As we discussed in an earlier post, one of the areas of dispute we anticipate will emerge as activities resume following the Coronavirus pandemic will center on whether business interruption insurance policies will cover losses stemming from the pandemic and ensuing Stay Home, Stay Safe Order. One of the specific issues we anticipate is whether coverage is triggered only by governmental orders resulting from physical loss or damage. The answer to this question will be dictated by the specific language of the business interruption policy, subject to fundamental principles of insurance contract interpretation. For policies that broadly insure against lost business income resulting from any loss of access to real or personal property due to prohibition by civil authority, corresponding physical damage need not be shown. More common, however, is that standard-form business interruption and civil authority coverage requires that some physical loss or damage precipitated the order of civil authority prohibiting access to the insured’s business. Under such policies, the existence and location of a physical loss, as well as the causal link between that loss and the act of civil authority, may raise threshold coverage issues.
Guidance on the limiting effects of physical loss requirements on civil authority business interruption claims can be found in litigation arising in the wake of the September 11, 2001 terrorist attacks. In Penton Media, Inc. v. Affiliated FM Ins. Co., 245 Fed. Appx. 495 (6th Cir. Ohio Aug. 15, 2007), the plaintiff trade-show operator was scheduled to host and operate the “Internet World Fall 2001 Trade Show” at the Javits Center in Manhattan from October 1 to October 5, 2001. Following the September 11, 2001 terrorist attacks, the Javits Center became a center of operations for emergency relief efforts by agencies including FEMA. As a result, Penton was unable to host the trade show as planned, and later submitted a claim under the civil authority provision of its business interruption insurance policy issued by Affiliated FM Inc. Co. (“FM”). That policy provided for “business interruption (“BI”) coverage for losses suffered by Penton due to ‘direct physical loss or damage’ to ‘locations described in the declarations’ section of the policy, or ‘when access’ to those locations ‘is prohibited by order of civil authority.’” The declarations section of the policy identified 31 of Penton’s office locations, rather than the venues where the trade shows occurred. Under a separate “Special Terms and Conditions” heading, Penton also obtained separate “‘contingent business interruption coverage,’ [“CBI”] extending the business interruption coverage, including civil authority coverage, to ‘loss . . . resulting from direct physical loss or damage insured by this policy occurring at each supplier and customer location.’” Penton had requested the CBI provision to cover its trade show locations.
FM denied Penton’s civil authority claim and Penton filed suit. The district court granted summary judgment in favor of FM, holding that the Javits Center was not a “described location” under Penton’s BI coverage, and that no “direct physical loss” existed to support Penton’s CBI claim. The Sixth Circuit Court of Appeals affirmed. It reasoned that the “CBI provision is explicit regarding what risks are and are not covered at Penton’s supplier locations,” and included only those “resulting from direct physical loss or damage insured by this policy.” It rejected Penton’s argument to broadly interpret the BI coverage to include the locations only referenced in the CBI provision, reasoning “[t]he CBI provision does not extend the BI endorsement to cover actual losses directly resulting from prohibition of access by order of civil authority occurring at each supplier and customer location.” Consequently, civil authority coverage under the CBI provision only applied to “direct physical loss or damage” occurring at the supplier location (i.e., the Javits Center).
In United Air Lines v. Ins. Co. of the State of Pa., 439 F.3d 128 (2nd Cir. 2006), the plaintiff-airliner sought to recover “lost earnings” under a “Property Terrorism & Sabotage” insurance policy resulting from the government’s closure of Ronald Reagan Washington National Airport (the “Airport”) in Arlington, Virginia, as a result of the September 11, 2001 terrorist attacks in New York City and Arlington. The policy “insure[d] against loss resulting directly from the necessary interruption of business caused by damage to or destruction of [United’s] Insured Locations [which include United’s facilities at both the World Trade Center and the Airport] resulting from Terrorism.” The business interruption provision also “specifically extended to cover a situation when access to the Insured Locations is prohibited by order of civil authority as a direct result of damage to adjacent premises.” (Emphasis added). While the Airport itself had not suffered “significant physical damage,” United argued that the Pentagon – also in Arlington – has suffered significant damage in the 9/11 attacks. The issue raised on appeal was “whether United can nonetheless recover for its lost earnings caused by the national disruption of flight service and the government’s temporary shutdown of the Airport.”
Both the district court and the Second Circuit Court of Appeals held that it could not. Specific to the civil authority coverage, the Court reasoned that even if the term “adjacent premises” could be deemed ambiguous and construed strictly in favor of United to include the Pentagon (1.25 Miles away), “United cannot show that the Airport was shut down ‘as a direct result of damage to’ the Pentagon.” It reasoned, “[t]here was apparently a temporary halt of flights into and out of the Airport on 9/11 before the Pentagon was struck.” Furthermore, “the government’s subsequent decision to halt operations at the Airport indefinitely was based on fears of future attacks,” and “[t]he Airport was reopened when it was able to comply with more rigorous safety standards; the timetable had nothing to do with repairing, mitigating, or responding to the damage caused by the attack on the Pentagon.” Consequently, “[t]he interruption to United’s business following the attacks was, therefore, not the ‘direct result’ of damage to adjacent premises.”
The lessons from Penton Media, Inc. and United Air Lines are not subtle ones. If unambiguous physical damage or loss requirements exist in business interruption policies, courts will enforce them.
While the ultimate intersection between physical damage requirements in business interruption policies and claims arising from COVID-19 remains untested in courts, plaintiffs in the earliest wave of such litigation appear to address the issue head on. In a Napa County California Superior Court action, French Laundry Partners, LP v Hartford Fire Ins. Co., three restaurant-group plaintiffs have filed an action for declaratory relief to compel coverage under a business interruption policy arising from COVID-19 stay-at-home orders. In their Complaint, these plaintiffs have alleged that “the deadly virus physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days,” and that civil authority orders have been “issued based on evidence of physical damage to property.” (French Laundry Partners, LP v Hartford Fire Ins. Co., Complaint, ¶¶20-23) (Emphasis added).
These allegations foreshadow and sharpen what may be key issues in COVID-19 business interruption litigation – whether civil authority orders barring access to businesses to curb exposure to physically contaminated property is sufficient to satisfy physical loss or damage coverage requirements. Given the novelty of the subject matter, attorneys asserting business interruption claims resulting from COVID-19 may argue by analogy to decisions grappling with the physical effect – even albeit temporary – of other biological agents on physical property. For example, see Hastings Mut. Ins. Co. v. Mosher Dolan Cataldo & Kelly, Inc. (On Remand), unpublished opinion per curial of the Court of Appeals dated Jan. 23, 2014 (Docket No. 296791) rev’d, in part, on other grounds, 497 Mich. 919 (2014) (“The [insureds’] claims were predicated on allegations that their property was physically injured because it was infested with mold. An argument could be made that mold growth on furniture does not constitute physical damage because it renders use of the furniture unhealthy and disagreeable without impairing the physical form and structure of the furniture. However, policy exclusions must be strictly construed in favor of the insured. Accordingly, exclusion (m) does not preclude coverage for MDCK.”).