Insurers Should Cover Small Businesses' COVID-19 Losses

By Sean Andrade and Stephen Masterson
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Law360 (October 8, 2020, 4:43 PM EDT) --
Sean Andrade
Sean Andrade
Stephen Masterson
Stephen Masterson
As a direct result of the pandemic, an estimated 900 lawsuits have been filed by businesses whose business interruption claims have allegedly been improperly denied. The estimated losses to small business are close to $300 billion per month.

In the months following California Gov. Gavin Newsom's stay-at-home order, almost half of small businesses surveyed in California either closed or planned to close soon, and millions of former employees have applied for unemployment. 93% of small businesses say they need financial support from insurers or the government in order to survive.

This type of disaster is exactly why American small businesses dutifully pay their insurance premiums. Across the country, the American dream stands at a precipice, and insurers and the federal government hold the key to preserving that dream.

Insurers are quick to interpret language as narrowly or broadly as they can to avoid paying out a claim, and large insurers have already issued statements declaring that they have no intention of paying COVID-19 claims, and repeated historically incongruous cries that they would be unable to survive if they paid out under the policies they sold.

2003's Severe Acute Respiratory Syndrome outbreak contributed to a wave of insurance claims causing insurers to dole out hefty payouts, including $16 million led by American International Group Inc. to the Mandarin Oriental Hotel. The industry adapted quickly, increasing premiums and adding exclusions to policies that specifically apply to losses due to communicable diseases, including viruses and bacteria. 

In response to the COVID-19 pandemic, insurers are regularly taking the questionable position that "the presence of an infectious agent or communicable disease at a location where there is covered property generally will not mean that property has suffered 'physical loss or damage' under a policy."[1]

The insurers position is typically based on conflating "physical loss" and "physical damage" which are not synonymous. And there are two separate and distinct questions — whether COVID-19 has caused a physical alteration that may be necessary for damage and whether a physical loss has occurred because the property is uninhabitable or unusable for its intended purpose.[2]

Especially in the absence of policy language specifically excluding communicable disease outbreaks or viruses, business owners should not give up.

Instead, to maximize their ability to obtain coverage, insured entities must provide insurance companies with prompt notice of COVID-19 losses, and most importantly, they should use general terms to avoid limited application of any coverage, diligently track expenses and losses, including the categories or types, and precise amounts, and document all COVID-19-specific facts and reasons — including applicable orders leading to closures — that would trigger coverage.

Various critical issues relating to application of coverage must be considered, including (1) whether the presence or feared presence of COVID-19 is physical loss or damage to property; (2) the period of time for which loss will be covered; and/or (3) whether closures are/were due to a qualifying order of a civil authority.

A major consideration is losses not due to the virus itself, but to the resultant stay-at-home and shutdown orders. Policyholders should carefully check to see if their policy covers losses due to closure at the order of civil authorities.

Typical business interruption coverage is based on an Insurance Services Office form for commercial property coverage which specifies that "suspension" of a business's operations must be a result of "direct physical loss of or damage to property at premises which are described in the Declarations."

But arguments can be made that in a state of emergency due to a global pandemic, with an airborne contagion, decontamination requirements satisfy that requirement, especially in confirmed cases where the possibility exists of contamination on a multitude of surfaces, including air ducts and other inaccessible areas that can require closures and major repairs.

Previous cases, even since the SARS outbreak's more restrictive policies, have seen opinions on the matter that can favor the insured. 2015's New Hampshire Supreme Court ruling in Doug Mellin & a. v. Northern Security Insurance Company Inc. found that an odor from a neighboring property was sufficient to cause insurable damage under the policy, as a result of a "contaminant or condition that causes a change to the property … that cannot be seen or touched."

Though this ruling found that a physical loss still requires the property to undergo a demonstrable alteration, the social distancing and other requirements seen under recent health guidelines, including ventilation requirements, closure of indoor seating, and other requirements that impact the layout of an establishment's premises, could be argued to qualify.

In addition, the ruling cites other examples that support the payment of claims under these circumstances, noting that there is "a substantial body of case law in which a variety of contaminating conditions, including odors, have been held to constitute a physical loss to property."

The court cites examples that cover contaminants ranging from ammonia, gasoline and other vapors, to odors from a methamphetamine lab. The ruling concludes that "physical loss" can be supported by "evidence that a change rendered the insured property temporarily or permanently unusable or uninhabitable."

Legislation to have the government support insurers in the event of future pandemics is already in the works, with a bill by Rep. Carolyn Maloney, D-N.Y., finding support from some individual insurers, and support for a public/private plan has come from insurance behemoths Chubb Ltd. and Marsh Commercial. While this plan would do nothing for the current state of things, it is surely a step in the right direction.

Even with communicable disease exclusions in policies, this should not be the end of the road for businesses that have faced direct losses as a result of the COVID-19 pandemic and the resultant state, county, and local health and safety orders. Coverage under other policies can and should be applied, including extra expense coverage, interruption by civil authority extension and communicable disease coverage.

Insurers should help to keep businesses open, the country employed, and goods and services flowing by honoring their policy obligations. If necessary, the federal government should backstop insurers with guarantees of bailouts for coverage of COVID-19-related losses. If anyone should be bailed out, it is small businesses and the people they employ.



Sean Andrade is the founding partner and Stephen Masterson is an attorney at Andrade Gonzalez LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] See March 17 letter from Chubb Group to policyholders with an explanation of how business interruption losses may apply to losses resulting from COVID-19 following March 10, 2020 directive from the New York Department of Financial Services.

[2] See, Studio 417 v. Cincinnati Ins. Co. , 2020 U.S. Dist. LEXIS 147600 (W.D. Mo., August 12, 2020.

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