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Law Firms Seeking Business Interruption Coverage for COVID-19 Losses Face Uncertainty

June 1, 2020

Virginia Lawyers Weekly (sub. req.) reported on May 18 that businesses which shut down due to the pandemic thought their business interruption insurance would cover their losses. But maybe not.

At least three lawsuits have been filed asking Virginia judges to find coverage for pandemic losses. An Arlington restaurant says its insurance company violated policy terms by denying coverage. A Fredericksburg escape game business and a California trucking company hope a federal judge will declare they have coverage.

Insurance industry groups say that business insurance policies were never designed to cover communicable diseases.

The industry's position is set out in federal actions in California and Florida. A sports bar's business loss claims "relate to purely economic losses brought on by outside events, not a direct physical loss to its insured property," wrote lawyers for Lloyd's underwriters in the Florida action.

The Virginia Bureau of Insurance, part of the State Corporation Commission, is not encouraging. A March 24 explanation says business interruption policies typically exclude virus losses and even closings ordered by "civil authority" must involve physical damage to the insured or nearby property.

Lawyers for businesses are contending that fear of contagion combined with government shutdown orders caused actual physical damage to their businesses.

A Mexican restaurant in Rosslyn might have been the first to go to court in Virginia. Guajillo Mexican Cuisine filed suit in Arlington County Circuit Court April 21 against Twin City Fire Insurance Company Inc., part of the Hartford Group. The restaurant says its policy covers loss of business income and "explicitly covered such loss when caused by a virus."

However, like many other policies, the policy endorsement for "loss or damage by 'fungi,' wet rot, dry rot, bacteria and virus" is pegged to "[d]irect physical loss or direct physical damage" to the property. The suit seeks a declaration of coverage and damages for breach of contract. The plaintiff's team hopes the court will find the closing order constitutes the requisite direct physical damage.

That may prove to be a daunting challenge. Even if they prevail in that argument, judges will have to compare the details of the plaintiff's business loss with the details of the contract while taking into account details of government shutdown orders. Lawyers seem to generally agree that there are so many fact variations that it is difficult to predict how any particular case would turn out.

The story even suggests that a subsequent wave of claims could target insurance brokers for failing to secure coverage that would have accounted for a pandemic.

From other sources, I have read that after the SARS outbreak in 2002, some insurance companies specifically excluded losses caused by viruses. No matter what, I expect these business interruption claims to face an uphill battle.

Sharon D. Nelson, Esq., President, Sensei Enterprises, Inc.
3975 University Drive, Suite 225|Fairfax, VA 22030
Email: Phone: 703-359-0700
Digital Forensics/Cybersecurity/Information Technology
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