Business Interruption Coverage Under All-Risk Policies

Minami Tamaki LLP’s Consumer and Employee Rights Group is investigating claims that insurance carriers are wrongfully denying business interruption insurance claims made by businesses coping with the coronavirus (COVID-19) pandemic.

Millions of businesses across the U.S. are struggling amid the economic crisis caused by coronavirus-related shutdowns. Many of these businesses have tendered claims under their business interruption coverage in their commercial property insurance policies in hopes of mitigating the losses they have experienced.

Unlike specified peril or named peril policies which only cover risks that are expressly identified in the policy, all-risk policies (also called “comprehensive” or “open peril” policies) cover everything except what is expressly excluded from the policy. Because traditional specified peril policies generally do not include viral or disease outbreaks, they will likely not provide coverage for businesses affected by the coronavirus pandemic. So, the question remains whether all-risk policies will.

Many insurance carriers, without conducting any investigation, have taken the position that claims related to COVID-19 are not covered by these all-risk policies. All-risk policies typically cover losses due to business interruption where a policyholder suffers “a direct physical loss of or damage to” the property covered under the policy. Additionally, some policies include what is called civil authority coverage which indemnifies policyholders for business interruption losses as a result of a government order that restricts access to the property. Insurance carriers have denied claims on grounds that policyholders have not suffered “a direct physical loss of or damage to” their property or that the government order did not restrict access as a direct result of “a physical loss or damage to” the property that is covered under the policy.

In early April, insurance provider Chubb Ltd. sent out a notice to policyholders on its website that “the presence of an infectious agent or communicable disease at a location where there is covered property generally will not mean that property has suffered ‘physical loss or damage’ under your policy.” Some insurance industry attorneys believe that there has been a concerted effort by insurers to dissuade the public from filing business interruption claims by sending out pre-claim notices such as Chubb’s April notice, as well as requiring property damage and denying claims based on lack of property damage.

Businesses have filed actions against their commercial property insurance carriers as their claims for losses potentially covered under their business interruption coverage have been denied. Chubb is facing a proposed class action lawsuit brought by New Jersey eatery, Benito Ristorante. Similarly, in San Francisco, Michelin-starred Thai restaurant Kin Khao has also filed suit against Oregon Mutual Insurance Company, alleging that Oregon Mutual Insurance Company is wrongfully refusing to provide business interruption coverage. As of the writing of this article, over 120 lawsuits have been filed in the past two months against insurance carriers for denial of claims for business interruption loss.

Many of these businesses claim that they are covered because government orders requiring them to cease operations have caused them to lose the use of their property. The lawsuits allege that the requirement to cease operations constitutes a physical loss of the insured property.

Contingent Business Interruption

Some policies may provide coverage for contingent business interruption losses. Contingent business interruption coverage insures against losses due to the suspension of operations of a contingent business, such as a supplier. Like the business interruption coverage, the contingent business interruption coverage requires a direct physical loss or property damage to the supplier that would have been covered if that direct physical loss or property damage was sustained by the policyholder. Again, because coverage for contingent business interruption requires a direct physical loss or damage to property, it is likely that insurance carriers will deny such claims unless there has been physical damage to the property of the contingent business.

Virus Exclusions

In 2006, the Insurance Services Offices adopted an endorsement amending coverage to exclude any losses due to virus or bacteria in response to the SARS outbreak. Policyholders who have continued to renew their policies with the same insurer over the years may discover that their policies contain virus exclusions as their claims are rejected on that basis.

However, rejection of claims based on the virus exclusion may be invalidated if the policyholder did not get notice that their coverage under the policy was changing. Under California Insurance Code section 676.2, subdivision(c)(1), if the policy has been in effect for more than 60 days or is up for renewal, a change in the conditions of coverage is not effective unless a written notice is given to the named insured at least 30 days before the effective date of the change. Thus, the insurance carrier’s failure to disclose the elimination of coverage will invalidate the exclusion.

Pre-claim notices

Any coverage analysis will depend on the specific language of the insurance contract. Some insurance carriers are sending out pre-claim notices about potential coverage for COVID-19 which includes what may be applicable portions of the policyholder’s insurance coverage provisions. These pre-claim notices are not denials of claims and are not actual determinations of coverage. As most insurers require prompt notice of any claims, policyholders must still make a claim if they would like to preserve their right to have their losses indemnified.

Other Questions?

For more information on insurance coverage for business interruption claims, contact us online or call us at 415-788-9000.

*The contents of this article are for informational purposes only and does not constitute legal advice. Readers should contact a licensed California attorney to obtain advice with respect to any particular legal matter. Information on this website may not constitute the most up-to-date legal or other information. Use of this website does not create an attorney-client relationship between the reader and Minami Tamaki LLP.