Is the risk of coronavirus a ‘physical loss’ to the property?

Commercial insurers may say that business interruption does not normally apply to the pandemic because coverage only kicks in when there is an insurable property loss. However, some clients’ lawyers are arguing the coronavirus should in fact be considered a physical loss.

South of the border, insurance lawyer Charles “C.J.” Haddick knows of one lawsuit in California and another in Louisiana where the client in a coverage dispute argues the coronavirus itself is a direct physical loss because the risk of the virus renders the property non-usable for its intended purpose.

“On the one hand, the insureds are going to be saying, ‘This is a direct physical loss and I cannot operate my machinery, equipment, restaurant facility, what have you,’ and on the other hand the insurance companies, who have not necessarily foreseen COVID in particular, are going to say ‘There was no damage to the property and restaurants still have the ability to operate, though at a reduced capacity,’” said Haddick, Harrisburg, Penn.-based managing attorney with Dickie, McCamey & Chilcote PC.

“So that to me is the first skirmish of the first battle of business interruption – whether there is a direct physical loss – and that will be hotly contested,” Haddick said during a podcast posted by A.M. Best Company Inc.

Haddick, whose practice includes coverages disputes, was asked by moderator John Czuba, managing editor of Best’s Directory of Recommended Insurance Attorneys, about business interruption coverage during the pandemic, and whether there are any early themes developing.

From what Haddick has seen of lawsuit documents filed so far with courts, plaintiffs’ lawyers seem to think they need to convince the court that COVID-19 is in fact a direct physical loss

Several jurisdictions in both the United States and Canada have placed major restrictions on event venues, restaurants and bars in order to reduce the risk of human-to-human transmission of COVID-19, which was declared a pandemic Mar. 11 by the World Health Organization. In Ontario for example, restaurants may only serve food for pickup and delivery, so customers are not allowed to sit down at the premises consume their food or beverages.

Similar restrictions are in place in Saskatchewan. A Regina restaurant known as Memories is now a representative plaintiff in a class action lawsuit filed April 9 with the province’s Court of Queen’s Bench.

Business interruption insurance lets a business or business owner to collect income that business would have expected to generate were it not for the intervention of an unexpected event, wrote the plaintiff’s lawyer, Anthony Merchant, in the statement of claim in the Saskatchewan class-action lawsuit. Allegations against the more than dozen Canadian insurers have not been proven in court.

The proposed class of plaintiffs includes any Canadian with a business interruption claim resulting from COVID-19 against any of the defendant insurers.

During the recent A.M. best podcast, Czuba, asked Haddick to comment on which insurance lines will be affected by the pandemic.

An obvious one is event cancellation, but that depends on the specific policy wording, Haddick  noted.

“You really have to read the language of the policies,” Haddick said of event cancellation insurance. Some policies are only triggered where the closures are actually mandated by civil authorities, he pointed out.

“Other event cancellation policies exclude [closure by civil authority] as a cause of loss. So it’s a little bit of a Wild, Wild West out there in terms of cancellations. They tend to go to the exotic Lloyds of London policies which insure athletes and so on, but that is certainly going to be impacted.”