The impact of the coronavirus pandemic will be dramatic across the spheres of medicine, government, personal relations, and business. While some essential businesses stay open, closures and slowdowns are likely more the rule than the exception. Affected businesses will naturally want to recoup business interruption losses through insurance if at all possible.
Although coverage varies significantly from policy to policy, some issues are likely to be generally important as insurers and insureds come to terms with potentially enormous losses. Perhaps the most important issue centers around the requirement, found in most commercial property coverages, that there be a “direct physical loss” to property before any coverage can be triggered. In many cases, this is an easy hurdle to clear; if a tree crashes into a business, forcing it to close, there has clearly been a “direct physical loss,” and if the policy provides business interruption coverage, there will likely be a viable claim.
By contrast, contamination by a virus is not clearly a “direct physical loss,” as contamination causes no observable, physical changes to real or personal property. Insurers will certainly take the position that no property coverages of any kind are triggered by viral contamination. However, this issue is not clear-cut. One Superior Court decision in Massachusetts found that the phrase “direct physical loss” was ambiguous, and that it could encompass more than “tangible damage to the structure of insured property.” Matzner v. Seaco Ins. Co., No. CIV. A. 96-0498-B, 1998 WL 566658, at *3–4 (Mass. Super. Aug. 12, 1998). This decision relied on similar analyses from courts in other states, and found that carbon monoxide contamination constituted “direct physical loss.” By contrast, other courts have found that mold contamination, even when it produces odors and bacteria in the air, is not a “direct physical loss,” as the presence of mold does not produce any “distinct and demonstrable” physical damage. Universal Image Prods., Inc. v. Chubb Corp., 703 F. Supp. 2d 705, 710 (E.D. Mich. 2010).
Of course, the issue is further complicated when businesses close due to the threat of viral contamination, without any signs that the virus is actually present. Although as a matter of plain English it does not seem that any “direct physical loss” could be caused by potential contamination, some courts have taken a broad enough view of the issue to permit an argument to be made; in Murray v. State Farm Fire & Cas. Co., 203 W. Va. 477, 493, 509 S.E.2d 1, 17 (1998), the Court suggested that a homeowner had sustained a direct physical loss when his home was threatened by a potential rockslide, even in the absence of any actual damage. On balance, though, it will likely be an uphill battle to find business interruption coverage in many policies.
The “direct physical loss” question may be the most central issue currently facing insurers and insureds, but there are multiple other issues to consider depending on the exact policy forms that make up the property coverage in question. For example, many policies exclude any coverage for losses arising from a virus, with limited exceptions. Any business owner facing business interruption losses should carefully review all pages of her policy, and seek legal advice where there is any uncertainty.
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