Physical Loss or Damage Requirement for Business Interruption and Civil Authority Insurance Coverage
Has your business been affected by the current coronavirus crisis? Perhaps your clients, customers, and patrons stay at home, either because of a governmental order or just because they are afraid to mix with the public. Maybe your business itself has been ordered closed by authorities. Business owners wonder whether their insurance policies can provide any relief from these monetary losses.
Commercial property policies typically provide coverage for business interruption losses that result from “direct physical loss or damage” to the insured premises. Some policies also extend “civil authority coverage,” which provides coverage when access to a business is prohibited by governmental order due to physical damage within the vicinity (a specified radius from the premises), whether or not the business itself is damaged.
This raises the question: is the presence of virus on surfaces within a business premises “physical loss or damage”? No cases have been published that give us a precise answer to this question. Cases that might give us guidance generally fall into two camps.
One line of cases holds that unless there is an alteration in the physical structure of a building, there is no direct physical loss or damage. The other line of cases holds that if the property is rendered unusable or uninhabitable, that is enough to constitute physical loss or damage.
An example of the former view is Universal Image Prods. v. Fed. Ins. Co., 475 F. App’x 569 (6th Cir. 2012). There, applying Michigan law, the US Court of Appeals for the Sixth Circuit held that water seepage resulting in mold and bacteria contamination of a business’s leased premises did not constitute “direct physical loss or damage” in order to trigger business interruption coverage. The court opined that there was no structural damage and economic loss was not physical loss.
An example of the latter view is Farmers Ins. Co. v. Trutanich, 858 P.2d 1332 (1993). There, an Oregon appeals court held that a homeowner suffered a “direct physical loss” due to a pervasive odor emanating from the basement, where a former tenant had operated a methamphetamine lab. The court concluded that the odor was “physical” because it damaged the house.
The “direct physical loss or damage” language is contained in the insuring grants of commercial property policies. This means that the burden is on the policyholder to prove that the property (or in the case of civil authority, property in the vicinity) has sustained physical loss or damage. Even if your jurisdiction were to recognize that the presence of virus on surfaces within a building constitutes physical loss or damage, as a policyholder you must establish that the virus was in fact present. The scope of proof courts will find acceptable has yet to be developed.
State law governs insurance coverage issues. While some states fall into one camp or the other, many states have simply not definitively decided yet what the phrase “direct physical loss or damage” means in a commercial property policy. Additionally, a careful review of your policy may reveal whether its language varies from the norm or offers coverage for business losses under other specialized coverage.