As a consequence of the rapid spread of the Coronavirus (now named COVID-19) worldwide, policyholders of combined commercial property and business interruption insurance policies are likely to suffer business interruption losses, either directly or connected with their supply and distribution chains.
The World Health Organization (WHO) declared the outbreak of the virus a “public health emergency of international concern” on 30 January. At present, it is reported that there has been over 79,000 infected individuals and over 2,500 deaths, worldwide.
In most business interruption policies, human infection with COVID-19 will not, of itself, constitute “physical damage” which is the triggering requirement for coverage. In addition, there are common exclusions which apply to losses arising out of “loss of use” of premises (eg due to virus contamination). There may also be contamination exclusions which relate to virus, communicable diseases or biological pollutants.
Business interruption policies may provide coverage for extra expenses and loss of profits arising out of COVID-19 related events, such as: (i) disruption to supply or distribution chains; (ii) denial of access to premises due to civil authorities’ orders; or (iii) “loss of use” of premises, ie due to virus contamination.
In addition to “denial of access” coverage, some business interruption policies provide coverage for extra expenses as part of “loss of attraction” or “communicable diseases” extensions. These extensions to standard policy coverage usually do not have the triggering requirement of “physical damage” or, depending on the policy language, “physical loss or damage” to insured premises.
Provided that the business interruption policy has no exclusion for “loss of use”, “loss of use” of the insured premises due to virus contamination may constitute insured “physical damage” or “physical loss or damage”.
Contingent business interruption losses are losses relating to the disruption of supply or distribution chains. These losses may be covered as part of a stand-alone Contingent Business Insurance (CBI) policy or as an extension to named suppliers and distributors of the policyholder.
Trigger for coverage of CBI losses to the policyholder require proof of “physical damage” to the premises of a supplier or distributor.
In the UK, policies refer narrowly to “physical damage” and others, often in the US, more broadly, to “physical loss or damage”. Some courts, for example in the US, have held that “physical loss and damage” is a broader concept which may more easily encompass “loss of use” than the stricter concept of “physical damage”.
Courts in many jurisdictions, including the US and England and Wales, have accepted that even temporary contamination of premises (or property) may amount to “physical damage” or “physical loss or damage” that is sufficient to trigger business interruption cover.
The usual factors which may determine whether “loss of use” due to contamination of premises constitutes “physical damage” or “physical loss or damage” include (i) the duration of the “loss of use”; (ii) the extent of impairment in usefulness of the premises; (iii) loss of value of the premises; and (iv) the financial cost of decontamination.
As regards the latest policy forms being made available due to COVID-19, the US’s Insurance Services Office (ISO) has recently issued two business interruption endorsements applicable to coronavirus as part of combined commercial property policies.
The two endorsements are: (i) Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus and (ii) Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus (Including Orders Restricting Some Modes of Public Transportation).
These endorsements extend coverage to business income losses and extra expenses suffered by the policyholder due to a civil authority order which places under quarantine the policyholder’s premises, even if there is only a threat of virus contagion.
Coverage encompasses civil authority orders issued merely to prevent the spread of virus contagion to other areas, without actual contamination of the insured premises. The endorsements may also provide cover for policyholder’s losses resulting from civil authority orders which affect the premises of named suppliers or distributors.
The scope of business interruption policy coverage can only be determined after careful consideration of the specific terms of each policy as these terms may be interpreted under the applicable law. Bearing in mind the worldwide impact of the COVID-19 virus on supply and distribution chains, there may be different results due to the diversity of business interruption policy terms adopted in different jurisdictions and industries.