The implications of COVID-19, declared a pandemic by the World Health Organization on March 11, 2020, are broad and far-reaching.  For every aspect of human life touched by the virus – commerce, travel, health, longevity – insurers will be asked to respond. 

ZTGH’s Coverage Practice Group will be providing a series of blog posts on the various insurance considerations raised by our collective change in circumstances. This blog update focuses on issues surrounding business interruption coverage.

What is Business Interruption Coverage?

With the COVID-19 outbreak leading to many businesses suspending their operations, one area insurers may expect an increase in is business interruption claims. After the occurrence of any loss the biggest exposure to any business is the loss of income or profit. Business interruption (BI) insurance provides coverage for losses to a business’s income due to loss or damage to its property caused by a covered peril or a government ordinance. Typically, BI coverage is purchased as part of a business’s commercial property insurance policy. As the market provides a variety of different coverages, riders and exclusions in this area, policy wordings will vary depending on the insurer and the coverage negotiated with each insured depending on the nature of its business. The specifics of the coverage provided for in each policy must therefore be carefully examined.

The Requirement of Direct Physical Loss or Damage

While each policy varies, standard BI policies typically require proof of direct physical loss of or damage to insured property for coverage to be available. Broadly speaking, business interruption due to the COVID-19 pandemic, by itself, would not be sufficient to trigger coverage; actual physical loss of or damage to insured property must be shown. As such, where a business chooses to suspend operations due to concern or suspicion of a COVID-19 outbreak, it is unlikely that such a disruption would trigger BI coverage, since no actual physical loss or damage to the insured property has occurred.

As most businesses will have difficulty testing for COVID-19 on their premises, it is unclear how an insured would prove the presence of COVID-19 on its premises. That said, in theory, if a business must suspend operations due to the actual presence of COVID-19 on insured property, which renders that property uninhabitable or otherwise not fit for its normal use, such a disruption may meet the definition of physical loss or damage under a BI policy. However, in practice, the length of time required to sanitize the insured’s premises may be less than the one or two week waiting period deductible common to such policies. As such, it is difficult to see how physical loss of or damage to the insured property as a result of COVID-19 would be sufficiently proven to engage BI coverage.

Is COVID-19 a “Covered Peril” Under the Policy?

In addition to establishing physical loss or damage to property, it is also necessary to demonstrate that COVID-19 is a “covered peril” under the policy. Property insurers typically write two kinds of policies: “All Risk” and “Named Peril”. Under an “All Risk” policy, coverage is provided for all fortuitous risks unless they are expressly excluded under the policy. Under such policies, losses arising from COVID-19 may be excluded through a standalone exclusion for infectious or communicable diseases (which became more common after the SARS outbreak in 2003) or through a broadly worded pollution or contamination exclusion.

Under a “Named Peril” policy, coverage is only provided for the specific named perils set out in the policy. Although infectious or communicable diseases may be included as a named peril, it is not standard in such policies and has become more uncommon since the SARS epidemic.

Policies may also include an extension of coverage for business interruption arising from an inability to use insured property as a result of an order or ordinance from a public authority. The invocation of an order or ordinance as a trigger for coverage is critical, and may be poorly understood under our current circumstances. In a number of very recent instances, municipalities and provinces have “urged”, but refrained from ordering, business closure. An urge may not be tantamount to an order under the law, and we therefore expect to see some litigation for coverage on this subject.

Practical Considerations for Insurers

The ongoing and imminent business interruptions caused by COVID-19 requires insurers to be vigilant and to take a number of proactive steps to adapt to this new reality and to protect themselves accordingly. Insurers will have to carefully, but quickly, review coverages, riders, and exclusions to adequately understand precisely what risk each policy insures, the circumstances in which coverage is triggered, and the exclusions that apply.  As a result of the complexity of this coverage area, the novelty of the claims, and the variance between policy wordings, insurers must be prepared for claimants who have minimal understanding of their entitlement under the relevant policy, particularly in respect of government directives and mandates to businesses, which seem to change by the day.

Going forward, we expect that insurers may underwrite to this changing landscape by imposing more stringent conditions on business interruption insurance. It is likely that infection and communicable disease exclusions will become more ubiquitous, and that further exclusions or limitations on coverage for viral and bacterial contaminations may be developed. Alternatively, insurers may continue to underwrite this risk but have a much better understanding of the premium required and the conditions necessary to make the coverage profitable.

ZTGH’s Coverage Practice Group will continue to closely monitor the legal and business implications associated with the COVID-19 pandemic and report on further developments. For more updates or to speak with a coverage lawyer, please click here.