Business Interruption Coverage for the Coronavirus (COVID-19)

The coronavirus (COVID-19) has already caused severe disruption to the economy. In the U.S., governmental entities as well as the private sector are implementing more and more drastic measures to respond to the coronavirus. While these efforts may be wise in light of the substantial public health concerns, they threaten to bring parts of the economy to a virtual halt, adversely impacting most every business and resulting in substantial losses. The Organization for Economic Cooperation and Development estimates that if the coronavirus continues to spread more widely, it could cut global growth in 2020 by half.

Business Interruption

As a company determines the impact of the coronavirus on its business, it should assess the business interruption coverage available under its commercial property (or “first-party”) insurance policies. Property policies usually contain “civil authority” or “civil order” coverage which encompasses losses caused by the actions of local, state, or federal authorities. Specifically, a property insurer may cover the loss of income that results when a government entity restricts access to a “location” covered by the policy—for example, an event facility, a shopping center, or factory owned by the company—or significantly impairs the company’s operations at that “location.”

This “civil authority” coverage may also require that the government action result from “direct physical damage” or “direct physical loss,” but this raises two important points.  First, these terms are broadly construed in California and many states as including, for example, a location that is contaminated with a virus or disease and/or is unfit for its intended use. Second, under many policies the contamination need not occur at a property owned by the company; instead, these policies provide that the contamination may exist anywhere within a defined radius around the company’s property of, say, 5 or 10 miles.

Finally, if the company’s own property is impacted by the coronavirus, then the policy may cover business interruption even in the absence of government action. The bottom line is that scope of business interruption coverage will depend on the language of your property policy and the specifics of the disruption to your business.

Contingent Business Interruption/Supply Chain Impacts

Many businesses depend on parts or products that are manufactured in China, Italy, or other areas impacted by the coronavirus, and have suffered losses due to disruption of their supply chain. Commercial property policies often contain “supply chain” or “contingent business interruption” coverage. Like the business interruption coverage for the company itself, this coverage may be triggered where there is physical loss/physical damage at links in the supply chain (for example, manufacturers, distributors, or customers), or there is a government order barring access to, or impairing the operations of, those upstream or downstream suppliers, service providers, and customers.

Next Steps

We have seen government orders and waves of cancellations and closures that were unthinkable just weeks ago. As companies assess the disruptive effects of the coronavirus, they should consider the business interruption and contingent business interruption coverage available under their insurance programs. They should also consult with their insurance brokers and counsel, because the insurance industry is likely to take a hard line on coronavirus claims as they are confronted with more and more of them.