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phillips, hunt & walker COVID-19 Coronavirus Pandemic Legal Advice: Business Interruption versus Civil Authority Insurance Claims

COVID-19 Coronavirus Pandemic Legal Advice: Business Interruption versus Civil Authority Insurance Claims

by D. Finley Williams

The big question on every business owner’s mind amid the Coronavirus Pandemic is whether or not their business interruption insurance is going to cover the losses sustained during, and the damages incurred after the shutdown is finally lifted. Due to federal, state, and local stay at home orders, as well as the forced closure of many businesses, this insurance a life-line. Many businesses have already closed their doors permanently. Unfortunately, as most businesses are quickly finding out their insurance provider is not paying their claims.

Business Interruption Insurance is intended to compensate for income lost during the time necessary to repair damage to covered property and may entitle the insured to recover additional expenses that would not have been incurred during the ordinary course of business. The caveat however is that this coverage is governed by certain exclusions. The most relevant exclusion for this issue is the Virus Exclusion. So the question remains, does this exclusion bar the business from making a business interruption claim due to the Coronavirus? The short answer is not necessarily.

Most policies today include a Virus Exception. This exception was added after the SARS outbreak in 2003. The insurance companies realized the effect a wide-reaching virus could have on their bottom line and started planning accordingly. The Virus Exclusion is their attempt to avoid paying their policy holders for just such a problem as the Coronavirus.

Business interruption insurance cases are very policy specific and depend entirely on the language included throughout the policy to determine if the insured is, in fact, covered. Frankly, they all should be covered but we know the insurance company is not going to see it that way. Consequently, many states are already introducing bills that will force the insurance companies to honor these claims regardless of the exceptions that they included in the policies.

However, many businesses can’t wait that long so they must address the issue directly with the insurance company. First things first, any attorney reviewing these cases must carefully read the policy from cover to cover. Many policies contain contradicting language throughout the policy. That ambiguity as to coverage is always read in favor of the insured and interpreted in favor of coverage. An exclusion listed in one area of the policy but then excluded in another can be interpreted as ambiguous as to coverage and thus result in the insured being covered.

Second, you must determine if you have a “Named Peril Policy” or an “All Risk Policy”. An “All Risk Policy” is just that; it is a policy that covers all risks of physical loss or damage unless specifically excluded. A “Named Peril Policy” is the opposite; the policy identifies only specified covered perils subject to further specific exclusions.

The biggest issue between the two types of policies in terms of litigation is how the burden of proof for coverage is determined. In an “All Risk Policy”, the insured must generally prove three things: 1) that a loss occurred, 2) that the loss occurred during the policy period, and 3) that the loss caused physical damage to the property insured by the policy. Because an “All Risk Policy” provides coverage for all losses not specifically excluded, once the insured has proven these things, the burden then shifts to the insurer to prove that the loss was caused by a peril specifically excluded.

The burden of proof under a “Named Peril Policy” is different. Like under an “All Risk Policy”, the insured must initially prove the 3 elements stated above. However, once this is shown, the burden does not shift to the insurer to prove that the loss was not covered. Instead, most jurisdictions require that the insured prove that the damages sustained were caused by a peril for which the policy insured against.

Next, we turn our attention to the specific language in the Business Income Coverage section. The specific language used here is crucial in successfully litigating a claim against the insurance company. Most terms used in the policy are defined throughout the policy themselves. However, if they are not defined, then the common meaning of the word is used. Additionally, any ambiguity between terms in this section and their uses in other sections will be read in favor of the insured.

The main area of concern is how “loss of” or “damage to property” is defined because that is directly how the business interruption coverage is worded. Because of the use of “or” in the sentence, loss must be read to mean something other than damage. Most policies leave “loss” undefined, which means the common uses and definitions prevail. Consequently, loss is commonly defined as, destruction, deprivation, act of losing possession, harm from resulting loss or separation. Throughout the country, the term loss is highly litigated and Courts have trended towards the liberal definition where there is loss of use or function even though there was no physical damage to covered property. This is especially important in Coronavirus cases as the majority of cases resulted from the forced closure of their business and not any physical damage to the property.

Business Interruption Coverage isn’t the only avenue for recovery under the policy. Typical policies also include Civil Authority Coverage. This coverage is put in place to cover short-term loss of business income caused by action of a civil authority that prohibits access to the described premises. However, as with all policies, the actual cause of the loss must still be a covered cause of loss to property other than the property at the described premises.

Civil Authority coverage might be an easier argument to make considering the State of Emergency and Orders issued by the state and local governments shutting down the businesses. However, the recovery is limited by 4 consecutive weeks of damage. Considering the wide ranging effects of the shutdowns, this timeframe is well short of the actual damage and in most cases may not be sufficient.

Regardless of the coverage from which you attempt to recover, the business owner must document and retain everything regarding the losses and expenses incurred during this time. Documentation is needed to substantiate the loss of sales, customers, and extra expenses. Documenting sales trends and business cycles before and after the damaging event is important to show the related losses.

On the flip side, the business must take all measures to mitigate the damage as well and retain any saved expenses (expenses not incurred as a result of the loss). Most policies require the insured to make reasonable efforts to mitigate the losses and damages.

The bottom line is that business owners must have their policies reviewed by an attorney prior to making any claims. Any insufficient claim made by the insured without the counsel of an attorney may limit or restrict any later claims made.

Phillips and Hunt is offering this initial policy review free of charge. Now more than ever everyone must do their part to combat this virus and the effects caused by the insurance company’s unwillingness to honor their policy agreements.

Due to the difficulty of navigating the aforementioned issues that will or may arise, combined with the ever changing rules relating the Courts, the necessity to hire expert legal counsel to navigate you through these waters and the necessity to stay calm and attempt to be as reasonable and rational as possible is important.

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