With the spread of COVID-19 to the U.S., many insurers are preparing for possible COVID-19 related first party property claims by reviewing what coverages and exclusions might be applicable to such claims. While any claim is dependent on the specific terms of the policy issued to each insured, insurance companies should consider certain coverages and exclusions as a checklist. Partners Karen Karabinos and Eric Mull will address a coverage provision or exclusion each day. Today’s focus is on Business Income Loss Coverage.
Coverage Provision – Business Income Loss Coverage
Most commercial policies provide for some business income loss coverage, usually defined as the actual loss of business income sustained during the period of restoration due to the “necessary suspension or delay of operations caused by direct physical loss of or damage to property at a location directly caused by a covered peril.” For example, if a tornado (which is a covered cause of loss) damages a business and causes the business the cease operating, the business interruption coverage would likely pay for lost income until the damage can be repaired and business can be restored.
What constitutes “direct physical loss of or damage” to property in an insured’s policy may vary from state to state. In Georgia, both the state and federal courts agree on the interpretation of that policy language. What is a “direct physical loss” under Georgia law was first addressed in AFLAC, Inc. v. Chubb & Son, Inc., 260 Ga. App. 306, 581 S.E.2d 317 (2003). In that case, the insured filed an action against its insurers seeking coverage of costs for converting its computer systems to avoid Y2K (year 2000) computer problems. Id. at 306, 318. The policy in AFLAC covered “direct physical loss of or damage to” covered property. Id. at 307, 318.
In determining whether the costs to convert the computer systems constituted “direct physical loss of or damage”, the court in AFLAC held the terms contemplated “an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly causing it to become unsatisfactory for future use or requiring repairs be made to make it so.” Id. at 308, 319. The court noted that the term “direct” is defined as “‘without intervening persons, conditions, or agencies; immediate’” (citing American Heritage Dictionary (2nd college ed. abridged, Dell, p. 200 (1985)) and further held:
While we have been unable to find any Georgia precedent construing the term of insurance ‘direct physical loss or damage,’ the common meaning of the words and the policies as a whole indicate that it contemplates an actual change in insured property then in a satisfactory state, occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory for future use or requiring that repairs be made to make it so.
Id. at 319. The court found that AFLAC had not sustained physical loss or damage because its alleged property damage was merely a defect in its computer systems that had “existed from the time the systems were created by design” and because AFLAC did not allege that any fortuitous event had changed the computer systems. The Court of Appeals thus held that the insured’s purely economic damages did not constitute a “direct physical loss of or damage to” covered property.
In Northeast Georgia Heart Center, P.C. v. The Phoenix Ins. Co., 2014 WL 12480022 (ND Ga. May 23, 2014), a case in which Karen defended Phoenix, Judge O’Kelley with the Northern District granted Phoenix’s motion for summary judgment by following the Court of Appeal’s definition of “direct physical loss of or damage to” property. The Court ultimately held that the insured’s loss of business income as a result of performing PET scans did not result from a direct physical loss of covered property.
In that case, the insured stopped using a generator used in connection with its PET scans at the request of its manufacturer Bracco. The manufacturer requested physicians to immediately stop using the generator due to safety concerns and Bracco advised it was initiating a voluntary recall. The insured followed Bracco’s directions and ceased using the PET scanner. Days later, Bracco requested the insured “immediately return” of the generator, which Plaintiffs did and then sought coverage for business income loss for the seven months it could not perform any PET scans.
Judge O’Kelley held that the return of the generator did not cause its business income loss and the suspension of its business operations did not result from the direct physical loss of or damage to its generator. According to Judge O’Kelley, absent from the insured’s loss was “some kind of physical effect on the covered property,” which the insured acknowledged was missing. The court held that the subsequent loss of possession was “an incidental consequence because the generator had already shifted from a ‘satisfactory’ state to an ‘unsatisfactory’ state before plaintiff returned the generator.” The court focused on the word “direct”, which “in an insurance policy indicates immediate or proximate case, as distinct from remote or incidental consequences. (Cits. omitted)” And, according to Judge O’Kelley, it was the manufacturer’s request that was the “’cause which is most nearly and essentially connected with the loss’” of the insured’s business income. (Citations omitted).
To obtain coverage resulting from the Coronavirus outbreak, the existence of the virus would need to constitute a Covered Cause of Loss, which results in physical loss of or damage to the covered property. This is unlike a fire or other causes of loss that result in visible damage to property. As business across the country close due to the Coronavirus, they may be closing even though there is no apparent/visible damage at all. However, what if Coronavirus is found within a business – does this constitute damage to property? As we have seen from the first COVID-19 related business income loss case filed in Louisiana, insureds will argue that the “direct physical loss” to property requirement is met because the virus can remain on surfaces for days. In that case, Ocean Grill filed suit against its insurer Lloyd’s of London, the governor of Louisiana and the State of Louisiana seeking a declaratory judgment that there was coverage under its policy when the governor of Louisiana barred public gatherings of 250 or more, with no exception for restaurants.
Finally, as part of your analysis, you must determine whether there has been a “necessary suspension or delay of operations” of your insured’s business. In today’s tech savvy business environment, many companies can dispatch employees to work remotely so as to avoid any disruption in day-to-day productivity. In fact, prior to the outbreak of COVID-19, many businesses regularly permitted employees to work from home. Consideration should be given to whether your insured had the ability to permit employees to work from home, and if not, what efforts were made, if any, to promote remote access for their employees so as to avoid a complete suspension or delay in operations. Depending on your insured’s particular industry, permitting employees to work from home might not be an option. In that case, consideration should be given to determine what other efforts, if any, were made by your insured to further mitigate their loss of income. For example, in the past week, we have all witnessed businesses changing their hours to better accommodate their customers, the increase in restaurants temporarily moving to to-go orders only, and businesses offering delivery of their goods and services (including free or reduced cost delivery). An analysis of your insured’s specific business is recommended to determine what mitigation efforts were possible and whether such efforts were attempted or implemented. We will further explore this issue in future analysis.
In tomorrow’s analysis, we will address Civil Authority coverage, which is at issue in the Ocean Grill case.