Many governmental authorities across the country have ordered “nonessential” businesses to shut down because of the COVID-19 crisis. Many business owners are asking what that means for the business income losses that they are forced to endure and whether insurance will cover those losses.
Most property insurance policies that offer business interruption coverage provide some form of “civil authority” coverage. Civil authority coverage provides insurance for the loss of income that results from restrictions prohibiting access to the insured’s premises. As with other insurance provisions, different policies will provide different operative language for triggering the civil authority coverage.
The Insurance Services Office, Inc. (“ISO”), the primary organization that drafts standard-form insurance policies often adopted in whole or with some modifications by various insurance companies, has released two different forms for business interruption. Coverage may differ depending on whether the insurer uses one or neither of these forms. The coverage for business income under either form typically begins 72 hours (unless modified by endorsement) after the civil authority action preventing access goes into effect and applies for up to several weeks. Note, however, that the specific language of your policy or as otherwise modified by endorsement may differ from or may be totally unrelated to the standard ISO business income language described here.
Under the older ISO form, civil authority coverage for business income losses is available “due to direct physical loss of or damage to property, other than at the [insured property], caused by or resulting from any Covered Cause of Loss.”
The newer form states that “[w]hen a Covered Cause of Loss causes damage to property other than [to the insured property],” insurance coverage is provided “for the actual loss of Business Income . . . sustain[ed] and necessary Extra Expense caused by action of civil authority that prohibits access to [insured property].” Two things must occur: “(1) [a]ccess to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage . . . and (2) [t]he action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage.”
Under either form, the battlegrounds in court will likely overlap over these issues: (a) whether there was a covered cause of loss, (b) whether the physical loss or damage to property requirement has been satisfied, and (c) whether a connection exists between the damage and the action of civil authority.
Covered Cause of Loss
“Covered Cause of Loss” is defined in ISO policies to describe the events triggering insurance coverage. The language varies depending on which of the three standard ISO Cause of Loss policy forms was used in your policy: the “basic form,” the “broad form,” or the “special form.” The basic and broad forms provide coverage only for the specific causes of loss identified in the respective form. Unfortunately, neither of these forms provides a clear avenue for coverage if the risk is not specifically included. The “special form” is the so-called “all risk” form, which generally means that all risks for property damage are covered unless they are specifically excluded. This last form provides the broadest protection for insureds and the highest likelihood of coverage.
It is unlikely that most insurance policies explicitly provide coverage for “coronavirus” or “COVID-19,” although endorsements for pandemic events exist. With that said, whether a loss caused by the coronavirus constitutes a covered cause of loss depends on the specific language of your policy.
It is also important to note that some policies may exclude coverage for “loss due to virus or bacteria.” While this is not a universal exclusion, many policies have included or have been endorsed to include such language. This particular exclusion, which makes coverage more challenging absent some legislative intervention, will be the subject of a future article. Some insurers may also argue that the virus is a “pollutant” and attempt to exclude coverage on that basis.
Damage to Property
The requirement that there be physical loss or damage to property is the second battleground. Again, whether this requirement is satisfied in the event of a coronavirus contamination depends on both the language of your policy and the applicable jurisdiction. As is often the case, insurance policies may not define what physical loss or damage to property means.
When language is undefined in a policy, courts often will apply the ordinary definition. “Physical damage” to property typically means, in a narrow sense, “‘a distinct, demonstrable, and physical alteration’ of its structure.” Other courts, however, have interpreted this phrase more broadly, consistent with the general principle that unclear policy language is construed in favor of the policyholder. These courts interpreting the physical loss or damage to property requirement (although not always in the civil authority context) do not always require that tangible changes or structural damage be shown for physical damage to be present.
For example, loss of use has been held to constitute physical loss when property has been contaminated by the presence of the e-coli bacteria. Likewise, in the case of cat urine odor originating outside of the property, the court reiterated that “physical loss may include not only tangible changes to . . . property, but also changes that are perceived by the sense of smell and that exist in the absence of structural damage.” In yet another case, while asbestos contamination “does not result in tangible injury to the physical structure of a building, a building’s function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants.” The rationale is that “where sources unnoticeable to the naked eye have allegedly reduced the use of the property to a substantial degree,” the standard to apply is “whether functionality of the . . . property was nearly eliminated or destroyed, or whether the property was made useless or uninhabitable.”
Additionally, physical loss or damage need not be permanent. If these intangible changes “render the . . . property temporarily or permanently unusable or uninhabitable,” then the loss could be considered physical. For instance, physical loss was found, even though the “damage” was only temporary, when the release of ammonia “physically transformed the air within [the] facility so that it contained an unsafe amount of ammonia or that the heightened ammonia levels rendered the facility unfit for occupancy until the ammonia could be dissipated.”
All of these cases indicate that the physical damage requirement can be met by the presence of COVID-19. It is important to remember, though, that courts have come to different conclusions, and the particular language of your policy will affect whether there is coverage. For example, some policies do not even require any physical damage to trigger civil authority coverage.
Connection Between Damage and Civil Authority Action
There can be no dispute that the many executive orders issued in response to the coronavirus constitute actions of civil authorities. The remaining issue discussed here is whether there is a connection between the damage to property and the action of civil authority.
An argument can be made that state and local governments have called for some businesses to shut down and prevented individuals from accessing the insured premises because some buildings in the community have been contaminated by the coronavirus. Accordingly, these governmental actions were taken in response to the dangerous physical conditions resulting from the coronavirus contamination, which is highly infectious and has caused over 1,000 deaths in the United States within the span of approximately two months since the first U.S. exposure.
At least one court has held that this connection requirement can be satisfied if the insured can show “any evidence outside the order establishing without question that actual damage to property other than the insured premises was a basis for the . . . order.” An analysis of the reasons for the action of civil authority and the language of the order itself provide a helpful starting point. However, the inquiry of whether coverage exists under a civil authority clause does not end there, especially when the insured business was forced to close its doors over a span of several days. As the court opined, “even if the initial . . . order was not based on existing property damage, there may have come a time over the next [several] days when property was actually damaged . . . and that damaged property became a basis for the [civil authority] to prohibit [the insured’s] access to its [business premises].” Whether this language applies to allow the insured some leeway in presenting evidence of the connection requirement will be the subject of some debate.
These issues are by no means exhaustive. Each policy and the jurisdiction interpreting the policy will dictate the exact battlegrounds and interpretive quirks, and thus it is imperative to thoroughly review and analyze your policy in order to determine whether there is coverage. Do not automatically assume one way or another that there is or is not coverage.
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Mark Bell and Quynh-Anh Kibler assist policyholders with insurance claims. For additional information please contact them or your regular Waller contact.
 Port Auth. of New York & New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002) (quoting 10 Couch on Insurance § 148:46 (3d ed. 1998)).
 Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 825-27 (3d Cir. 2005).
 Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 805 (N.H. 2015).
 Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997).
 Hardinger, 131 F. App’x at 826-27.
 See, e.g., Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724, 737 (N.J. Super. Ct. App. Div. 2009) (“We find no basis in the language of the . . . policy . . . to require that the physical damage . . . be permanent.”).
 Mellin, 115 A.3d at 805.
 Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418 WHW, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014).
 See, e.g., Sloan v. Phoenix of Hartford Ins. Co., 207 N.W.2d 434, 436-37 (Mich. Ct. App. 1973).
 Assurance Co. of Am. v. BBB Serv. Co., 576 S.E.2d 38, 41 (Ga. Ct. App. 2002).
 Id.; see Assurance Co. of Am. v. BBB Serv. Co., 593 S.E.2d 7, 8 (Ga. Ct. App. 2003) (affirming the trial court’s finding that the basis for the evacuation order forcing the insured to close its business premises was actual damage to property other than the insured premises when the insured introduced photographs of the damage throughout the evacuation period and testimony from the policy group describing the factors that led to the signing of the evacuation order).