The halting effect of COVID-19 and Governor Whitmer’s Executive Order 2020-21 on Michigan businesses is unrivaled in recent memory. Unforeseen interruptions to businesses and their income, however, are not. In addition to conventional CGL coverage, for decades insurers have offered insurance products that protect businesses from financial strain resulting from unexpected business disruptions. These policies are commonly referred to as business interruption or income interruption insurance. Businesses with such coverage that have or are planning to submit claims may find themselves involved in novel disputes with insurers over whether lost income resulting from COVID-19 or Executive Order 2020-21 are covered losses. While this question likely remains unanswered for many insureds, well-established legal principles and existing decisions of Michigan’s appellate courts provide some guidance.
Battles over whether business-income losses resulting from COVID-19, or government action in response to the pandemic, will turn on principles of contract interpretation applicable to insurance policies generally. “A two-step analysis is used when interpreting an insurance policy: first, does the general insurance policy provide coverage for the occurrence, and second, if coverage exists, does an exclusion negate the coverage?” Auto Owners Ins. Co. v. Olympia Entm’t, Inc., 310 Mich. App. 132, 146 (2015). In answering these questions, insurance policies “are subject to the same contract construction principles that apply to any other species of contract.” Rory v. Cont’l Ins. Co., 473 Mich. 457, 461 (2005). However, “[a]n ambiguous provision in an insurance contract is construed against the insurer and in favor of coverage.” Olympia Entm’t, Inc, 310 Mich. App. at 146.
The intersection of some of these principles and a business interruption claim resulting from a Governor’s executive order was addressed in Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46 (1973). In Sloan, the plaintiff movie theatre owner was forced to close its doors for eight days during the 1967 Detroit riots in accordance with an executive order by Michigan’s then Governor. The movie theatre suffered a net-income loss of $11,360 as a result of its compliance with the executive order, and submitted a claim under its business interruption policy. There was no dispute that “the policy in question provided for insurance against the interruption of plaintiffs’ business due to riot or civil commotion.” Notwithstanding, the insurer denied the claim due to the absence of physical damage, relying on two paragraphs of the policy defining covered losses as requiring “interruption of business caused by damage to or destruction of real or personal property.” However, a third paragraph titled “Interruption by Civil Authority,” provided that the “policy is extended to include the actual loss as covered hereunder, during the period of time, not exceeding 2 consecutive weeks, when as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.” The Michigan Court of Appeals ruled in favor of the plaintiff theatre owner, reasoning that in the civil authority interruption coverage, “no mention is made of the necessity for physical damage to the premises.” Consequently, “[t]o read the policy in the manner advanced by the [insurer] would construe any reasonable doubt in favor of the insurer and thereby negate … principles of insurance contract construction….” For cases following Sloan, see also Allen Park Theatre Co. v. Michigan Millers Mut. Ins. Co., 48 Mich. App. 199, 201 (1973); Southlanes Bowl v. Lumbermen’s Mut. Ins. Co., 46 Mich. App. 758, 760 (1973).
While Sloan and its progeny may prove instructive, businesses submitting lost-income claims under business interruption policies may face additional obstacles due to particular policy exclusions. Policies that cover interruptions based on civil authority may be gutted by express exclusions relating to communicable diseases, pathogenic organisms, viruses, or even pandemics, specifically. Furthermore, losses resulting from the declaration of a national or state emergency – from which Executive Order 2020-21 may be argued to have engendered – may also be an express policy exclusion. Such “[e]xclusionary clauses in insurance policies are strictly construed in favor of the insured.” Olympia Entm’t, Inc, 310 Mich. App. at 146. However, “clear and specific exclusions will be enforced as written so that the insurance company is not held liable for a risk it did not assume.” Id., at 146-47.
How insurers will respond to business interruption claims in the wake of COVID-19, Executive Order 2020-21, or other executive orders yet to come remains to be seen. The viability of such claims will necessarily depend on the specific provisions of each businesses’ insurance policy, as interpreted through the principles discussed above. Business are reminded to adhere to the notice and proof of loss requirements of their specific policies, so as not to self-defeat an otherwise valid claim. See D.J. Mfg. v. Citizens Inc. Co. of America, unpublished opinion per curiam of the Court of Appeals dated Apr. 2, 1999 (Docket No. 205338) (Affirming dismissal of an insured’s business-interruption claim for failure to adhere to the policy-requirement “to file a sworn proof of loss and the information that constituted a satisfactory proof of loss….”).
Authored by: Matthew D. Smith