before finding physical loss or damage.  Moreover, the suspension of operations or business must be caused by that direct physical loss of or damage to property.  In most cases, the suspension is the result of prophylactic measures to curb the spread of COVID-19—not the result of physical loss of or damage to property.

3. If there is direct physical loss or damage, has the policyholder proven that it was to: the policyholder’s property (business interruption coverage), property of the policyholder’s supplier or customer (contingent business interruption coverage), or nearby property (civil authority coverage)?  And for civil authority coverage, has the policyholder shown that access to its own property has been impaired or prohibited by an order of civil or governmental authority issued because of damage to a nearby property?

4. If so, are there any applicable exclusions? ISO exclusion CP 01 40 07 06 (“Exclusion for Loss Due to Virus or Bacteria”) has been used in many states and is almost certain to apply to COVID-19 losses.  There may also be exclusions for contamination, pandemics, and communicable or infectious diseases.

5. If the exclusions do not bar coverage, insurers must determine the applicable waiting period and calculate the period of indemnity. If the exclusions do bar coverage, the insurer must carefully review the policy to determine whether any coverage extension or specialized coverage exists for COVID-19 losses.

As always, insurers must ensure that policyholders comply with all notice and cooperation provisions in the policy.

Consideration One:  Covered Perils

Is the policy an all-risk or specified-risk policy?  If it is a specified-risk policy, is pandemic-related contamination a covered peril?  Probably not.

Commercial property policies are issued on all-risk or specified-risk forms.  Specified-risk forms are triggered only by covered perils listed in the policy, and pandemic-related contamination is unlikely to be a listed peril.  If no covered peril exists, neither specified-risk policies nor the business interruption coverages within them can be triggered.

Consideration Two:  Direct Physical Loss of or Damage to Property Causing Suspension of Business Operations

Has the policyholder proven that its loss is the result of “direct physical loss of or damage to property”?  Probably not. 

Standard property policies require a “direct physical loss of or damage to property.”  Business interruption, alone, is not sufficient to trigger coverage.  One common, standard ISO form for business interruption within commercial property policies is CP 00 30 (“Business Income (and Extra Expense) Coverage Form”).  CP 00 30 states that:

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 . . . .

Absent actual contamination of the structure, the policyholder is unlikely to show “direct physical loss or damage.”  Even if actual contamination exists, case law is unclear as to whether microscopic contamination without any physical manifestation constitutes physical loss or damage.  Most jurisdictions would require structural alteration or, at the very least, physical manifestation of intangible damage before finding physical loss or damage.  Moreover, the suspension of operations or business must be caused by that direct physical loss of or damage to property.  In most cases, the suspension is the result of prophylactic measures to curb the spread of COVID-19—not the result of physical loss of or damage to property.   

Economic Losses and Prophylactic Measures Are Not Physical Losses

Economic losses do not constitute physical losses or damages to property.  The decline in economic activity, the absence of employees and customers, and supply chain disruptions are not physical losses or damages to property.

Likewise, prophylactic measures designed to protect against future contamination are not physical losses or damages to property.   In general, businesses are closing because of health-related concerns, not because any property is actually impaired.  If the shutdown of the policyholder’s facilities is due to quarantine and an attempt to contain the spread of the virus, there is not likely to be any actual physical loss or damage necessary to trigger coverage.  The collective economic impact of these activities – although significant – does not result in physical loss or damage to property.

As an example, in United Air Lines, Inc. v. Insurance Co. of Pennsylvania, 439 F.3d 128, 134-35 (2d Cir. 2006), the Second Circuit Court of Appeals affirmed that United Air had no coverage for its lost earnings after the national disruption of flight service following the 9/11 terrorist attacks.  The airline sought coverage based on the government’s decisions to suspend flights and close airports, including its facilities in Arlington, Virginia at the Ronald Reagan Airport.  The Second Circuit found that the suspension was caused by fear of future attacks, not physical damage caused by the 9/11 terrorist attacks.

Microscopic Contamination May Not Constitute Physical Loss or Damage

Standard forms do not define the phrase “direct physical loss of or damage to property,” and courts are split as to the meaning of that phrase.  Some jurisdictions stay true to the policy language and require that the loss be “physical,” with a distinct and demonstrable physical alteration of the property.[7]  Some courts deem even intangible damage to fall within “physical loss of or damage to property,” as long as it has some physical manifestation (such as odor).[8]  A few other courts have taken a hybrid approach and also considered “physical loss of or damage to property” to exist when the property becomes uninhabitable or unusable for its intended purpose.

Adding to the uncertainty, no reported cases appear to analyze the presence of intangible viruses, such as the novel coronavirus, or infectious or communicable diseases, such as COVID-19.  Rather, most of the case law centers around mold, asbestos, ammonia, and other odors or gasses.  Some courts have addressed microscopic changes.  As an example, in Columbiaknit, Inc. v. Affiliated FM Ins. Co., 1999 WL 619100 (D. Or. 1999), an Oregon federal court expressly addressed the impact of microscopic damage and found that it must result in some distinct and demonstrable physical damage – the “mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage”:

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.  In the methamphetamine odor damage cases, the physical damage is demonstrated by the persistent, pervasive odor.  In the absence of such odor, no physical damage could be found.  The mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage.

(emphasis added).

In more general contexts, courts have required distinct, demonstrable or physical alteration before finding a physical loss or damage.  See, e.g., MRI Healthcare Ctr. of Glendale, Inc. v. State Farm Gen. Ins. Co., 187 Cal.App.4th 766, 780 (2010).  In MRI, the court found that the insured had not sustained a “physical loss” because it failed to demonstrate any “distinct, demonstrable [or] physical alteration” of its MRI machine.  The court explained that, “[f]or there to be a ‘loss’ within the meaning of the policy, some external force must have acted upon the insured property to cause a physical change in the condition of the property, i.e., it must have been ‘damaged’ within the common understanding of that term.”  Id.

Coronavirus does not cause a tangible alteration to the appearance, color or shape of a building, even if contaminated.  There is no evidence that the virus causes tangible alteration of a structure observable to the naked eye.  Nor is there any evidence that contamination causes any demonstrable manifestation of damage, such as a corresponding odor or gas.

Insurers must work with their coverage counsel to thoroughly analyze the applicable case law in each relevant jurisdiction.

Importantly, courts finding physical loss or damage are analyzing properties actually contaminated.  These cases do not indicate that prophylactic shutdowns of uncontaminated properties constitute physical loss or damage.  Although some policyholders (such as cruise companies and airlines) will have confirmed contamination on their properties, many policyholders will try to commingle these concepts and request coverage for properties not contaminated.  Courts have not indicated this will be a successful path forward.  See, e.g., Newman Myers Kreines Gross, P.C. v. Great Northern Ins. Co., 17 F. Supp. 3d 323 (S.D.N.Y. 2014) (holding that the policyholder’s prophylactic shutdown during Hurricane Sandy, without any “demonstrable harm” to the building itself, was not “direct physical loss or damage”).

 Consideration Three:  Damage to or Loss of Property

If there is direct physical loss or damage, has the policyholder proven that it was to:  the policyholder’s property (business interruption coverage), property of the policyholder’s supplier or customer (contingent business interruption coverage), or nearby property (civil authority coverage)?  And for civil authority coverage, has the policyholder shown that access to its own property has been impaired or prohibited by an order of civil or governmental authority issued because of damage to a nearby property?

The direct physical loss or damage must occur to certain categories of property, depending on the type of coverage.

Business Interruption

For traditional property and business interruption insurance, the physical loss or damage must be to the policyholder’s property – usually scheduled or listed in the declarations.

Contingent Business Interruption

For contingent business interruption coverage, the physical loss or damage must be to the property of the policyholder’s supplier or customer.  To trigger this coverage, the policyholder must prove that it suffered loss of revenue due to that property loss or damage.  For example, a policyholder may contend it could not manufacture its products because its supplier suffered physical loss or damage and could not timely send the supplies.

Again, however, there can only be coverage where the supplier or customer actually suffered “direct physical loss or damage.”  As with business income coverage, the direct physical loss requirement will be challenging for policyholders to meet.  In general, businesses are closing because of health-related concerns, not because any property is actually impaired.  If the shutdown of suppliers’ or customers’ locations is due to quarantine and an attempt to contain the spread of the virus, there is not likely to be any actual physical damage necessary to trigger coverage.

Civil Authority

Civil authority coverage provides coverage for business income losses sustained when a civil or governmental authority prohibits or impairs access to the policyholder’s premises because of property damage in an adjacent or nearby area.

There generally must be a mandatory (not voluntary) order from a civil authority (such as the local government or state governor) impairing or limiting access to the policyholder’s property.  Anything other than a mandatory mandate may not trigger coverage.  A mandatory mandate would not include, for example, businesses that voluntarily shut down due to their own health concerns or lack of business stemming from quarantines.  Nor would it include suggested non-congregations of crowds or peoples.  See, e.g., 730 Bienville Partners, Ltd. v. Assurance Co. of Am., 2002 WL 31996014, at *2 (E.D. La. Sept. 30, 2002) (holding that the civil authority coverage did not apply to a Louisiana hotel whose business was affected by the FAA closure of airports after September 11, 2001, as access to the hotel was not “prohibited” by any order).

Civil authority coverage generally requires a cessation of business due to physical loss or damage at or near the policyholder’s property[9] – for example, when neighboring businesses are ordered to close after a local fire fills the neighborhood with toxic fumes.   This would not include prophylactic shutdowns of neighboring properties in anticipation of future harms.  As an example, in United Air Lines, Inc. v. Insurance Co. of Pennsylvania, 439 F.3d 128, 134-35 (2d Cir. 2006), the Second Circuit found no civil authority coverage for an airline after the government ordered all flights suspended after 9/11.  The court found that the order was issued out of fear of future attacks, not physical damage to an allegedly “adjacent” property (the Pentagon) caused by the 9/11 terrorist attacks.

As another example, courts have not generally found civil authority coverage for preemptive hurricane evacuations.  Although policyholders may cite one particularly favorable case affirming (based on a “clearly erroneous” standard of review) a finding of coverage for preemptive hurricane evacuations, other courts have disagreed with that case.  Courts have generally held that preemptive evacuation orders are not issued because of property damage; rather, they are issued as prophylactic attempts to avoid property damage.  As a result, there cannot be coverage.  As one court explained:

When, as here, the only relevance of prior damage to other property in deciding whether to issue a civil authority order that would preclude access to the insured’s property is to provide a basis for fearing future damage to the area where the insured property is located, the causal link between the prior damage and the civil authority order is missing.  Requiring such a causal link between the prior damage and the action by a civil authority does not rewrite the parties’ policy, but rather gives effect to the language it contains.

Texas Med. Clinics, P.A. v. CNA Fin. Corp., 2008 WL 450012, at *10 (S.D. Tex. Feb 15, 2008); see also Dickie Brennan & Co. v. Lexington Ins. Co., 636 F.3d 683, 686 (5th Cir. 2011) (affirming that the policyholder “failed to demonstrate a nexus between any prior properly damage and the evacuation order”).

The first COVID-19 coverage suit filed in March 2020 seeks declaratory judgment as to civil authority coverage.  That suit was filed by a restaurant policyholder in the civil district court in New Orleans.  The policyholder seeks declaratory judgment that the civil authority coverage within its all-risk property policy, written by Lloyd’s of London, will cover lost revenue following state orders restricting the size of public gatherings and requiring restaurants to stop on-site dining in response to the novel coronavirus.  The policyholder argues that, if the civil authority even mentions that the virus creates property damage by sticking on surfaces, that triggers business interruption coverage for the restaurants.  This is not the typical civil authority scenario in which the local governmental authorities shut down businesses after a neighborhood fire or next to a collapsing building.  The civil order was not the result of damage but, instead, a prophylactic method of preventing contamination and spread.

Finally, access to the policyholder’s property must be prohibited by civil authority as a result of the nearby property damage.  With COVID-19, most orders have not prohibited access to the property itself.  In fact, most orders allow restaurants to continue carry-out or drive-thru operations on the property.

Consideration Four:  Applicable Exclusions

If so, are there any applicable exclusions?  ISO exclusion CP 01 40 07 06 (“Exclusion for Loss Due to Virus or Bacteria”) is used in many states and should apply to COVID-19 losses.  The policy may also include exclusions for contamination, pandemics, and communicable or infectious diseases.

In every jurisdiction, conspicuous, plain and clear exclusions override the insuring clause and eliminate coverage the policy might otherwise afford.  Standard virus exclusions do just that – they clearly and conspicuously exclude coverage for losses caused by or resulting from any virus.

In 2006, ISO submitted and state regulators approved CP 01 40 07 06 (“Exclusion for Loss Due to Virus or Bacteria”).[10]  CP 01 40 07 06 expressly bars first-party coverage for “loss or damage caused by or resulting from any virus . . . that induces or is capable of inducing physical distress, illness or disease,” and it expressly applies to business income claims.  This exclusion should bar all coverage for the novel coronavirus claims under business interruption, contingent business interruption, and civil authority coverages.

In a July 6, 2006 circular, ISO explained the context behind CP 01 40 07 06:

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 a point of disagreement in a particular case.  In addition, pollution exclusions are at times narrowly applied by certain courts.

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.

Although coverage depends first and foremost on the policy language, courts consider insurance industry publications, including ISO circulars, as helpful resources to understand the scope of policy coverages and limitations.  See, e.g., American Star Ins. Co. v. Insurance Co. of the West, 232 Cal.App.3d 1320, 1329 (1991); Maryland Cas. Co. v. Reeder, 221 Cal.App.3d 961, 971-972 (1990) (relying on ISO circular to support insureds’ interpretation of endorsement); Grow Group, Inc. v. North River Ins. Co., 1992 WL 672265 *3 (N.D. Cal. 1992) (“In interpreting insurance contracts, for example, it is permissible to examine a circular prepared by [ISO], since the circular explains the intent, purpose, and effect of the standard form provisions which themselves are prepared and published by ISO.”).

Courts have also enforced this type of exclusion.  As an example, in Meyer Natural Foods, LLC v. Liberty Mutual Fire Ins. Co., 218 F. Supp. 3d 1034 (D. Neb. 2016), the court held that a contamination exclusion barred coverage for the contamination of beef with E. coli while in the insured’s possession.  The exclusion barred coverage for loss resulting from “[t]he actual or suspected presence of any virus, organism or like substance that is capable of inducing disease, illness, physical distress or death, whether infectious or otherwise, including but not limited to any epidemic, pandemic, influenza, plague, SARS, or Avian Flu.”  Id.

This exclusion clearly applies to business interruption losses relating to viruses, which would include the novel coronavirus.  And if the policy expressly excludes viruses, damage and loss arising from coronavirus would not be covered.

Consideration Five:  Coverage Extensions and Specialized Products

If the exclusions do not bar coverage, insurers must determine the applicable waiting period and calculate the period of indemnity.  If the exclusions do bar coverage, the insurer must carefully review the policy to determine whether any coverage extension or specialized coverage exists for COVID-19 losses.

Specialized Products, Extensions and Endorsements

Some policies may provide coverage for COVID-19 claims via endorsement or as specialty property policies.  For example, some insurers offer “Communicable or Infectious Disease” endorsements or separate “Pandemic Disease Business Interruption Insurance” policies.  Neither usually requires “direct physical loss or damage to property,” nor do they include virus-related exclusions.

If an extension applies, it likely covers:  (1) lost income or profits due to the presence of contamination at the insured property; (2) extra expenses incurred due to the presence of contamination at the insured property; (3) the cleanup, removal, and disposal of the contamination; and (4) fees paid or costs incurred for “reputation management” necessitated by the presence of contamination at the insured property.  However, this type of specialized coverage is typically subject to a much lower sublimit and it generally includes a waiting period that operates as an SIR or deductible.

Other specialized policies – such as political risk coverage, trade disruption insurance, supply chain insurance, force majeure insurance, and performance bonds may also provide relief for the limited number of policyholders who purchased those products.  Each policy should be reviewed for possible extensions, and not all seemingly relevant extensions may be triggered.  For example, a policyholder may have purchased a “notifiable disease” extension, but “notifiable diseases” include only those listed in the policy.  The novel coronavirus would not have been listed in any policy issued prior to January 2020.

COVID-19 Extensions

ISO recently drafted two business interruption endorsements as a specific response to the novel coronavirus pandemic.  ISO has not yet filed these endorsements on behalf of the industry (which would be CP 15 XX forms) but made them available as advisory forms for use by any member carrier.  An insurer wishing to use either form must submit them to the relevant regulatory authority.

The new forms include “Business Interruption:  Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus – Edition February, 2020” and “Business Interruption:  Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting Some Modes of Public Transportation – Edition February, 2020).”  These endorsements do not add a waiting period.  Instead, coverage begins immediately upon suspension of the insured’s operations and extends for the time period specified in the schedule, limited to the annual aggregate stated in the schedule.  Both endorsements provide limited coverage for suspension of operations due to closure or quarantine at the insured location when ordered by civil authority attempting to limit or avoid the spread of coronavirus infection.  Both exclude costs to clean, disinfect, dispose of or replace any property, as well as the cost for testing, loss or expense related to absence of infected workers or those under quarantine, and loss or expense related to vendors, tenants, customers avoiding the premises out of fear.

Period of Indemnity

Business interruption coverage is tied to the theoretical period of time it should take an insured, acting with due diligence and dispatch, to clean its property and remove the novel coronavirus.  This is often a relatively short period of time.  Prolonged periods of delays to acquire cleaning supplies, overcome shutdowns, or replace ill employees are unlikely to factor into the period of indemnity.  This is, of course, a theoretical calculation and, where the actual restoration period exceeds the theoretical period or where the premises are not restored, the theoretical period becomes the computation period.

Legislative and State Efforts to Secure Coverage

On March 10, 2020, the New York Department of Financial Services ordered all commercial property insurers to send each policyholder a “clear and concise explanation of benefits” – current and prospective – relating to each policyholder’s business interruption coverage with respect to COVID-19.[11]  Each insurer must specify to the policyholders and NYDFS a litany of items, including the covered perils under the policy, whether the policy has a “physical damage or loss” requirement, whether contamination constitutes “physical damage or loss,” what type of damage or loss may be sufficient under the policy, and describe any applicable waiting period.  Insurers should be very cautious in objecting or responding to this request, as any response could be deemed a public record and used in future coverage suits.  California has now followed suit and ordered insurers to disclose similar information.

On March 16, 2020, the New Jersey legislature introduced a bill (New Jersey Bill A-3844) that would create retroactive coverage for business interruption coverage relating to COVID-19 claims.  The bill would require carriers to pay business interruption claims for coverage that, admittedly, was never purchased.  Insurers would have to ignore applicable virus exclusions and sublimits and, instead, pay the full amount of the policy limits for any excluded loss.  The bill would apply to New Jersey businesses with less than 100 eligible employees (full-time employees working a week of 25 hours or more, as of March 9, 2020).  Legislatures in Ohio and Massachusetts have now followed suit and introduced similar bills.

Similarly, on March 18, 2020, a group of U.S. House members wrote a letter to four insurance industry trade organizations requesting that insurers retroactively recognize financial losses relating to COVID-19 under commercial business interruption policies.  The industry responded:

Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators.  Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.

– David Sampson, president and chief executive officer of the APCIA, Charles Chamness, president and CEO of NAMIC, Bob Rusbuldt, president and CEO of IIABA and Ken Crerar, president and CEO of CIAB

Although these legislative efforts should fail for constitutional and other reasons, they show the lengths to which legislators will go to secure coverage for sympathetic policyholders that failed to purchase adequate coverages.  This raises concern that courts and judges may, likewise, stretch to find coverage where none exists.

Finally, state and local governmental actors across the country have included statements in their shutdown and emergency orders stating that the novel coronavirus is causing “property loss and damage.”  This appears to be another attempt to assist policyholders in securing coverage but, as with the legislative attempts, should not be successful.

We suggest carriers proactively prepare for the upcoming onslaught of COVID-19 coverage claims by consulting with coverage counsel now to develop a comprehensive game plan to defeat those claims.

As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules.  This is not an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand.  This article does not address the potential impacts of the numerous other local, state and federal orders that have been issued in response to the Covid-19 pandemic.

FOOTNOTES

[1] Standard policies may vary and can be endorsed or extended to offer additional coverages.  Each policy should be carefully reviewed to determine potentiality of coverage.
[2] French Laundry Partners, LP v. Hartford Fire Ins. Co., filed on March 25, 2020, and pending in the Napa County Superior Court.
[3] Big Onion Tavern Group, LLC v. Society Insurance, Inc., filed on March 27, 2020, and pending in the Northern District of Illinois as Case No. 1:20-cv-02005.
[4] Cajun Conti LLC v. Certain Underwriters at Lloyd’s of London, filed on March 16, 2020, and pending in the civil district court in New Orleans.
[5] Prime Time Sports Grill, Inc. v. Certain Underwriters at Lloyd’s London, filed on April 2, 2020, and pending in the Middle District of Florida as Case No. 8:20-cv-00771.
[6] For example, the Ohio bill – HB 589 – states, in relevant part, that “every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, in force in this state on the effective date of this section, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic during the state of emergency.”
[7] See, e.g., Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass’n, 793 F. Supp. 259 (D. Or. 1990) (holding that the mere existence of asbestos contamination represented an economic loss, not a physical loss, because the building remained physically intact and undamaged), aff’d, 953 F.2d 1387 (9th Cir. 1992); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130, 1143 (Ohio Ct. App. 2008) (affirming that staining from mold was not physical damage, as it did not alter or otherwise affect the structural integrity of the building and could be removed by cleaning); Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 709-10 (E.D. Mich. 2010) (holding that mold and bacterial contamination in the policyholder’s ventilation system constituted an intangible harm resulting in pervasive odors and the presence of mold and bacteria and there was no “direct physical loss” because there was no “structural or any other tangible damage” and the intangible harms did not render the premises uninhabitable) ), aff’d, 475 Fed. App’x 569, 573-74 (6th Cir. 2012); Mama Jo’s, Inc. v. Sparta Ins. Co., ­­­2018 WL 3412974 (S.D. Fla. June 11, 2018) (holding that the policyholder restaurant did not sustain direct physical loss when dust and debris from nearby roadwork could be remediated by cleaning, as “cleaning is not considered direct physical loss”).
[8] Mellin v. N. Security Ins. Co., 115 A.3d 799, 805 (N.H. 2015) (“[W]e hold that physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell and that exist in the absence of structural damages.  These changes, however, must be distinct and demonstrable.  Evidence that a change rendered the insured property temporarily or permanently unusable or uninhabitable may support a finding that the loss was a physical loss to the insured property.”); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (Or. Ct. App. 1993) (finding that property had been physically damaged by odors resulting from methamphetamine cooking in neighboring apartment unit); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (finding, under Massachusetts law, that an odor rendering the property unusable constituted physical injury to the property).
[9] Some forms require “damage to property” rather than “direct physical loss of or damage to property.”
[10] The American Association of Insurance Services filed a similar form, FO 0675 10 06.
[11] The NYDFS sent this letter pursuant to Section 308 of the New York Insurance Law.