By: Louis G. Adolfsen
For businesses that were shut down by COVID-19 a common question is whether there is coverage for business interruption. In New York, the answer is no. This should be the answer nationwide. Coverage for business interruption requires property damage. Lawyers have come up with all sorts of creative ideas for how COVID-19 has caused property damage to a business. It is unlikely that their arguments will succeed. COVID-19 does not cause damage to property. One can argue that it contaminated the property and that that is a form of property damage. But the Insurance Industry does not look at it that way and the courts in New York have supported the Industry’s point of view.
Apart from the absence of property damage as the reason why insurance policies might not provide coverage liability rising out of COVID-19, the Industry decided, more than a decade ago, not to provide coverage for liability arising out of bacteria or viruses. The rationale is that the policies were never intended to cover this type of risk.
On July 6, 2006, the Insurance Service Organization (“ISO”) issued a circular introducing a new endorsement CP 01 40 07 06 – Exclusion Of Loss Due To Virus Or Bacteria, which states that there is no coverage for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. New Endorsement Filed to Address Exclusion of Loss Due to Virus or Bacteria, Commercial Property LI-CF 2006-175. © ISO Properties, Inc., 2006
ISO explained the rationale for adding this new exclusion in its Introduction in this manner:
The current pollution exclusion in property policies encompasses contamination (in fact, uses the term contaminant in addition to other terminology). Although the pollution exclusion addresses contamination broadly, viral and bacterial contamination are specific types that appear to warrant particular attention at this point in time.
An example of bacterial contamination of a product is the growth of listeria bacteria in milk. In this example, bacteria develop and multiply due in part to inherent qualities in the property itself. Some other examples of viral and bacterial contaminants are rotavirus, SARS, influenza (such as avian flu), legionella and anthrax. The universe of disease-causing organisms is always in evolution.
Disease-causing agents may render a product impure (change its quality or substance), or enable the spread of disease by their presence on interior building surfaces or the surfaces of personal property. When disease-causing viral or bacterial contamination occurs, potential claims involve the cost of replacement of property (for example, the milk), cost of decontamination (for example, interior building surfaces), and business interruption (time element) losses.
© ISO Properties, Inc., 2006
Then, in describing the Industry’s “Current Concerns,” ISO made the prescient observation that a “pandemic” might be coming:
Although building and personal property could arguably become contaminated (often temporarily) by such viruses and bacteria, the nature of the property itself would have a bearing on whether there is actual property damage. An allegation of property damage may be a point of disagreement in a particular case. In addition, pollution exclusions are at times narrowly applied by certain courts. In recent years, ISO has filed exclusions to address specific exposures relating to contaminating or harmful substances. Examples are the mold exclusion in property and liability policies and the liability exclusion addressing silica dust. Such exclusions enable elaboration of the specific exposure and thereby can reduce the likelihood of claim disputes and litigation.
While property policies have not been a source of recovery for losses involving contamination by disease-causing agents, the specter of pandemic or hitherto unorthodox transmission of infectious material raises the concern that insurers employing such policies may face claims in which there are efforts to expand coverage and to create sources of recovery for such losses, contrary to policy intent.
In light of these concerns, we are presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.
© ISO Properties, Inc., 2006
Building and Personal Property Coverage is written on forms which provides coverage for “direct physical loss of or damage to Covered Property at the premises.” Under provisions on Causes of Loss, a covered cause of loss is defined as “direct physical loss unless the loss is excluded.” Such forms contain an exclusion for “delay, loss of use or loss of market,” as well as an exclusion for “acts or decisions, including the failure to act or decide, of any person, group, organization or governmental body.”
A policy’s Business Income (and Extra Expense) Coverage provides coverage for loss of business income “due to the necessary suspension of your operations during the period of restoration.” The policy provides that the suspension of operations “must be caused by direct physical loss of or damage to property at” the insured premises.
Business Income coverage also contains coverage for Civil Authority which reimburses lost business income caused by the action of civil authority where access is prohibited to the insured premises. However, such coverage is only provided where access is prohibited to the insured premises because of damage to other property in the immediate area of the insured property and no more than one mile away. It also requires that the denial of access be caused by the dangerous condition of the damaged other property or be due to the need for civil authorities to gain access to the damaged property.
Now, since 2006, policies may contain the endorsement entitled New York – Exclusion of Loss Due to Virus of Bacteria (since it is an exclusion it does not apply unless it attached to the policy) which is applicable to all coverage parts of the policy and states as follows:
“We will not pay for loss or damage caused by and resulting from any virus, bacterium or other microorganism that incudes or is capable of including physical distress, illness or disease.”
ISO prepared this endorsement for use on Commercial Property policies more than a decade ago precisely to address a pandemic such as the COVID-19 situation presented here. ISO noted that arguments could be made that buildings and/or personal property had become contaminated by a virus and therefore were damaged. Thus, the exclusion was developed to make it clear that such claims were excluded from coverage in any case.
In the liability policy context, the New York courts have held that a policy exclusion for “bodily injury arising out of the transmission of a communicable disease by an insured” (see below for the wording of that exclusion) precludes coverage for claims against an insured for injury sustained as a result of the transmission of the HIV infection was “neither ambiguous nor unduly broad.” See, Plaza v. General Assurance Company, 244 A.D.3d 238, 664 N.Y.S.2d 444 (1st Dep’t 1997). The same is true of the Virus or Bacteria exclusion.
Given the clear policy requirement that there be “direct physical loss” to property at the insured premises and since no actual property damage has occurred here, no coverage is provided. Under New York law, where the policy provisions “are clear and unambiguous, they must be given their plain and ordinary meaning, and courts should refrain from rewriting the agreement.” United States Fidelity and Guarantee Co. v. Annunziata, 67 N.Y.2d 229, 501 N.Y.S.2d 790 (1986). The New York Courts thus will enforce the policy requirement that there be “direct physical loss” and will uphold denials of coverage for business interruption claims where there is no actual property damage.
In Newman Myers Kreines Gross Harris, P.C. v. Great Northern Insurance Company, 17 F.Supp.3d 323 (S.D.N.Y. 2014), where the insured law firm was forced to shut down for several days due to a loss of electrical power to its office building as a result of hurricane Sandy. The law firm submitted a claim for loss of business income asserting that the cessation of electrical services constituted “direct physical loss or damage” to its premises because it made ingress and egress to the 26th Floor where its office was located impossible.
In rejecting the law firm’s claim and upholding the insurer’s denial of coverage, the court cited to the above-referenced Roundabout Theatre case and stated that “the critical policy language here – ‘direct physical loss or damage’ – similarly, and unambiguously, requires some form of actual, physical damage to the insured premises to trigger loss of business income and extra expense coverage.” The court further concluded that the insured law firm “simply cannot show any such loss or damage to the insured premises”. The court also noted that, under New York law, “the words ‘direct’ and ‘physical’ which modify the phrase ‘loss or damage,’ ordinarily connote actual, demonstrable harm of some form to the premises itself, rather than forced closure of the premises for reasons exogenous to the premises themselves, or the adverse business consequences that flow from such closure.” 17 F.Supp.3d at 331.
These decisions are precisely applicable in the case of COVID-19 and fully support a denial of coverage. A policy containing the applicable language requiring “direct physical loss of or damage to property” at the insured premises, and no such actual property damage has occurred in this case where the business interruption loss stems from the mandated business closures due to concerns over persons spreading of the COVID-19 virus.
As with the requirement of “direct physical loss” in the Business Income coverage, New York Courts will apply the Civil Authority coverage in accordance with its terms and will not extend the coverage to situations that do not fall within the clear and unambiguous provisions of this coverage part. Thus, in United Airlines, Inc. v. Insurance Company of the State of Pennsylvania, 385 F.Supp.2d 343 (S.D.N.Y. 2005), the insured airline claimed a loss of business income as a result of the FAA’s total shut down of all air travel subsequent to the 9/11 terrorist attacks. The Court concluded that nothing in the record supported UAL’s contention that access to the airport was barred “as a result of direct physical damage.”
See forth below are the two exclusions that, in addition to the requirement of property damage, bar coverage for COVID-19.
NEW YORK – EXCLUSION OF LOSS
DUE TO VIRUS OR BACTERIA
This endorsement modifies insurance provided under the following:
- We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. However, this exclusion does not apply to loss damage caused by or resulting from “fungus”, wet rot or dry rot. Such loss or damage is addressed in a separate exclusion in this Coverage Part.
EXCLUSION – COMMUNICABLE DISEASE
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE FORM
This insurance does not apply to any damages arising out of the following:
“Bodily injury”, “property damage”, “personal and advertising injury” or medical payments arising out of claims, accusations or charges brought by or against any insured(s) for actual or alleged damages arising out of a communicable disease no matter how transmitted.
This exclusion applies even if the claims against any insured allege negligence or other wrongdoing in the:
- Supervising, hiring, employing, training or monitoring of others that may be infected with spread a communicable disease;
- Testing for a communicable disease;
- Failure to prevent the spread of the disease; or
- Failure to report the disease to authorities.
All other terms and conditions of this policy remain unchanged.