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COVID-19 Raises Novel Business Interruption Insurance Questions: Are You Covered?


In light of ever-increasing government orders requiring “non-essential” businesses to shut down physical operations due to COVID-19, businesses should carefully examine the business interruption coverage in their first-party property insurance policies for potential relief. While certain policies may include special communicable disease business interruption coverage endorsements that provide coverage arising from a shutdown when there is the actual existence of a communicable disease like COVID-19 on an insured premises,[1] coverage may exist even in the absence of such endorsements depending on the facts and the policy’s language.

Business interruption insurance is intended to protect businesses against lost income resulting from a covered peril. This coverage can be triggered when the insured suffers lost income due to loss of or damage to its property; lost income due to property damage suffered by a supplier or third party[2]; or lost income due to an order or decree from a civil or military authority prohibiting the use of an insured premises.[3] These various business interruption coverages generally require there to be a suspension of the insured’s operations due to “direct physical loss of or damage to” property at the insured’s premises or some form of physical property loss or damage elsewhere that impacts the insured operations.[4] Therefore, in the context of COVID-19, a policyholder’s biggest hurdle may be establishing the “direct physical” component within any of these business interruption coverages.

Certain courts interpreting this language have denied coverage where an insured merely suffers a loss of use unaccompanied by a distinct, physical alteration or change to the insured property.[5] Under this interpretation, for example, a civil order or decree that shuts down a non-essential manufacturing plant under a “stay at home” order would not likely amount to “direct physical damage or physical loss” if the physical structure of the manufacturing plant or its equipment was not physically damaged.

In certain other jurisdictions, courts have reached the opposite result by applying a broader interpretation, finding coverage despite the lack of physical alteration or damage to insured property. These decisions hold that the temporary and non-structural loss of a property’s function or use amounts to “direct physical loss.”

In Total Intermodal Services v. Travelers Property Casualty Company of America,[6] the Central District of California federal court interpreted “physical loss of or damage to” language to mean loss of use. In that case, the court held cargo that was lost or misplaced in shipment but not physically damaged constituted “physical loss of” insured property, stating that “the ‘loss of’ property contemplates that the property is misplaced and unrecoverable, without regard to whether it was damaged.”[7]

In Port Auth. of New York & New Jersey v. Affiliated FM,[8] the Third Circuit addressed physical loss in the context of asbestos contamination, holding that physical contamination of a building rendering it useless would constitute physical loss under New Jersey law. The court wrote that if “the presence of large quantities of asbestos in the air of a building is such as to make the structure uninhabitable and unusable, then there has been a distinct loss to its owner” which would constitute “physical loss.”[9]

Cases involving buildings affected by noxious fumes or smells and which did not involve actual structural damage are instructive and potentially analogous to COVID-19 contamination. See Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009) (applying Massachusetts law and finding that an unpleasant odor rendering property unusable constituted physical injury to the property); TRAVCO Ins. Co. v. Ward, 715 F.Supp.2d 699, 709 (E.D. Va.2010), aff'd, 504 F. App'x. 251 (4th Cir. 2013) (finding “direct physical loss” where “home was rendered uninhabitable by the toxic gases” released by defective drywall); Largent v. State Farm Fire & Cas. Co., 116 Or.App. 595, 598, 842 P.2d 445, 446 (1992) (odor from methamphetamine cooking constituted “direct physical loss” to house); Farmers Ins. Co. of Oregon v. Truitanich, 123 Or.App. 6, 858 P.2d 1332, 1336 (1993) (same); Western Fire Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 39, 437 P.2d 52, 55 (1968) (en banc) (gasoline fumes which rendered church building unusable constituted direct physical loss).

Note, in each of the above cases, the noxious or toxic contaminant was actually found or assumed to exist at the property. In the case of COVID-19, proving the presence of the novel coronavirus in and of itself may be difficult or impossible, and would likely require expert analysis.[10] With that said, it may be argued that the existence of a virus in the general population along with a showing as to how it is transmitted to surfaces from infected persons may demonstrate continual contamination of an insured property sufficient to trigger coverage.

Due to the various hurdles insureds face in obtaining business interruption coverage for COVID-19-related losses, some states are considering legislation to help alleviate barriers to coverage. In New Jersey, for example, Bill A-3844 provides potential coverage to businesses that suffer business interruption losses due to the COVID-19 pandemic. If enacted, it would be retroactive for any insured with a business interruption policy in place from March 9, 2020, when New Jersey Governor Phil Murphy first declared a public health emergency due to the virus. It is unclear at this time whether these legislative efforts will be successful, and, if they are, whether they will withstand the legal scrutiny that is sure to follow.

Given the numerous legal uncertainties in this area, businesses that have experienced a facility shutdown or other business interruption due to pathogen contamination or a governmental order relating to COVID-19 should strongly consider providing notice of a claim or potential claim under their first-party property policy for their losses. The existence of coverage will ultimately depend on the particular policy language, the controlling law, and the underlying facts giving rise to the claim. Nonetheless, without a tender and timely notice to the carrier, potential coverage may forever be precluded.

For more information about business interruption insurance, please contact your local Quarles & Brady attorney or

[1] Note that language differs from policy to policy and may contain limited coverage or exclusions for losses caused by communicable diseases such as COVID-19. See, e.g., ISO form CP 01 40 07 06, titled “Exclusion for Loss Due To Virus Or Bacteria”, providing, in relevant part, that the insurer “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.”

[2] Contingent business interruption coverage, which provides coverage to an insured for losses that arise away from the insured’s property that result in a business interruption, such as damage to a parts supplier, typically also require the third party supplier to first suffer “damage to, or destruction of, any real or personal property” in order to trigger coverage. See ISO form CP 00 30 10 12.

[3] For business interruption caused by a government order or decree, sometimes referred to as civil authority coverage, the insured property must be impaired by order or action of civil or military authority and typically requires “damage to property other than property at the described premises” as a condition of coverage. See ISO form CP 00 30 10 12.

[4] See Pentair v. American Guarantee & Liability Insurance Co., 400 F.3d 613, 615-618 (8th Cir. 2005) (holding that a lack of electricity to the insured’s supplier did not cause direct physical loss to the insured or to the supplier because there was no evidence that insured’s suppliers’ equipment had been physically damaged by the power failure).

[5] See Port Murray Dairy Co. v. Providence Washington Ins. Co., 52 N.J. Super. 350, 354–55 (Ch. Div. 1958) (held no “direct physical loss or damage” under policy when farmers called milk strike and proceeded to block entrances and exits to dairy plant because strikers did not physically damage plant or equipment).

[6] 2018 WL 3829767 (C.D. Cal. July 11, 2018).

[7] Id. at *3-4.

[8] 311 F.3d 226 (3d Cir. 2002).

[9] Id. at 236.

[10] In instances where insureds suspect novel coronavirus to be present on insured property, notice should be provided to general liability carriers and workers compensation/employer’s liability carriers. Moreover, if your company has insurance for environmental events, notice to those insurers should also be considered.

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