Aside from the health concerns of the COVID-19 pandemic, businesses across most industries have been heavily impacted by the virus and related government action. Commercial property insurance policies frequently provide coverage for the kinds of consequential economic losses that have arisen due to COVID-19.

While the insurance industry has been outspoken about the fact that their policies have virus exclusions, or otherwise do not apply, there are a number of reasons why businesses in the District of Columbia, Virginia and Maryland should not accept these arguments at face value.

If you have commercial property insurance coverage for business losses, or business interruption, you should consider filing a claim.

What are Insurance Companies Saying?

Hartford issued a statement on their website saying:

“Most property insurance includes business interruption coverage, which often includes civil authority and dependent property coverage. This is generally designed to cover losses that result from direct physical loss or damage to property caused by hurricanes, fires, wind damage or theft and is not designed to apply in the case of a virus.”

Travelers issued a letter to New York policyholders stating:

“Insurance for business interruption can provide coverage when a policy holder suffers a loss of income due to direct physical loss or damage to covered property at its location or another location. It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage. Accordingly, business interruption losses resulting from these types of events do not present covered losses under our property coverage forms.

Even if there has been direct physical loss or damage to property, your policy contains a number of exclusions that are likely to apply to business interruption losses. The most important exclusion to note is the exclusion for losses resulting from a virus or bacteria, which would include coronavirus.”

The position taken by much of the industry is clear: that they plan to deny most claims based on the fact the idea that if you cannot see it, it is not there.

Can COVID-19 constitute “physical loss”?

Yes. In nearly all cases, property loss coverage, and “time element” or business interruption losses, both require a showing of “physical loss or damage.” Generic arguments from the insurance industry would have people believe that because COVID-19 property loss only applies to damage that can, essentially, be seen; such a fire or flood. However, policyholders should be skeptical of this without a detailed review of their policies.

Courts in the region have widely held that contamination is a form of physical loss or damage if it impairs the use of the insured property. As a Fourth Circuit court analyzing Virginia law explained, “[t]he majority of cases appear to support [the] position that physical damage to the property is not necessary, at least where the building in question has been rendered unusable by physical forces.” TRAVCO Ins Co. v. Ward, 715 F. Supp. 2d 699, 708 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013).

Decisions from other jurisdictions provide additional guidance for determining whether the coronavirus has caused the subject property to become uninhabitable such that the physical loss requirements are satisfied. For instance, in Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005), the court held that contamination of well with e. coli rendered the property useless or uninhabitable satisfying the physical loss requirement. The court relied on the opinion in Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226 (3d Cir. 2002), which held that asbestos contamination could satisfy the requirement, ultimately finding that the requirement was not met.

In Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247, at *9 (D. Ore. June 7, 2016), the smoke from nearby wildfires satisfied the physical loss requirement, as the poor air quality rendered the property unusable for its intended purpose. See also Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo.1968) (holding the infiltration of a church by gas fumes constituted a physical loss); Farmers Ins. Co. v. Trutanich, 123 Or. App. 6, 858 P.2d 1332 (1993) (holding the saturation of an insured dwelling by methamphetamine fumes constituted a physical loss); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 541 (App. Div. 2009) (“The fact that the term “physical damage” is capable of at least two different reasonable interpretations convinces us that it is ambiguous. And well-established precedent teaches that such an ambiguous provision must be construed favorably to the insured.”).

Civil Authority Business Interruption Coverage

State and local governments have ordered a variety of COVID-19 related restrictions including stay-at-home orders in the District of Columbia, Maryland and Virginia. Insurance companies may argue that these policies are not implicated because they do not directly target the property, or do not completely close off access.

Standard ISO forms currently define “suspension” of business to include slowdowns resulting from covered peril. Moreover, most property policies cover losses resulting from the impact to the insured’s property or to other property which results in business interruptions for the insured. For example, in Virginia, a court considering this held that the insured’s CA policy was implicated by government mandated airport closures after the 9/11 attacks. See US Airways. 65 Va. Cir. 238 (2004) (Finding that US airways had to, and did, prove “that a civil or military authority issued an order which caused a denial of access to US Airways property and that order was issued as a direct result of a peril insured against).

Civil Authority coverage will often look like this:

What about Exclusions?

Insurance companies have stated that their policies expressly contain “standard form” exclusions for viruses. Businesses must carefully review their policies to see if an explicit virus exception exists. Typically, however, they will be relying on pollution and contamination exclusions – the interpretation of which varies widely from state to state.

In most cases, conflicting or ambiguous policy provisions are construed in favor of the insured. However, the exact wording of these clauses is very important. For instance, in Virginia, these exclusions have been interpreted broadly, but not universally. Considering the issue, the Virginia Supreme Court held that a pollution exception which expressly included “contaminants” applied to the release of toxic trihalomethanes into a municipal water supply. City of Chesapeake v. States Self-Insurers Risk Retention Group, Inc., 628 S.E.2d 539 (2006); see also TRAVCO Ins Co. v. Ward, 715 F. Supp. 2d 699, 708 (E.D. Va. 2010), aff’d, 504 F. App’x 251 (4th Cir. 2013) (Under Virginia law, pollution exclusion in homeowners policy barred coverage for damage to insured’s residence caused by toxic gases released by drywall manufactured in china; sulfur gases released by drywall were pollutants.).

A Virginia Circuit court declined to apply a pollutant exception clause to lead paint, stating that “it is reasonable to conclude that the exclusion clause applies only to claims based on environmental pollution.” See Unisun Ins. Co. v. Schulwolf, 53 Va. Cir. 220 (2000).

What if a clause is ambiguous?

In most cases, policy concepts and phrases will be defined somewhere in the policy. Where they are not, the majority of jurisdictions, including the District of Columbia, Maryland, and Virginia, will resolve these ambiguities in favor of the insured. See, e.g., O’Brien v. N. River Ins. Co. of City of New York, 212 F. 102 (4th Cir. 1914) (applying Maryland law) (ambiguous provisions of an insurance policy will be construed most strongly against the insurer and in favor of the insured); Emersons, Ltd. v. Max Wolman Co., 388 F. Supp. 729 (D.D.C. 1975), aff’d, 530 F.2d 1093 (D.C. Cir. 1976) (courts regularly resolve ambiguities in insurance contracts against the insurer); VA____.

Conclusions

Context matters – Just because there is a generic exclusion written into a policy does not necessarily mean a business is not covered. As indicated above, these exclusions are contextual, not just in terms of what is considered a contaminant or pollutant, but where they exist in the policy.

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