A Starbucks store, partially reopenedduring the Coronavirus pandemic, is boarded up to protect againstvandalism during the days of demonstrations protesting the killingof George Floyd and police brutality, Washington, D.C. June 6,2020. (Photo: Diego M. Radzinschi/ALM)

The COVID-19 pandemic has brought a wave of businessinterruption claims and related coverage lawsuits from businessesimpacted by widespread closures.

These businesses already face significant hurdles in obtainingcoverage for pandemic-related losses, as insurers and policyholderslitigate over whether COVID-19 contamination and mandatory closuresto force social distancing measures to constitute "directphysical loss of or damage to property" sufficient to triggercoverage under business interruption policies.In these suits, insurers have argued that these policies provisionswere written to insure against natural disasters that causetangible physical damage to property such as hurricanes andearthquakes, not viral pandemics. At least one court has agreed.

Now, just as reeling businesses begin to slowly reopen, thedeath of George Floyd by a Minneapolis police officer has led tomassive protests, some of which have become unruly and resulted inproperty destruction. As a result, many businesses have been closed— some by government orders such as curfews, others on their ownvolition to prevent the potential for damage. These closures havecompounded their loss of business income.

The good news for these concerned business owners is that mostcommercial property insurance policies will cover physical property damage from fires andvandalism resulting from civil unrest. However, income lossesresulting from anticipatory or mandatory business closures may notbe covered.

Physical property damage

Theft of goods and personalty, such as furniture, computers,machinery and office supplies, typically qualify for coverage underpersonal property coverages. Coverage provisions for such physicalproperty damage are typically found in both "covered perils" and"all-risk" policies.

As with any contractual policy, policyholders have a duty tomitigate risks to the extent feasibly possible. A commercial policytypically covers expenditures made to secure property againstfurther loss. The extent of such coverage will depend upon thefacts and circumstances of each situation.

Loss of income: Anticipatory closures

Insurers are expected to take a less forgiving positionregarding the loss of income due to closing a business inanticipation of COVID-19. As we see in COVID-19-related coveragedisputes, insurers insist that "direct physical loss of or damageto property" is required to trigger coverage.

For those businesses whose closures resulted from the occurrenceof actual property damage — broken windows, fire damage, etc. —this trigger will undoubtedly be met. On the other hand, businessesthat unilaterally closed in anticipation of potential damage willbe hard-pressed to obtain relief for losses resulting from suchclosures in the absence of physical damage.

Loss of income: Mandatory closure

What is less clear is the fate of businesses that suffer loss ofincome from closures in compliance with civil authority ordersissued in anticipation of potential disruption or property damage,including the institution of curfews. Many commercial property orbusiness owner policies contain "civil authority" clauses thatprovide coverage for loss of business income caused by an "actionof civil authority" that "prohibits access" to the insured'sproperty as a result of damage to property occurring elsewhere. Theweight of authority indicates that civil authority coverage isintended to apply to situations where access to an insured'sproperty is prevented or prohibited by order of civil authorityissued as a direct result of physical damage to otherpremises in the proximity of theinsured's property.

For example, in a 1995 case, Syufy Enterprises v. Home Ins.Co. of Indiana, a federal district court in NorthernCalifornia held that curfew orders issued in anticipation ofrioting, looting and property damage after the Rodney King verdictdid not entitle a business owner to coverage under the civilauthority provision because the "requisite causal link betweendamage to adjacent property and denial of access" was lacking.Likewise, in Dickie Brennan & Co. v. Lexington Ins.Co., the U.S. Court of Appeals for the 5th Circuit held thatmandatory evacuation order issued in anticipation of damage fromthe impending Hurricane Gustav, which had caused damage in theCaribbean, did not trigger business interruption coverage undercivil authority provisions.

As always, the specific policy language will govern, and anyambiguities will tend to favor policyholders — for example, thecourt in Sloan v. Phoenix of Hartford Ins. Co., theMichigan Court of Appeals rejected the insurers' claim that theloss had to be accompanied by "direct physical loss or damage". InSloan, following the assassination of Dr. Martin LutherKing, Jr., the Mayor of Detroit ordered the closure of "places ofamusement," which included the plaintiff's theatre. Thebusiness-interruption policy provided in relevant part:

"1. This policy covers against lossresulting directly from necessary interruption of businesscaused by damage to or destruction of real or personal propertyby peril(s) insured against…" (emphasis added)

"7. Interruption by Civil Authority.This policy is extended to include the actual loss… when as adirect result of the peril(s) insured against, access to thepremises described is prohibited by order of civilauthority."

The Sloan court compared the two provisions and foundthat they "contemplate separate and distinguishable businesslosses," namely that the Civil Authority provisions "speaks tobusiness-interruption losses occasioned by the denial of access tothe premises by order of civil authority." In finding in favor ofthe policyholder, the court found the absence of language requiringsuch coverage to be triggered by physical damage to be"conspicuous," and therefore equivocal.

Even where property damage has occurred in a location other thanthe policyholders' property, many civil authority coverageprovisions require an element of proximity.

In United Air Lines, Inc. v. Ins. Co. of State of PA,United Airlines sought coverage for losses uncured due to thegovernment-ordered grounding of air travel immediately followingthe 9/11 terrorist attacks shutdown. At issue was coverageresulting from the tragic crash of American Airlines Flight 77 intothe Pentagon. The civil authority provision at issue providedcoverage "when access to the Insured Locations isprohibited by order of civil authority as a direct result of damageto adjacent premises." United argued that damage to thePentagon from qualified as an "adjacent premise" to the RonaldReagan Washington National Airport, in Arlington, Virginia, whereUnited maintained a ticket office.

While the court upheld the denial of coverage where U.S.Government's decision to ground airplanes following 9/11 terroristattacks, was based on fears of future attacks — not physical damageto arguably adjacent property, the court commented, in dicta, thatthe term "adjacent" was likely ambiguous given that two propertiescan be adjacent without necessarily sharing a border.

Damages

Even if coverage is found, the calculation of damages is boundto be another issue ripe for dispute. Insurers will view closureorders issued in relation to civil unrest as distinct from closureorders or limitations issued as a result of the COVID-19 pandemic.Complicating matters further, claims will be valued on the basis ofexpected revenues a business would have seen had there not been anycivil unrest. In the wake of COVID-19 closures, insurers are likelyto determine this to be significantly less value than fulloperations prior to COVID-19.

As always, each the language of each policy will control andshould be evaluated in light of the facts and circumstances of eachindividual claim. Even so, the above considerations show thatbusiness owners seeking coverage under business interruptioninsurance policies face increasingly complicated challenges.

Eric J. Robbie, Esq., is an attorney at CMBG3 Law in Boston.He focuses his practice on toxic torts, environmental and businessinterruption litigation and insurance issues. He can be reachedat [email protected].

This article originally appeared on CMBG3 Law'sblog and is republished here with consent. 

Related:

• Evaluating business interruption claims in apost-COVID-19 world
• Pandemic B.I. claims: After the sound and fury,where are we now?
• Workplace safety during civilunrest