Many businesses in Ohio are suffering from a loss of business income due to events relating to the COVID-19 global pandemic. Dozens of articles have been written about the insurance coverage issues present when a restaurant or other “Non-essential” business closes because of a state’s Stay at Home Orders. To look at a different issue, this article will provide an overview of the insurance coverage issues that are present when an Ohio business makes an insurance claim for lost income because it closed due to a known exposure to COVID-19.
It is important to note that for the purposes of this article, the business making the business income loss claim is classified as an Essential Business under the Ohio Department of Health Director’s Stay at Home Orders. The analysis set forth in this article would be fundamentally different if the businesses making the claim was classified as Non-Essential or if it did not have a provable exposure to COVID-19. Further, this article does not address the “Extra Expense” or “Civil Authority” coverages within the Business Income (“BI”) policy.
The facts of every insurance claim are unique. However, businesses that intend to tender a business income loss claim, businesses that have had their insurer request an Examination under Oath, and businesses that have had an insurance claim denied have one thing in common – they could all benefit from an experienced insurance coverage attorney.
A. Ohio Widgets’ Business Income Loss Claim
To animate this analysis, this article will use the fictional company Ohio Widgets. Ohio Widgets is a family owned business that sells equipment to healthcare providers. On Friday, March 20th, Cyndi, a sales representative, did not go into the office because she felt fatigued and she had a slight fever. Not knowing if her symptoms were caused by a sinus infection, seasonal allergies, the flu, or COVID-19, she visited her primary care provider who managed to get her tested for COVID-19 that day. Cyndi told her manager that afternoon that she as ill and tested for COVID-19. Cyndi was told to not return to work until her test results were back.
The Ohio Department of Health Director’s Stay at Home Order became effective at 11:59 p.m. on March 23, 2020. On March 30th, Cyndi tells her manager that she tested positive for COVID-19. The owner of Ohio Widgets decides to close the business that day for two weeks so that the company can sanitize its building. Ohio Widgets contacts its commercial insurance company and makes a business income loss claim on Tuesday, March 24th. From March 23rd through April 6th, Ohio Widgets lost $100,000 of net income directly attributable to its closure.
B. Coverage for Ohio Widgets’ Business Income Loss Claim
Ohio Widgets’ general commercial liability (“CGL”) insurance policy includes the industry standard Business Income (“BI”) endorsement.
- Direct Physical Damage or Loss
In order for Ohio Widgets to obtain coverage for its BI claim, Ohio Widgets must show that it suffered from a physical loss of or damage to insured property. If Ohio Widgets cannot show that its insured property suffered from a physical loss or damage, then its claim will be denied. The two sub-issues within this issue are; 1) is the virus physically present within Ohio Widget’s insured building, and 2) is the presence of the virus a physical loss or damage to the building?
a. Proving the Virus is Present
The insurance company will state that it is Ohio Widget’s burden to show that the virus is physically present in its building. This is a significant challenge to any insured given that COVID-19 tests are currently restricted for use by healthcare providers. Since Cyndi tested positive for COVID-19, there is a strong argument presuming Ohio Widget’s office has been contaminated with COVID-19. Common sense dictates that if a carrier of a known lethal virus was physically present in a building for four workdays, then it is more probable than not that the building has become contaminated with the virus. Individuals can be tested, but there is no practical way to test the surfaces of a building for COVID-19.
However, it is not clear how an insurer or Ohio court will analyze this issue given the impossibility of testing. Assuming the insurer agrees that Ohio Widgets probably has been contaminated with COVID-19, the next issue is whether that is enough damage to its building to qualify as a covered claim.
b. Whether the Presence of a Highly Contagious and Lethal Virus Qualifies as Physical Damage or Loss to Property
There are arguments supported by case law that the presence of COVID-19 within a building is a physical loss or damage to property. No intelligent person doubts COVID-19’s ability to quickly spread and harm or kill people who are exposed to it. However, insurers also have arguments and case law stating that the contamination from a virus might not be a physical loss. This issue is already being litigated across the country. How the courts address this issue will determine whether any claimant for a COVID-19 exposure obtains insurance coverage for COVID-19 related business income losses.
Ohio Widgets’ contamination with COVID-19 is similar to how an intrusion of lead dust, toxic fumes emitting from “Chinese drywall,” and asbestos fiber contamination make a building uninhabitable due to a physical damage or loss. In re Chinese Manufactured Drywall Products Liability Litigation, 759 F.Supp. 2d 822(E.D. La. 2010); Widder v. Louisiana Citizens Property Ins. Corp., 2011-0196 (La. App. 4 Cir 08/10/11), 82 So.3d 294, 296; Bd. of Edn. v. Internatl. Ins. Co., 308 Ill.App.3d 597, 242 Ill.Dec. 1, 720 N.E.2d 622 (1999). There is nothing that makes a lethal virus less physically present than lead dust or asbestos fibers. Either COVID is physically present in a defined space, or it is not. For all three contaminants, remediation is necessary to allow the buildings to become safely occupied by humans.
Insurers will be extremely resistant to classify a virus contamination as a direct physical loss or damage. Insurers will assert the argument that in order to qualify as a direct physical damage or loss, the damage or loss must be more permanent. The ability for COVID-19 to be eliminated by sanitizing the building helps the insurance company’s argument that such contamination is not a direct physical damage or loss.
Most if not every insurer will deny claims similar to that of Ohio Widgets’ by stating that the possible existence of a virus within a building is not a physical loss or damage to property. From the insurance company’s perspective, allowing the presence of a virus in a building to qualify a physical loss will open the floodgates of insurance claims and payouts. There is no doubt that this issue will be the subject of lawsuits and the final resolution of this question will be determined as a matter of law by an Ohio court.
- Relevant Exclusions and Conditions
Proving a direct physical loss or damage to insured property is a significant event in making a BI claim. For an all risk policy, claims resulting from the loss or damage to the property are covered unless the cause of the damage is specifically excluded by the policy. For those insured by an all risk policy, it is now the insurer’s burden to prove an exclusion applies to the claim. Ohio Widget’s BI claim is covered unless its insurer can prove that a specific exclusion applies to its BI claim.
a. Damage Mitigation Condition & 72 Hour Waiting Period
All insureds are required to take the reasonable steps necessary to protect the insured property from additional damage. This condition is essentially a responsibility that the insured agrees to undertake in order to obtain insurance coverage. Under the damage mitigation condition, insurers will argue that the insured had to sanitize the building as soon as practicable to minimize the “additional damage,” which in this case is the presence of COVID-19.
It is not clear how much traction this condition-based argument will have with Ohio courts. Insurers will argue that some insureds are capable of sanitizing the building themselves. In other situations, insurers will insist that the insured must attempt to schedule a sanitization as quickly as possible. Regardless of the approach, insurers will claim that the BI loss ends once the sanitization is complete or after fourteen days – whichever is sooner. The applicability of this condition will be claim specific.
The damage mitigation condition is particularly relevant given that BI claims generally have a 72-hour waiting period before the coverage begins. If Ohio Widgets manages to have the building sanitized within 72 hours of receiving notice that Cyndi tested positive, then Ohio Widgets is probably not entitled to any BI coverage.
b. Virus Exclusion
Many insurers added a specific exclusion for losses caused by viruses after the SARS outbreak in 2003. The exclusion denies 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.”
The virus exclusion is a formidable barrier for businesses attempting to obtain coverage for their COVID-19 related BI claims due to the broad scope of the exclusion’s language. In the backdrop of every BI claim like that of Ohio Widgets’ is the global pandemic. Insurers have already cited the virus exclusion as why BI claims that occurred during the COVID-19 global pandemic are denied. To that end, if Ohio Widgets’ insurance policy has the virus exclusion, the insurer will likely deny its claim.
This exclusion has not been frequently tested by courts. It will take creative arguments based on each claim’s unique set of facts to avoid the application of this exclusion. Just because a BI claim is filed during the COVID-19 pandemic does not mean that the business’s loss of income was caused by a virus. It is vital for the business to take the time to gather evidence and prove alternative causes, or at least evidence that its losses were not caused by COVID-19, before making a claim for a loss of business income. Unfortunately, many of these challenges will occur in the court system after the issue was used to deny the business’s claim.
One possible angle to attack the virus exclusion in an Ohio court is to argue that Ohio Widget’s losses and business closure were not caused by COVID-19 itself but by the fear of a known exposure to COVID-19. This argument relies on the fact that Ohio Widgets can show COVID-19’s presence in its building, which is necessary to qualify as direct physical damage or loss. While the details of this argument will depend on the facts of each claim, it is worth pursuing against the blanket denials being issued to Ohio businesses. Ohio insurance coverage attorneys who represent policyholders will be carefully watching for any arguments against the application of the virus exclusion.
c. Acts or Decisions
The “acts or decisions” exclusion precludes coverage for losses and damage caused by the act or decision, or failure to act or decide, of any person, entity or governmental body. Technically speaking, even though the virus was present within the building, Ohio Widgets voluntarily chose to close its business. Even though there are obvious moral and ethical reasons to close a business after a known exposure to COVID-19, insurers are not known to pay on claims their policy language could allow them to deny.
Even though this exclusion is seemingly applicable to Ohio Widget’s BI claim, it is not a strong exclusion for an insurer to use to deny a claim because of how broadly the exclusion is written. Some courts have found this “acts or decisions” exclusion to be ambiguous and concluded that otherwise valid claims should not be denied coverage by this policy exclusion. As a federal court interpreting Ohio law explained, if the exclusion were to be taken literally, “it would exclude coverage from all acts and decisions of any character of all persons, groups, or entities. Such an interpretation would leave the insurance policy practically worthless.” Cincinnati Holding Co., LLC v. Fireman’s Fund Ins. Co., S.D.Ohio No. 1:17cv105, 2020 U.S. Dist. LEXIS 23317, at *24 (Feb. 11, 2020).
However, the weakness of this exclusion does not necessarily mean that it is invalid. There are likely claims which would allow the operation of this exclusion. Nevertheless, Ohio businesses that have had a BI claim denied under the “acts or decisions” exclusion should consult an experienced insurance coverage attorney.
The issues involved in Ohio Widgets’ business income loss claim will be subject to litigation throughout the country for years to come. The stances Ohio courts take on each of these issues will determine if the vast majority of COVID-19 related BI claim denials were legal. Some lawmakers have even proposed bills that would effectively eliminate the issues and force insurers to pay BI claims caused by COVID-19 and the related stay at home orders of each state. Ohio business owners should consider consulting with an experienced insurance coverage attorney before tendering a BI claim or challenging an insurer’s denial of a COVID-19 related BI claim.