Many cases, including class actions, have been filed by insureds seeking business interruption coverage for COVID-19 related losses under first-party property insurance policies. In these cases, many insureds are claiming entitlement to business interruption coverage because of a “loss of use” of property resulting from business closures due to various governmental orders. Insureds claim that such closures constitute “physical loss or damage” under the business interruption provisions in their policies, even though there is no evidence that the virus that causes COVID-19 was ever physically present within the insured property.[1]
Typically, first-party property policies require that the insured premises suffer “direct physical loss or damage” for a property claim to be covered. Further, coverage for loss of business income and extra expenses is generally only provided in the event of “direct physical loss or damage by a covered peril to property of the type insured.” Insureds are claiming that government-ordered closures of property during the COVID-19 crisis constitute “physical loss or damage” because the insured lost use of the business property. However, the “direct physical loss or damage” requirement of a first-party property policy generally precludes coverage for losses that are intangible or incorporeal, and property policies do not cover claims for economic loss that do not result from the actual physical condition of the property. See, e.g., Newman Myers Kreines Gross, P.C. v. Great N. Ins. Co., 17 F. Supp. 3d 323, 331-33 (S.D.N.Y. 2014) (holding that business interruption claim for loss of use of law firm resulting from utility’s preventative shutdown of electric service prior to Super Storm Sandy was not covered physical loss or damage); Roundabout Theatre Co. v. Cont'l Cas. Co., 302 A.D.2d 1, 6-8 (1st Dept. 2002) (finding no business interruption coverage because loss of access to a theater due to construction damage in the area did not constitute “direct physical loss or damage”); Pentair v. Am. Guar. & Liab. Ins. Co., 400 F.3d 613, 614 (8th Cir. 2005) (concluding mere loss of electricity without physical damage is not “direct physical loss”); J. O. Emmerich & Assocs. v. State Auto Ins. Cos., 2007 U.S. Dist. LEXIS 108969, *8 (S.D. Miss. November 19, 2007) (holding that economic loss resulting from unavailability of computers due to mere loss of power does not constitute physical loss); see also Couch on Insurance, § 148:46 (3rd ed. 2009) (defining “physical loss” as a requirement which is “widely held to exclude alleged losses that are intangible or incorporeal”); Id. § 167:15 (“business interruption policies generally require some physical damage to the insured’s business in order to invoke coverage”).
Insureds will likely rely on a series of cases that hold that the presence of fumes, noxious gas, asbestos fibers, or other similar conditions that rendered property uninhabitable or unusable, constitute direct physical loss or damage. See, e.g., Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002) (noting that the presence of large quantities of asbestos in the air of a building constitutes physical loss or damage, but preventative measures taken to avoid a future release of asbestos do not constitute physical loss or damage); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-cv-04418 (WHW) (CLW), 2014 U.S. Dist. LEXIS 165232, at **17-18 (D.N.J. Nov. 25, 2014) (finding that the release of unsafe levels of ammonia into the air of a business was physical loss or damage because the property was rendered uninhabitable); Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (finding that an unpleasant odor rendering property unusable constituted physical injury to the property); TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 709 (E.D.Va. 2010), aff'd, 504 F. App'x. 251 (4th Cir. 2013) (finding direct physical loss where home was rendered uninhabitable by toxic gases released by defective drywall); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 38-39 (Colo. 1968) (holding that a church building’s saturation with gasoline vapors constituted a direct physical loss when the building could no longer be occupied or used); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 540-42 (N.J. App. Div. 2009) (holding under a service outage extension that loss of functionality of power generation equipment constituted physical damage).
However, these cases are readily distinguishable because coverage depended on a physical condition that rendered the property uninhabitable or useless. By contrast, business properties during the COVID-19 crisis have not been closed because of the demonstrable physical presence of the virus within the property rendering the property uninhabitable or useless. Property policies are not intended to cover claims for a mere “loss of use” of property that is not caused by a demonstrable physical condition.[2] Accordingly, the properties at issue in insureds’ recent COVID-19 filings should not be held to have suffered any type of physical loss or damage.[3]
Based on the foregoing, “loss of use” of property caused by a government-ordered closure related to COVID-19 does not constitute “direct physical loss or damage” under a property policy and insureds’ business interruption claims resulting from such a “loss of use” should not be covered.
[1] This article does not address whether the mere presence of the Novel Coronavirus constitutes physical damage under a first-party property policy. Property policies are not intended to cover the presence of a virus as physical damage and many property polices include exclusions that preclude coverage based on the existence of the virus at the insured property. Because of this and the difficulty in proving the physical presence of the virus related to closures of property, insureds seem to be moving to alternative arguments designed to avoid the adverse impact of the lack of demonstrable presence of the virus.
[2] This article does not address the highly debatable issue of whether, or the extent to which, the types of conditions outlined in the preceding paragraph in cases relied upon by insureds, e.g., the presence of gases or fumes, constitute actual physical loss or damage under the basic coverage requirements of a property insurance policy. As demonstrated in this article, claims for loss of use related to COVID-19 would not even be covered under those decisions relied upon by insureds.
[3] It should be noted that in many recent COVID-19 filings the businesses at issue are still being used and have not even suffered a complete “loss of use,” e.g., restaurants open for takeout and delivery and non-essential businesses open for essential business operations.
PartnerAaron Gould is a civil litigator whose practice focuses on representing clients in complex insurance coverage disputes, including environmental and catastrophic claims, and other complex commercial litigation. He works with ...