If you’re looking to file a Business Interruption (BI) claim, you may be curious as to what your chances of success are. Your insurance provider may have told you they will deny all claims related to COVID-19. An agent may have advised you not to file a claim, or else the insurance company will raise your premiums. However, these are all irrelevant as to whether you should file a BI claim. The most important thing that will tell you if you’re covered is found in your contract.
Direct Physical Loss
Most BI contracts usually contain a clause stating that the insurance company will cover loss of income due to “direct physical loss or damage.” Practically all of these claims that have shown up in California have been dismissed. So far, of the cases that have been dismissed, the arguments have centered on the government order preventing access to business property. Courts have found that there is no “physical loss” when the plaintiffs remain in possession of all of their property, even if they are forbidden from going there. Because Stay at Home and Curfew orders are merely temporary, you have technically not been dispossessed of your property and therefore not experienced “physical loss.”
The first case in the U.S. to survive a motion to dismiss is currently underway in Missouri, in a case called Studio 417. The plaintiff in Studio 417 made a simple yet persuasive argument: there is a high likelihood that COVID-19 entered their business property. The court found this persuasive for a few reasons. First, COVID-19 is physical in the ordinary sense of the word. It’s a physical substance, emitted into the air, that lives on and is active on inert physical surfaces. Second, it creates loss. COVID-19’s presence on the physical property creates a loss of use of the property. The court found that Studio 417 had alleged enough facts that fit the requirements of “physical loss” to proceed with their claim. This decision was just affirmed by the 8th Circuit.
In essence, a claim for “physical loss” should rely on facts pertaining to COVID-19 being on the premises, rather than a government mandate. Showing that COVID-19 actually entered the premises is a great argument, but even showing that there’s a possibility that COVID-19 entered your property is more persuasive than arguing that the government’s shut-down orders caused you to suffer physical loss. Facts pertaining to a government mandate should instead be included in a civil authority claim, explained below.
In addition to a physical loss clause, many BI policies will also carry a civil authority clause. This means insurance companies promise to cover lost profits due to a civil order denying access to the premises, but it remains contingent upon physical loss or physical damage to adjacent property. In other words, if your neighbor has suffered a physical loss as described above, and it caused the authorities to bar access to the insured property (place of business), thereby causing you lost profits, you should be covered. This argument has also been made numerous times but dismissed on masse.
Unsuccessful plaintiffs have been dismissed for failing again to show physical loss. So far, arguing that government mandates caused physical loss has been a losing argument. So, if you can’t prove you suffered a physical loss, can you prove that your neighbors did instead? The answer is no. If the government mandate doesn’t cause you physical harm, then it won’t do so for your neighbor. Thus, civil authority claims pertaining to COVID-19 have been unsuccessful without a successful claim for physical loss.
Unsurprisingly then, the first case to also survive a motion to dismiss for a civil authority claim is Studio 417. Studio 417, alleging sufficient facts that they suffered a physical loss due to COVID-19 on their premises, showed that their neighbors suffered as well. The presence of COVID-19 caused the government to issue a mandate limiting business operations. The court found that this was an argument that should go to trial.
A civil authority claim requires the same “physical loss” analysis as above. However, because showing that a government mandate was harmful to your business is relatively easy, this can be added in conjunction with a physical loss claim. These two claims make up the bulk of what we’ve seen so far in BI cases.
Some policies state that they will not cover for anything related to a virus, bacteria, or other airborne pathogens. This is an effective escape hatch for insurance companies. Other policies actually define “physical loss.” If the contract defines physical loss, the courts are inclined to use that definition, even if it specifically excludes viruses.
So far, most BI cases have involved small businesses. However, after months of suffering through the pandemic and shut down orders, big businesses such as Ralph Lauren have filed their own BI claims. Some have seen this as good news, as big businesses have more resources to take their insurance providers to court and may lead to the discovery of more successful avenues like Studio 417 did. Others are more skeptical since big business is being dismissed with everyone else.
There are currently hundreds of pending cases related to BI claims for COVID-19. There are plenty of eyes on Studio 417, due to its success as “first to survive a motion to dismiss.” Indeed, some California courts have signaled in their decisions that plaintiffs should follow in Studio 417’s footsteps, and that they are more likely to allow cases to be tried if they allege that COVID-19 entered the premises. What we’ve seen with Studio 417 is just the first step to winning a BI case. Although it survived a motion to dismiss, it still must prove a claim on the merits.