Court decisions support the conclusion that actual or threatened coronavirus contamination at or near insured property constitutes physical loss or damage triggering business interruption coverage.
State and local orders impairing access to insured property on account of the threat of COVID-19 or actual contamination, may trigger civil authority coverage under property policies.
Exclusions that insurers refer to as “standard form” virus exclusions often do not exclude viruses at all.

The insurance industry responded to the emergency of the COVID-19 pandemic with preemptive press statements that property insurance policies would provide no coverage—even before policyholders submitted any claims. Given this preliminary knee-jerk reaction, it is unsurprising that the first claims are being denied quickly, and without so much as a pretense of an investigation. In fact, the situation does not lend itself to generic denials. Commercial property policies vary in their terms, definitions and structure, and often include specialized or “manuscripted” provisions. The underlying situation is also unusually fluid. Policyholders should examine their policies carefully in light of their circumstances, and should insist on coverage where appropriate.

Because some policies have strict time limits on coverage, policyholders should carefully and quickly assess their policies, focusing on (1) the property damage “trigger,” (2) the existence and terms of any additional coverage extensions, and (3) the terms and structure of any exclusions that their insurers may seek to apply. Whether coverage exists will mainly involve legal issues beyond the expertise of brokers.

The Trigger: Physical Loss or Damage to Property
Commercial property insurance generally covers “physical loss or damage to property,” as well as resulting “time element” or business interruption losses. Therefore, business interruption coverage is typically dependent on a finding of physical loss or damage. And in many cases, particularly those involving business closures or disruptions resulting from a pandemic, the business interruption coverage may be more important, financially, than coverage for any cost of repairing property.

Importantly, the “physical loss or damage” that triggers both property and business interruption coverage is not confined to the physical destruction of property, such as experienced in a fire or earthquake. The presence of a contaminant, whether a chemical constituent or a contagion such as COVID-19, may constitute insured physical loss or damage to property, and therefore may trigger coverage for resulting economic losses. A growing body of scientific evidence indicates that COVID-19 can survive for days on surfaces normally considered inhospitable to viruses, such as doorknobs, faucets, and other hard surfaces in buildings. Such loss or damage to the insured’s own property may be sufficient to trigger business interruption coverages.

Insurance policies use the phrase “physical loss or damage” and similar variations to provide coverage for either “loss” or “damage.” This phrase has been broadly interpreted to mean more than, for example, the sort of structural damage that would result from a fire. It has also been interpreted to include conditions that make the property unusable, such as smoke from a fire somewhere else. And once coverage is triggered for physical loss or damage, property policies also cover resulting business interruption.

Courts have widely held that contamination is a form of physical loss or damage if it impairs the use of the insured property. As one federal court explained: “The 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). For example, in Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., a federal appeals court held that a building contaminated with asbestos fibers suffered “physical loss or damage” triggering property coverage. While the mere installation of asbestos was not loss or damage, the court found that the presence or imminent threat of a release of asbestos would “eliminate[] or destroy[]” the function of the building, making the structure “useless or uninhabitable.” 311 F.3d 226, 236 (3d Cir.2002). Similar decisions are legion, finding that the presence of materials such as gas fumes, e-coli bacteria and smoke caused physical loss or damage to property. See, e.g., 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); 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.”); 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); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005) (contamination of well with e-coli would render property useless or uninhabitable and therefore constitute covered physical loss or damage); Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247, at *9 (D. Ore. June 7, 2016) (where theater cancelled performances because of air quality due to nearby wildfires, “[t]he smoke that infiltrated the theatre caused direct property loss or damage by causing the property to be uninhabitable and unusable for its intended purpose”).

Insurers are showing a sort of “flat earth” mentality, arguing that if you can’t see it, then it doesn’t exist. Recent experience teaches us that such thinking is not only wrong, but highly dangerous. The presence of an infectious disease, or even an infected person, can render property uninhabitable. Once that loss or damage is shown, property damage coverage attaches.

Civil Authority Coverage
Most property policies do not limit coverage to financial losses arising only from physical loss or damage to the insured’s own property, but also cover losses resulting from impacts to other property which result in business interruptions for the insured. The most common of these coverage extensions is “civil authority” coverage, which generally covers losses when governmental or military authorities limit or prohibit access to insured property because of damage to it or other property within the area. The most memorable recent example was the closure of lower Manhattan for an extended period after the 9/11 attacks destroyed the World Trade Center. Civil authority coverage typically applies if such loss or damage occurs within a defined radius—commonly five miles—of the insured location.

State and local governments have ordered a variety of quarantines and restrictions on public gathering in response to COVID-19. These restrictions effectively bar the use of office buildings, hotels, restaurants and other places where people work or gather. Based on past conduct and current press “spin,” we expect that insurers will make several incorrect arguments to deny claims for civil authority coverage.

First, insurers will likely argue that stay-at-home and similar orders are not focused on specific locations, but on people. However, most orders directly apply to businesses and the impact of such orders is to take away the use of the insured building. Further, the civil orders now in place unquestionably respond to widespread actual occurrences or the imminent threat of COVID-19 throughout the areas to which they apply. That the orders are statewide, countywide or citywide makes no difference for coverage.

Case law supports policyholders on this issue. In US Airways, Inc. v. Commonwealth Insurance Co., for example, a Virginia court considered orders issued after the 9/11 terrorist attack on the Pentagon, which closed Reagan National Airport and made it unavailable to the insured, US Airways. 65 Va. Cir. 238 (2004). The court held that US Airways merely had to 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,” finding that: “The order to close Reagan National was made specifically out of fear of being a target for further terrorist attacks. Closing premises acted to protect the property of not only US Airways, but all the other commercial and private operators at the airport.” The court found that this prevention of risk was insured by US Airways’ civil authority coverage.

Second, insurers will likely argue that most COVID-19 civil authority orders do not completely close access to buildings; they merely restrict the activities of people. But significantly, many policies’ civil authority coverage is triggered when authorities “restrict” or “impair” access to insured property. Even policies that require a prohibition of access are fairly triggered, as civil authority orders plainly prohibit at least most access to insured property. The types of orders issued with respect to COVID-19 clearly meet this standard.

Civil authority is not the only coverage extension that may trigger the insurer’s duty to indemnify the policyholder on account of business interruption due to physical loss or damage to property other than its own. Ingress/egress coverage applies if physical access to the insured property is impeded; and attraction property coverage applies if properties that draw business to the insured property (such as transportation nodes, arenas, theaters, or cultural attractions) are closed. Every policy must be reviewed carefully for such auxiliary triggers of insurance coverage.

Besides pretending that the presence of COVID-19 cannot constitute physical loss or damage to property, insurers are arguing that insurance policies expressly exclude viruses under “standard form” exclusions. The most frequently cited exclusions are those that bar coverage for losses resulting from pollutants and contaminants, and specific exclusions for bacteria, mold, pathogens and pathogenic organisms. In some cases, these exclusions will really bar some or all coverage under a policy, but it is important not to take this for granted. There may be definitions, interpretive rules, context or structural features of the coverage that enable the insured to avoid or minimize the impact of such exclusions. These need to be examined closely.

  • Does the Exclusion Expressly Exclude Viruses?

There is no “standard” virus exclusion that exists in all property policies. In determining whether there is a virus exclusion, the first thing to consider is whether the term “virus” is found in any exclusion at all. Many policies contain pollution and contamination exclusions that list of litany of supposed pollutants or contaminants that are excluded from coverage, including various chemical constituents, smoke, soot, vapor, etc. Only occasionally do such exclusions expressly list biological contaminants and, even then, they do not usually include viruses. Because exclusions should be interpreted narrowly, the operative assumption supported by court decisions should be that an exclusion that contains a lengthy list of contaminants, yet does not expressly mention viruses, does not exclude coverage for viruses.

Even if the list of excluded pollutants and contaminants does include biological contaminants in some form, it may not exclude coverage for viruses. For one thing, the terms “bacteria,” “microorganism” and “microbe” all refer, in scientific parlance, to living things—things that eat, reproduce, and respond to stimuli. Viruses are non-cellular strands of DNA that are not known to do any of these things, and therefore are not considered living things. They are not bacteria, microbes or, in a strict scientific sense, microorganisms. When such terms appear in an exclusion, therefore, they should not be interpreted to exclude coverage of viruses.

  • Does the Context or Structure Remove the Exclusionary Impact?

Even when an exclusion encompasses viruses, explicitly or otherwise, the context in which the term is used or the overall structure of the policy may mean it still doesn’t apply. For example, many pollution and contamination exclusions bar coverage for a “release, escape, discharge, or dispersal” of contaminants (or use a similar string of synonyms). It is important to understand that these verbs limit the scope of the exclusion. Consider whether any of them applies to the mere presence of either the novel coronavirus as a contaminant or any person infected with COVID-19. Terms like release, escape, discharge and dispersal all refer to an escape of contaminants from a place of containment, such as a storage tank or cell. (See, e.g., Queen City Farms, Inc. v. Central Nat’l Ins. Co. of Omaha, 126 Wn.2d 50, 882 P.2d 703 (Wash. 1994) (terms such as discharge, dispersal, release or escape in a pollution exclusion presuppose a place of containment). The mere presence of a virus is not an “escape” of the virus. Terms like those used in many pollution exclusions do not encompass the transmission of an infectious disease, which occurs in nature and does not involve a release of contaminants from a confined place. Such exclusions should not be viewed as a bar to coverage.

It is also important to consider the broader context in which the exclusion appears. Property policies as a whole cover various categories of physical loss or damage, not limited to the insured’s own property. Nearly all such policies include civil authority coverage, outlined above. These and similar coverages sometimes appear in policy extensions. In assessing the implications of an exclusion, it is important to consider whether the terms of the exclusion apply to these additional coverages or coverage extensions. Sometimes there is a structural or semantic argument that they do not.

Other Considerations
Besides business interruption and civil authority coverages, property policies often add coverage for “contingent business interruption,” decontamination expense, losses by communicable diseases, and other features that can be specific to a given policyholder’s industry. Such coverages highlight the impropriety of the insurance industry’s blanket messaging that COVID-19 losses are not covered.

With the emergence of the COVID-19 pandemic, insurers rushed to declare a lack of coverage even before they saw the first claim. Such urgent, premature protests should be viewed with great skepticism. Too much is at stake. Every policyholder facing losses from the pandemic should carefully review its insurance with qualified coverage counsel.

For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.

Pillsbury’s experienced multi-disciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.

These and any accompanying materials are not legal advice, are not a complete summary of the subject matter, and are subject to the terms of use found at: https://www.pillsburylaw.com/en/terms-of-use.html. We recommend that you obtain separate legal advice.