As restaurants and businesses across the United States are forced to close their doors in response to city and state coronavirus-related shutdown mandates, business owners are left wondering if the losses they are sustaining as a result of this pandemic are covered under their business insurance policies.
The answer to this critical question comes down to the terms of your insurance policy and your State’s laws on insurance policy construction and interpretation.
Some states strictly adhere to whether the policy language is clear and unambiguous. If a policy clearly excludes a loss, then the insured has no insurance coverage for that loss. However, if the policy’s terms are ambiguous, the policy is construed against the insurer and in favor of coverage for the insured. Other states adhere to the “reasonable expectation doctrine” which tends to be more favorable to the insured. The reasonable expectation doctrine allows the court to rewrite an insurance policy when it does not meet ordinary or common expectations. Thus, determining whether the losses your business sustained as a result of a coronavirus-shutdown are covered will require the correct legal analysis of your insurance policy’s terms and conditions.
With this in mind, let’s briefly examine business interruption insurance, also known as loss of business income insurance. This type of insurance compensates your business for interruptions that force you to close your doors temporarily and lose income. Another type of business interruption insurance is insurance that covers a landlord for loss of rental income.
We’ve examined policies for two clients purchased these types of business interruption insurance. The first client owns a condominium unit in a ski resort that was used as a rental property. The resort where the condominium was located shut down as required by a local shutdown order issued to slow the COVID-19 pandemic. As a result, the condominium owner could not rent the unit during the busiest time of the ski season. The client’s insurance policy that covers loss of rental income provides as follows:
Under the terms of this policy, our client may have coverage for the loss of rental income caused by the shutdown. If the insurance company denies the claim, it will likely do so arguing that the condominium unit itself is not “unfit to live in[.]” However, the policy does not define this phrase and, depending on the legal rules of insurance policy interpretation that apply to this policy, there may be an argument that the insured is entitled to coverage.
Conversely, an insurance policy that we reviewed for a restaurant client in Fort Lauderdale seems to exclude business losses in this scenario. A city mandate forced the restaurant to close its doors. Although the insurance policy covers “direct physical loss” from outside forces, including business closure by order of “Civil Authority,” this policy contains a “virus” exclusion which very likely negates coverage for business losses associated with the COVID-19 pandemic. The exclusion is called “Total Mold, Mildew or Other Fungi” exclusion which includes “organic pathogens” and “virus.” The fact that this exclusion exists in the restaurant’s policy is very unfortunate, but not all policies contain “virus” exclusions.
For business interruption policies that do not contain a “virus” exclusion, the insurance company will likely argue that the loss of income due to a civil shutdown order does not constitute “direct physical loss” which is what this insurance covers. How insurance companies and the courts interpret this undefined phrase will be key to determining whether coverage exists or does not exist.
These two examples demonstrate that each case must be analyzed on its own facts, taking into account the specific language in the applicable insurance policy. Where one policy may provide insurance coverage for your losses, another may not.
What remains to be seen is how insurance companies and the courts will respond to such claims in these difficult and unprecedented times. It is possible that some insurance companies will not enforce virus exclusions and that courts throughout our nation will broadly construe such “physical loss” provisions to provide coverage and financial relief to businesses during this pandemic.
If you have been told that your insurance policy does not cover your business losses, call or e-mail us for answers. At Ratzan Weissman & Boldt we have a dedicated team of attorneys who are trained and ready to review your insurance policy and analyze whether your insurance policy may provide coverage for your losses. We will be happy to provide you guidance through these difficult times.