COVID-19 and Business Interruption Insurance Coverage


Many property insurance policies contain coverage for certain types of business interruption. Business interruption insurance usually operates as a safety net to compensate business owners for losses when their place of business must temporarily close due to a “covered peril,” such as damage from storms, flooding, vandalism, or theft. Generally a prerequisite to coverage under business interruption insurance is a “physical loss” or “physical damage” to property.

When the novel coronavirus (“COVID-19”) became widespread across the United States, many businesses temporarily shuttered their doors, and most of these were left without steady income to continue paying their fixed expenses, including rent, employee wages and benefits, subscriptions, and loan payments. Some large businesses, like The Cheesecake Factory and Staples, subsequently stopped paying rent. But most businesses, especially small ones, cannot afford the risk of defaulting on their leases, loans, and other fixed obligations, and instead continue to operate at a loss.

Insurance claims denied
Left with limited options, a number of business owners have begun tendering claims to their property insurers for business interruption coverage due to COVID-19. Some insurers have investigated such claims and requested documented proof of the physical loss or physical damage to property. Although the presence of COVID-19 may not be as readily detectable as the damage associated with fire, hail, flooding, or other disasters, policy holders have argued that the presence of COVID-19 nevertheless has caused loss or damage to property. Other insurers have summarily denied coverage due to an alleged lack of physical damage. Still others have denied coverage if the insurance policy contains an explicit exclusion for “viruses” or “pandemics.”

Litigation arising from insurance companies’ denial of claims for business interruption losses has already begun. Cases involving have been filed in nearly all fifty states and Washington, D.C. In Minnesota, there have been at least three cases filed: Kenneth Seifert dba The Hair Place v. IMT Ins. Co., Lucy’s Burgers LLC v. Society Ins. Co., and Young Blood Coffee Roasters LLC et al. v. State Auto Prop. Cas. Ins. Co. (a class-action lawsuit). All have been filed in federal district court, on May 6, 2020, April 27, 2020, and May 4, 2020, respectively.

State legislative efforts to mandate coverage
Legislatures in some states have started debating whether there should be legislation requiring insurers to cover certain types of COVID-19 business losses. In New Jersey, New York, Massachusetts, Michigan, Ohio, Pennsylvania, Rhode Island, South Carolina, and Louisiana, state legislatures have introduced bills requiring insurers to provide business interruption insurance or similar coverage in such cases. No such legislation has been introduced or proposed in the Minnesota state legislature.

In Massachusetts, Senate Docket No. 2888 has been proposed to provide business interruption coverage for losses resulting from business interruption caused “directly or indirectly” by COVID-19 and all mutated forms of the virus. It also proposes that all insurance policies that cover against loss or damage to property that includes “the loss of use and occupancy and business interruption” be construed to cover such losses due to COVID-19. The docket prohibits denials of business interruption insurance claims on account of either 1) COVID-19 being a virus (regardless of whether the policy includes an exclusion for viruses), or 2) a lack of physical damage to the insured property. Massachusetts’ proposed bill applies only to policies held by businesses with 150 or fewer full-time employees. New York’s legislature has introduced a similar bill, but applies it to policies held by insured with fewer than 250 “eligible employees,” so it could offer broader coverage than that proposed in the Massachusetts bill. Such bills would undoubtedly provide needed relief to hard-hit businesses.

Federal legislation initiative
In addition, the United States House of Representatives, led by Congressman Mike Thompson, introduced the Business Interruption Insurance Coverage Act of 2020 on April 14. The bill appears to have bipartisan support, and, if passed, would require insurance companies that offer business interruption insurance to “make available, in all [ ] policies providing business interruption insurance coverage, coverage for losses resulting from . . . any viral pandemic . . . any forced closure of businesses, or mandatory evacuation . . .” The bill also provides that exclusions to such coverage are void to the extent that they exclude the aforementioned losses due to pandemics, forced closures, and mandatory evacuations. Such exclusions may be reinstated if authorized in writing by the insured or if the insured fails to pay any increased premium charged by the insurer for providing such business interruption coverage.

Such legislation, however, both at the state and federal levels, appears to be at odds with recent guidance from the U.S. Department of Treasury. On May 8, 2020, Frederick W. Vaughan, the Treasury’s principal deputy assistant secretary, reportedly wrote to Senator Ted Budd, stating that the Treasury is “actively monitoring the various proposals being discussed in Congress, state legislatures, and the private sector related to insurance and business interruption coverage.” Vaughan further stated the Treasury’s position that, while insurers should pay “valid” claims, the various legislative proposals could “fundamentally conflict with the contractual nature of insurance obligations and could introduce stability risks to the industry.”

Legislators are undoubtedly caught between a rock and a hard place in an attempt to appease lobbying efforts by large insurance companies while also representing the best interests of their small-business-owner constituents. Moreover, legislatures and courts will be caught between upholding the specific terms of bargained-for contracts and providing needed relief to small business owners at the expense of multi-billion dollar insurance companies.

Action taken by state and federal legislation, as well as by individual business owners in court may have been empowered by President Trump’s April 10, 2020 press conference, where he suggested that businesses with business interruption insurance that does not specifically exclude pandemics should receive coverage from their insurers due to COVID-19. But again, President Trump’s comments appear to conflict with the U.S Department of Treasury’s current stance on the matter.

MMB attorneys have reviewed business interruption insurance policies for a number of clients and are prepared to advise on the relative strengths and weaknesses of asserting such claims. Much depends on the specific language of the policy and the particular types of losses sustained. We would be pleased to review your particular situation, advise on the pros and cons of submitting a claim, and commencing litigation where appropriate. We recognize these are unprecedented circumstances and are ready to assist your business in weathering the storm.