Making an Insurance Claim for COVID-19: What A Business Can Do

Many business owners paid for insurance, year-after-year, and now need help from their insurance company due to COVID-19 and government orders to temporarily close. Here are some potential coverages, and here’s what businesses can do.

The most important first step is to make the claim to your insurance company. If you make your claim, the insurance company may be obligated to provide you an insurance benefit. Or they may not be obligated.  But if you do not make a claim, the rule of law is clear. The insurance company has no obligation to provide you any benefit under your policy, if you do not ask for it.

This means, do not be swayed by an insurance agent or friend who tells you it is not covered, don’t bother to make a claim. These people are well-meaning but may well be wrong. There are many examples of claims made to insurance companies, that initially seemed like they would be denied, and the insurance company later agreed to or a court decided it was obligated to provide policy benefits.

The next important step is to ask the insurance company to promptly pay your claim or tell you in writing why they will not. The insurance company’s letter, stating its reasons for denying your claim, is an important document. It states how they are analyzing the insurance policy. The insurance company’s letter, by stating the basis of denial, narrows the issues to be addressed in seeking to obtain policy benefits.

An insurance policy has language stating what kinds of claims the policy covers. Other clauses define claims that are within the covering language, but that the policy excludes. Courts have said language saying what is covered will apply broadly and language saying what is excluded, is applied narrowly.

Many lawyers believe interruptions and disruptions from COVID-19 may potentially be covered. Some have brought lawsuits against insurance companies to secure coverage benefits for clients. These include suits by prominent restaurants in California, New Orleans and Florida, well-known tribal nations in Oklahoma and movie theater owners in Chicago. All these suits seek to have insurers provide coverage for damage due to COVID-19 or government closure orders because the owners cannot use their property for its intended purpose.

An insurance policy might state:

We will pay for the loss of income you sustain due to suspension of your operations. The suspension must be caused by direct physical loss of or physical damage to property at the premises caused by or resulting from a covered cause of loss.

Insurance companies claim this language does not cover COVID-19 disruptions. They argue the losses are due not to coronavirus but due to market conditions, economic slowdown, fear of contamination or cancellations, suspensions and shutdowns that are not covered. Insurers claim these are not due to direct physical loss or damage. Insurers also argue that disruption due to coronavirus is not physical injury to or loss of the property where the business is conducted.

Where COVID-19 was found at business premises, there is arguably direct physical damage. Apart from the physical damage clause, a business that is closed due to coronavirus, that cannot lawfully use its premises, arguably suffered a loss of premises, as distinct from physical damage.

Courts generally require some kind of physical impact to the building. One court said the policy’s use of the words “direct” and “physical” meant to exclude indirect, nonphysical losses [Great North. Ins. v. Benj. Franklin Sav. & Loan, (D.Or. 1990) 793 F.Supp. 259, 263]. Yet, some courts take a broader view. In one case, strong “odor” was considered direct physical loss [Farmers Ins. v. Trutanich, (1993) 123 Or.App. 6]. In another case, accumulated gasoline nearby (around and under a building) made the premises uninhabitable and was direct physical loss [Western Fire Ins. v. First Presbyterian Church, (Colorado 1968) 437 P.2d 52, 55].

A business owner should also keep in mind any conditions that may affect coverage if not met. For example, a policy may provide for “resumption of operations,” if possible, as a condition for coverage and say that any reduction shall be considered in arriving at the amount of loss. Some courts interpret that provision as a condition of coverage, not a reduction of damages clause [Pennbarr Corp. v. Ins. Co. of N. Am. (3d Cir. 1992) 976 F.2d 145, 152].

Many polices have an exclusion for claims based on damage from microorganisms. Some define microorganisms to include fungi and bacteria. COVID-19 is not caused by a fungus or bacterium. Therefore it is not excluded by such policies. Some policies define microorganisms to also include viruses.

Even if a policy has an exclusion for claims arising from viruses, the policy may not have an exclusion for claims based on government closure orders or may expressly extend coverage for civil authority orders that cause business interruption without the need for direct for direct physical loss [Sloan v. Phoenix of Hartford, Inc. Co. (Mich.App.1973) 207 N.W.2d 434]. Then, an insured business may be able to obtain coverage based on a government closure order.

Some policies may have a strong basis for coverage and may not be disputed by the insurance company. Other claims may be denied. But it is a certainty that courts will be asked to decide many coverage issues arising from COVID-19 and government closure orders. Any number of these decisions may favor policyholders.

It is important for a business owner to have made a claim, to potentially be able to benefit from any favorable decisions that may come.

David Gurnick and Jessica W. Rosen are franchise and business litigation attorneys.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.