Celebrity chef Thomas Keller filed a lawsuit last week against the insurance company that insures his famous French Laundry restaurant in Napa Valley, California, contending that the carrier wrongfully denied Keller’s claim for business interruption arising from the government-ordered closure of the restaurant due to the COVID-19 crisis. Many other businesses across the country, including those in North Carolina, may wonder if they should file a claim under the business interruption (a/k/a “business income”) provisions of their insurance policies and whether their insurance carriers will deny those claims. The answer to the first question is “yes”; and the answer to the second question is “probably”. The likelihood that COVID-related claims will be denied, however, should not discourage businesses from filing claims.
Business interruption claims arising from COVID-19 face an uphill battle under standard policy language. The primary obstacle is that most policies pay for business interruption arising from physical damage to the covered property. The coverage would apply, for example, if a business’ property is damaged by fire so that it cannot operate for a number of months. A business submitting a business interruption claim due to COVID-19-related exposure will face an argument by the insurance company that Coronavirus would not constitute physical damage to property even if it were found to be present on the insured premises. The argument in favor of coverage is even tougher where there is no evidence that the virus is present on the covered premises and the closure is due to fear that the virus is somewhere in the community.
Most business income coverage also applies to business interruption caused “by action of civil authority that prohibits access to the [insured] premises . . .” On its face, this would appear to be the coverage most applicable when a business is closed by order of the Governor or local authorities as a precaution to limit the spread of COVID-19 illness. Unfortunately, this part of the coverage generally is also tied to the existence of property damage to other property within or specified distance from the insured’s property. The same question about whether COVID-19 constitutes property damage therefore arises under this part of the coverage as well.
Some policies also provide “contingent business interruption” [“CBI”] coverage that protects against business interruptions caused by damage to the supply chain of the business. This coverage, however, typically applies only when a link in the supply chain has suffered the type of property damage that would be covered on the insured’s own premises. Thus, the question about whether Coronavirus will constitute property damage arises from this type of coverage as well.
As if the “physical damage” requirement were not a sufficient obstacle, many insurance policies now have a “virus” exclusion that purports to exclude coverage “for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
So with all these obstacles (and some others), why bother to file a claim?
The short answer is that it does not cost much to submit an insurance claim (relatively speaking), and no one can say with certainty that the claim will be denied – or that the denial will be sustained by the courts. But a business certainly will not recover anything under its policy for business interruption if it does not submit a claim.
The uncertainty about whether a claim denial will be sustained arises from several sources.
First, coverage – or a lack of coverage – depends on the precise language of your particular insurance policy. The discussion above addresses standard language, but your policy may have different language.
Second, the scope of insurance coverage ultimately depends on how the courts interpret the relevant policy language, and the courts often interpret the language differently than intended by the insurance industry. The courts have not had an opportunity to interpret the property damage and virus exclusion provisions summarized above in the context of the COVID-19 crisis. The general rule of law in North Carolina and elsewhere is that any ambiguities in insurance policies must be construed in favor of coverage. In the wake of the COVID-19 crisis, thousands of lawyers for insureds across the country, like the lawyers for the French Laundry, will be developing arguments about why the COVID-19 circumstances constitute property damage that falls within the scope of business interruption coverage or why the coverage is at least ambiguous in this regard. Some of those arguments may find favor with the courts.
Finally, there have been rumblings of legislative “fixes”. The New Jersey and Ohio legislatures, for example, have considered bills that would expand COVID-19 coverage under existing policies. While there might be a significant question about the constitutionality of such legislation, it bears watching.
The bottom line is submitting a business interruption claim preserves the insured’s rights to compensation in case (i) the particular provisions of that insured’s policy create broader than normal coverage; (ii) the courts start handing down rulings that interpret business interruption coverage broadly in the case of COVID-19 claims; or (iii) legislatures provide relief.
Now more than ever, it is vital that business owners and operators understand their rights and opportunities. At Manning Fulton, we stand ready to assist you in that analysis and would be honored to help you through these uncertain times. Should you have any questions about how any of the foregoing issues might impact you or your company, please contact Michael Medford or your Manning Fulton relationship attorney.