Thousands of Colorado businesses, large and small, have suffered significant, if not crippling losses of income arising out of the effects of the COVID-19 pandemic and associated stay-at-home and safer-at-home orders. Some of those same businesses have now experienced additional losses from rioting and civil unrest and associated curfews. These businesses are now asking the same question: Do I have insurance for my losses of business income?
Fortunately, most insurance policies purchased by businesses include coverage for loss of business income, including losses arising from closures by “civil authority.” Unfortunately, insurers have been uniformly denying coverage for any claims relating to COVID-19. Insurers should accept coverage, however, for claims arising from riots and civil commotion.
The majority of insurance policies carried by businesses include commercial property coverage. Among the types of damage included in this coverage are losses of business income, typically defined as being loss of net income before taxes, plus continuing normal operating expenses incurred, including payroll. One of the most common policy forms, used by many standard lines insurers, provides, in pertinent part:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. With respect to loss of or damage to personal property in the open or personal property in a vehicle, the described premises include the area within 100 feet of such premises. [ISO form CP 00 30 10 12 – “Business Income (and Extra Expense) Coverage Form”]
To fall within this grant of coverage, there must be a “suspension” of the business, usually defined as including not only the total cessation of business but also a “slowdown” of a business. For those Colorado businesses that were able to limp along by reducing their services, such as restaurants whose dining rooms were closed but provided food on a take-out basis, they would still qualify.
This coverage applies during the “period of restoration,” which is commonly defined as extending from the time the business suffers direct physical loss or damage (often, there is a waiting period of 72 hours or similar), i.e. when the business is shut down, until the loss or damage is repaired, rebuilt or replaced, i.e. when the business re-opens. Many policies also include “extended business income” coverage for that period of time after the loss or damage is repaired, rebuilt or replaced until the business resumes its prior level of business income (frequently limited to 60 days or similar period of time).
The grant of coverage also requires that the suspension of the business be “caused by direct physical loss of or damage to” covered property. This is the requirement that most, if not all, insurers are relying on to deny coverage for COVID-related business interruption loss claims, arguing the virus, whether actually present or not, has not caused a “direct physical loss of or damage to” property. Many insurers’ denial letters allege this requirement can only be met if there is a physical change to the property, such as is obvious after a fire or hail storm. Colorado law does not require such a physical change to the property for this requirement to be satisfied.
In Colorado, the existence of a condition that renders the premises uninhabitable constitutes “physical loss of or damage to” the property. In Western Fire Insurance Company v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (1968), a church sought coverage for losses that it incurred after the local fire department ordered it to close its building. The fire department had determined that an accumulation of gasoline around and under the building made continued use of the building dangerous. The Colorado Supreme Court held that this was “direct physical loss” of the covered property, triggering coverage. It is also important to note that Governor Polis’ Executive Order closing all non-essential businesses expressly recognizes that COVID-19 “physically contributes to property loss, contamination, and damage due to its propensity to attach to surfaces for prolonged periods of time.” [Amended Updated Public Health Order 20-24 Implementing Stay At Home Requirements (Mar. 26, 2020)].
Although there is not yet precedent anywhere in the nation analyzing the question of whether the closure (or slow-down) of a business due to the presence of or to avoid the spread of a virus meets the “direct physical loss of or damage to” property requirement, the Western Fire case, and others like it around the nation, as well as Governor Polis’ Executive Order, provide a strong argument that there is “direct physical loss” of covered property (the business) when a business is forced to close its doors arising out of the presence of or to avoid the spread of the virus.
For businesses shuttered due to the recent riots and civil commotion, if they suffered actual physical damage, there should be no issue to triggering coverage. However, if they lost business because they shut down or due to curfews imposed, it is possible insurers may make similar arguments, i.e. they have not suffered “direct physical loss of or damage to” property. A case decided by the Michigan Court of Appeals back in 1973 addressing the closure of movie theaters in the City of Detroit due to widespread rioting in the summer of 1967 should prove helpful. See Sloan v. Phoenix of Hartford Ins. Co., 46 Mich. App. 46, 207 N.W.2d 434 (1973). There, the court found that, even though the theaters had not actually suffered any physical damage, there still was coverage for their business income losses under their civil authority coverage.
The final requirement for proving an entitled to business income coverage is that the loss be caused by or result from a “Covered Cause of Loss”. Virtually all Commercial Property policies provide coverage on an all-risk basis. This means any loss is covered, so long as it is accidental and is not excluded or limited. As applied here, losses arising out of COVID and riots and civil commotions are covered, unless they are excluded. Most policies do not include exclusions for riots and civil commotions, and in fact, most expressly include “riot and civil commotion” as a “specified cause of loss” (a special type of cause of loss that is beyond the scope of this article). Many, but not all Commercial Property policies do include some kind of virus exclusion.
Here is the language of a common virus exclusion:
We will not pay 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. [ISO form CP 01 40 07 06 – “Exclusion of Loss Due to Virus or Bacteria”]
In addition to the “direct physical loss of or damage to” property requirement discussed above, the virus exclusion is the second reason most often relied on by insurers to deny coverage. As word of caution: read your clients’ policies carefully. This author has found that, while most policies do include some form of virus exclusion, many policies do not. In the instances where the insurer chose not to include a virus exclusion, that same insurer likely relies on the pollution, fungus or microorganism exclusions, even though that same insurer includes virus exclusions in other policies it issues. If a virus is considered to be a “contaminant” (within the definition of “pollutant”), then why is a separate virus exclusion even needed? Scientifically, a virus is not a living thing (it needs a host), so it is not an organism or fungus. In short, these other exclusions should not pose an impediment to coverage.
The key question as to the applicability of the virus exclusion is whether the loss, i.e. the business closure (“suspension”) was “caused by or resulting from” the COVID virus? For most businesses, their losses were not “caused by or resulting from” the virus. Instead, their losses were “caused by or result[ed] from” Governor Polis’ Executive Orders, or another order of a governmental authority (including the Colorado Department of Public Health and Environment).
The “caused by or resulting from” verbiage is known in the insurance world as “anti-concurrent causation” language, which defines the scope of the exclusion. Conspicuously missing from the standard virus exclusion language quoted above are other anti-concurrent causation language commonly found in other exclusions, such as “arising out of”; and “loss or damage caused directly or indirectly by”, “such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.”
Colorado’s rules of construction for interpreting insurance policies include the following: provisions providing coverage must be “liberally construed in favor of the insured to provide the broadest possible coverage.” Apt. Inv. & Mgmt. Co. v. Nutmeg Ins. Co., 593 F.3d 1188, 1197 (10th Cir. 2010) (quotation omitted); in contrast, policy exclusions must be clear and specific, Bohrer v. Church Mut. Ins. Co., 965 P.2d 1258, 1262 (Colo. 1998), and are interpreted “strictly against the insurer,” Sims v. Sperry, 835 P.2d 565, 572 (Colo. App. 1992); Apt. Inv. & Mgmt., 593 F.3d at 1190, 1197 (citing Hecla Mining Co. v. N.H. Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991)).
In light of Colorado’s rules of insurance contract interpretation and the missing words of anti-concurrent causation, there are arguments to be made in rebuttal to the insurer’s claims that the virus exclusion precludes coverage for anything relating in any manner to COVID. If the business closed due to the government order, then it did not close because of the virus. The closure arguably “arose out of” the virus, or the loss was “indirectly” caused by the virus, but those losses are not within the scope of the standard language in the ISO exclusion quoted above. Again, while there is no precedent as relates to the interpretation of the virus exclusion, this author submits there are strong arguments to be made that there is, in fact, coverage for these losses of business income. If the virus exclusion does not apply, then there is a “Covered Cause of Loss” since the policy provides all-risks coverage, the loss is accidental, and the loss is not excluded.
Last, most business policies also include an “additional coverage” for loss of business income due to action by a civil authority. This coverage, however, is often limited to 4 weeks 30 days, or a similar short period of time. The standard Civil Authority provision reads, in pertinent part:
When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply: (1) Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and (2) The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property. [ISO form CP 00 30 10 12 – “Business Income (and Extra Expense) Coverage Form”]
To trigger this coverage, there must be damage to property nearby the Covered Property (often confined by a radius such as one mile), which causes the civil authority to prohibit access to the insured premises. The damage to the neighboring premises must be by a Covered Cause of Loss. The virus exclusion, if it is a part of the policy, likely expressly applies to the Civil Authority coverage. The same analysis as above for Covered Cause of Loss here applies. The “dangerous condition” is the need to prevent the spread of the virus.
Civil Authority coverage does not usually start until 72 hours after the governmental order. So, for those businesses shut down as a result of the recent riots and civil commotion, this coverage should apply, after the 72 hours waiting period.
In conclusion, there should be insurance coverage for business that have suffered loss of income as a result of the recent riots and civil commotion. In this author’s opinion, there should also be coverage for businesses that suffered losses of business income as a result of being shut down by governmental order as a “non-essential” business, but the insurance industry is denying all coverage for any COVID-related losses. Judging by the volume of cases already filed nationwide on COVID-related business interruption insurance claims, this is a fight that will likely continue long after the hoped-for vaccine is found.
— Thomas Henderson is a shareholder at Burg Simpson Eldredge Hersh & Jardine.