Viewpoint: Does Denial of Access to Customers Constitute Covered Damage?

COVID-19 has forced the suspension of thousands of businesses, resulting in widespread economic loss. Many of the businesses that have survived are looking to their insurers to cover their losses. While Covid-19 is a virus, the economic loss sustained by businesses is attributable to shelter-in-place orders that have denied businesses access to their customers. Numerous cases have addressed whether the denial of access to a business by order of government is a covered cause of loss under an all-risk policy. A review of this authority shows that the salient issue is whether the insured can show that its loss arose from a direct physical loss or damage to its property. To the extent that the great majority of business interruption claims arising from COVID-19 have resulted from government shutdowns, rather than physical property damage, insureds may have difficulty recovering on their business interruption claims.

The evaluation of a business interruption claim begins with an analysis of three forms: (i) the commercial property form (e.g., CP 0010 1012), (ii) the business interruption form (e.g., CP 0030 0607), and (iii) the cause of loss form (e.g., CP 1030 0402).

The coverage section of the business interruption form sets forth what ultimately turns out to be the critical element to the analysis – direct physical loss or damage. “We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration’. The ‘suspension’ must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.” (CP 0030 0607 (2007)). (Emphasis added.)

In identifying the “Covered Causes Of Loss”, the standard commercial property form indicates, “[s]ee applicable Causes Of Loss form as shown in the Declarations.” (CP 0010 1012 (2011)). Accordingly, “the policy only provides coverage for loss or damage to covered property if the loss or damage stems from a covered cause of loss.” U.S. Fidelity & Guar. Co. v. First State Bank and Trust Co., 941 F.Supp. 101, 104 (E.D. Mo. 1996).

The basic covered cause of loss form (CP 1010) lists certain perils (e.g., fire, windstorm, etc.), and the broad form (CP 1020) adds several risks (e.g., water damage. etc.) thereto. Under a named-perils policy, “[a]n insurance policy only insures against the perils named in the contract of insurance.” New Orleans, T. & M. Ry. Co. v. Union Marine Ins., 286 F. 32, 34 (5th Cir. 1923). In other words, “‘named perils’ or ‘specific perils’ policies … exclude all risks not specifically named.” Preis v. Lexington Ins. Co., 508 F.Supp.2d 1061, 1071 (S.D. Ala. 2007). Since a virus is not a designated peril, a business interruption claim based thereon is – absent an endorsement – not covered under the basic or broad cause of loss form.

On the other hand, the special form (CP 1030) indicates “[w]hen Special is shown in the Declarations, Covered Causes of Loss means Risks Of Direct Physical Loss unless the loss is … [e]xcluded in Section B.” Thus, all-risk coverage under the special form applies to losses not excluded thereunder. Parks Real Estate Purchasing Group v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 48 (2nd Cir. 2006) (“In order to obtain coverage under a first-party [insurance] policy, the insured must … suffer a loss not caused by an excluded peril in an all risk policy.”) However, “‘all risks’ does not mean ‘every risk'”, such that “the responsibility under a first-party ‘all risks’ policy must be determined by the terms and conditions of the contract.” Port Authority of New York v. Affiliated FM Ins. Co., 311 F.3d 226, 234 (3rd Cir. 2002).

Thus, subject to the policy terms, and to the extent not excluded thereunder, a loss resulting from an order issued by a civil authority may constitute a covered cause of loss under an all-risk policy. See, Dixson Produce, LLC v. National Fire Ins. Co. of Hartford, 99 P.3d 725, 729 (Okla. 2004) (denying coverage because “there was no ‘action of civil authority that prohibited access to the described premises due to direct physical loss of or damage to property …'”) However, this is not the end of the analysis.

While eradication of Covid-19 is the ultimate concern of the shelter-in-place orders, the economic harm suffered by businesses is caused by government directives denying customer access. The treatment of business interruption claims arising from the Federal Aviation Administration stand-down orders following the Sept. 11, 2001 attacks indicate that prophylactic government orders intended to prevent future harm do not constitute direct physical loss or damage to property so as to trigger business interruption coverage.

The court in United Air Lines, Inc. v. Insurance Co. of State of PA, 439 F.3d 128 (2nd Cir. 2006), addressed whether an airline could “recover for its lost earnings caused by the national disruption of flight service and the government’s temporary shutdown of the Airport.” The court observed that the airline “would be required to demonstrate that the business interruption at issue resulted from … physical damage to property at the insured location in question, i.e., the Airport.” Id.,131. However, rather than physical damage, “access” was “prohibited because of concerns over a possible further attack. In such a case, it cannot be considered due to physical damage of the type insured.” Id.,135.

Likewise, in Philadelphia Parking Authority v. Federal Ins. Co., 385 F.Supp.2d 280 (S.D.N.Y. 2005), a garage operator made a business income claim after the FAA issued an “order … which halted takeoffs and landings at all airports” as a result of 9/11. Id., 282. The insurer denied coverage on the grounds that “it was not the direct physical loss or damage … that caused or resulted in interruption of [the insured’s] operations,” but rather “concern about future terrorist attacks that led to the shutdown of the air transportation system.” Id., 283. The court agreed with the insurer and denied coverage, holding, “the phrase ‘direct physical loss or damage’ … requires that claimed loss or damage must be physical in nature.” Id., 289.

The foregoing principle is not limited to FAA directives, but also applies to business interruption claims arising from other types of government closure orders. In Dickie Brennan & Co. v. Lexington Insurance, 636 F.3d 683 (5th Cir. 2011), a restaurant filed a business interruption claim after New Orleans “issued a mandatory evacuation order” due to Hurricane Gustav. Id., 684. The insurer “denied coverage for the [restaurant’s] losses incurred when they were unable to conduct business during a mandatory evacuation of New Orleans.” Id. The court agreed with the insurer, holding, “[n]othing in the record, including the order itself, shows that the issuance of the order was ‘due to’ physical damage to property …” Id., 686.

Finally, in Roundabout Theatre Co., Inc. v. Continental Cas. Co., 302 A.D.2d 1 (N.Y. 2002), the court addressed “whether the business interruption clause of an insurance policy issued to plaintiff theatre company covers losses occasioned by an order of the City of New York closing the street and denying access to the insured’s theatre due to a construction accident in the area, notwithstanding the absence of any physical damage to the theatre premises.” Id., 4-5. The court found that, although the policy covered “‘all risks of direct physical loss or damage to the [insured’s] property,’ not otherwise excluded,” the insured was not entitled to relief because “the only conclusion that can be drawn is that the business interruption coverage is limited to losses involving physical damage to the insured’s property.” Id., 7.

Just as the concern in United Airlines, Philadelphia Parking and Dickie Brennan was to prospectively prevent injury, in the case of COVID-19, the government orders are likewise meant to avert future harm. As such, the orders themselves do not constitute direct physical loss or damage to property. In the absence of direct physical loss or damage, a loss of income due to lack of customer access resulting from government shelter-in-place orders does not appear to trigger business interruption coverage.

Business interruption claims arising from Covid-19 present an unprecedented exposure for insurers, not only due to the geographic scope of the pandemic, but because the length of the shelter-in-place orders means that the “period of restoration” for which an insurer must “protect the prospective earnings of the insured business” (National Union Fire Ins. Co. of Pittsburgh v. Anderson-Prichard Oil Corp., 141 F.2d 443, 445 (10th Cir. 1944)) and “allow the business to remain in the same financial condition as before the loss” (Cotton Bros. Baking Co., Inc. v. Industrial Risk Insurers, 941 F.2d 380, 385 (5th Cir. 1991)) may last years. Accordingly, to the extent dictated by the facts of a particular claim, an insurer should identify whether a government shelter-in-place order is a covered cause of loss under a given policy form, and confirm whether the denial of customer access constitutes direct physical loss or damage to property.