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Business Interruption Coverage: Understanding Direct Physical Loss or Property Damage as it Relates to Covid-19 Claims

COVID-19 has led to unprecedented closures of businesses world-wide. Many businesses are seeking to recoup their losses by filing claims with their insurance companies under the business interruption coverage provisions of their policies. Business interruption insurance is intended to cover losses when businesses are shut down or curtailed because of damage to property or order of civil authority. Not surprisingly, COVID-19 has led to a record number of business interruption insurance claims.

Business Interruption Insurance Coverage

Business interruption coverage is a type of insurance coverage, which typically covers losses resulting from a direct physical loss or damage to a property caused by a covered peril, such as a fire, flood or other events. Put another way, business interruption coverage operates to compensate the insured for losses stemming from the business interruption including lost profits, loss of earnings, and continuing expenses during the period of repair or restoration of property damaged or destroyed by reason of a covered peril. What is “covered” is determined, in large part, by the policy language. Insurance policies are contracts and, therefore, are governed by the rules of construction applicable to contract law.  Generally, the unambiguous language in the policy will determine coverage. If there is ambiguity, however, coverage provisions are interpreted broadly to afford the greatest possible protection to the insured, whereas exclusionary clauses are interpreted narrowly.

Virus Exclusions in Business Interruption Policies

In this COVID-19 era, many businesses are feverishly perusing their policies to determine whether they have coverage for the fallout from the virus.  Many commercial policies expressly exclude business interruption coverage for losses due to contamination by a virus.  If the policy, however, provides for coverage due to viruses, the policy will likely require a showing of “direct physical loss” or “damage to a property.” 

In California, however, such business interruption claims due to losses from a viral pandemic, such as COVID-19, tread into an undeveloped area of law.  If it is indisputable that the policy excludes coverage for all viruses, then courts will likely uphold such exclusions.  In policies where viral contamination is covered, the insured must still demonstrate direct physical loss or damage to a property.  Insureds are challenging what those terms mean to trigger coverage. Is “direct physical loss” or “damage to a property” defined in the policy? If not, when and under what circumstances may a virus be deemed to cause property damage or direct physical loss?

Coverage for Closure by Civil Authority

Trending are claims seeking to recover business losses due to “civil authority” orders to close businesses.  Many companies are challenging the insurers’ denial of business interruption coverage if a business is closed due to a mandatory government order—also known as action of civil authority.  Insureds argue that the government, not the virus, caused the business losses through mandatory closures. Insurers respond that despite government-ordered closures, the insured must still show “direct physical damage” or “direct physical loss.” A government-ordered shut down due to the pandemic may not be sufficient to trigger business interruption insurance coverage in the absence of “direct physical damage” or “direct physical loss.”

California’s courts are on course to become a testing ground for COVID-19-related business interruption coverage disputes. Insureds are challenging the blanket assertion that the governmental mandated stay-in-place orders do not cause physical damage or physical losses that trigger the civil authority order coverage. In the action of Scratch Restaurants LLC et al v. Farmers Group Inc. et al, filed April 1, 2020, insureds, representing restaurants, filed an injunctive lawsuit to declare coverage for business interruption losses arising out of the COVID-19 related shut down orders. The complaint alleges that several insured restaurants suffered covered losses when they were forced to close following government-issued orders.

Another challenge to the denial of coverage related to civil authority is from renowned chef Thomas Keller, owner of the Yountville restaurants the French Laundry and Bouchon Bistro, which have been adversely impacted by the closure orders.  In French Laundry Partners, et al. v. Hartford Fire Ins. Co., et. al, plaintiffs filed suit against Hartford Fire Insurance Company seeking a declaration in favor of coverage for the plaintiffs’ business interruption losses under the insurance policy’s action of civil authority provision.  The suit said plaintiffs shut down the restaurants due to an order issued by the county public health officer.  Plaintiff’s direct “physical damage” stems from the fact that the coronavirus remains on surfaces for up to twenty-eight days, necessitating cleaning and fumigating to remove microbials. (Noted, the policy in this matter did not have a virus exclusion.) 

Other cases are popping up to challenge the action of civil authority coverage of business interruption coverage in other industries, such as retail. (Moda LLC et al. v. Hartford Fire Insurance Co.; Easy Spirit LLC, et. al. v. Hartford Fire Insurance Company) In sort of a preemptive strike, Travelers Casualty Insurance Co. of America recently filed action against a law firm in California federal court, saying it has no duty to cover the law firm for business losses during the COVID-19 pandemic because the virus has not caused “physical loss or damage” to the firm’s offices.

Clear from these cases, policy language is key in determining whether there is coverage.  Where policies have not clearly defined “direct physical loss” or “property damage,” business interruption claims from this coronavirus pandemic will likely continue given the substantial economic impact the government-mandated shutdowns are having on businesses. 

For further resources, visit our Covid-19 Resource Page

Aleshia M. White is a senior attorney with the Employment Group at Berliner Cohen and may be reached at or 408-286-5800, if you have any questions.