Business Interruption Insurance Is Not Available to Cover COVID-19 Losses

We live in a new world of virtual currency, the Metaverse, AI, and so many more developments that are disconnected from tangible physical objects. But the insurance industry’s approach to coverage for business losses due to COVID-19 remains rooted in the mid-20th Century, if not earlier. That is, the industry insists that there must be “direct physical loss or damage” to the tangible property of a business before a claim for business interruption insurance will be entertained. Temporary contamination of surfaces by the virus will not qualify as a covered loss.

Beginning in March 2020 and continuing through 2021, the spread of COVID-19 caused restaurants, hotels and other businesses to shut down or restrict capacity, many in response to direct government orders, and others out of concern for the well-being of their staff and customers. Many of these businesses looked to their business interruption insurance policies to help them pay their rent, employees, vendors, and other expenses. Insurance companies uniformly resisted these claims, and numerous court cases were commenced throughout the country. Almost all decisions in such cases upheld the positions of the insurers, and the decisions have generally been upheld on appeal.

Two recent appeals court decisions in New York appear to have settled this issue, at least under New York law: Consolidated Restaurant Operations, Inc. v. Westport Ins. Corp., decided April 7, 2022 by the Appellate Division, First Department; and Kim-Chee LLC v. Philadelphia Indemnity Insurance Co., decided January 28, 2022 by the United States Court of Appeals, Second Circuit.

Consolidated Restaurant considered the claims of a company that operated numerous restaurants in the United States and abroad, while Kim-Chee involved the closure of a single tae-kwon-do studio in Amherst, New York, a suburb of Buffalo. In each case, businesses were closed as a result of executive orders which limited public access to them.  But, in each case, the appeals courts upheld the dismissal of the insured party’s claims because neither insured was able to allege direct physical loss to its property, or a tangible alteration of its property such that repair or restoration would be required. The Kim-Chee decision also distinguished the virus’s very temporary contamination of surfaces within the studio from persistent contamination by “radiation, chemical dust, gas, asbestos, and other contaminants whose presence could trigger coverage.” The fact that neither policy contained a common “virus exclusion” endorsement was of no help to the plaintiffs.

These cases follow a long line of decisions involving pre-COVID disasters which strictly interpret insurance policies under New York law. For example, in Roundabout Theater Co., Inc. v. Continental Cas. Co, a construction accident near the theater caused a street closure order which prevented access to the theater, but because there had been no damage to the theater building itself, no recovery was allowed under the theater’s business interruption policy. And in Newman Myers Kreines Gross Harris, PC v. Great N. Ins. Co., a power shutdown in advance of an approaching hurricane, which prevented the law firm employees from access to their offices at 40 Wall Street, did not trigger coverage under the business interruption policy, again due to lack of physical damage to the insured premises.

In retrospect, we know that, in 2020 and 2021, many businesses were able to survive the effects of the pandemic with help from government grants and government-sponsored loans, and sometimes with renegotiation of their obligations to landlords, vendors and other creditors. Many other businesses did not survive. In no case, however, was business interruption insurance available.

How can a business insure itself against the next pandemic or other disaster that doesn’t fall neatly within its current insurance policy coverage? It seems unlikely that the insurance industry would be willing to bear the enormous risk of insuring against a pandemic, which by definition is so widespread that coverage would be unaffordable. Perhaps the government could backstop the insurance companies, acting in effect as a reinsurer, so that catastrophic pandemic losses may be covered by a combination of private and government insurance. Beginning in 2020, a number of bills have been introduced in Congress and in State legislatures to have business interruption insurance policies cover such occurrences as  COVID-19 losses, and to provide for government assistance to the insurers; but, to our knowledge, none of them have been enacted into law.

This article is intended as a general discussion of these issues only and is not to be considered legal advice or relied upon. For more information, please contact Michael Utevsky who counsels clients on commercial real estate,  financing of commercial sites, and individual purchases or sales of residential dwellings. Mr. Utevsky is admitted to practice law in New York. Attorney Advertising.