California issued its statewide COVID-19-related business lockdown and “stay at home” order on March 19th, 2020, causing massive disruptions and losses to businesses. Even as California begins to reopen, business will be far from ordinary. Supply chain interruptions and individuals’ curtailment of their ordinary activities will continue to affect business profitability.
Salamati Law expects to field many questions about California Contingent Business Interruption insurance coverage in the coming weeks. Speaking with a Southern California business interruption insurance lawyer as soon as possible can help put your mind at ease that you are doing everything possible to have your business interruption claim honored by your insurance company before it’s too late.
What does Contingent Business Interruption cover?
Most businesses have first-party property insurance policies.
Some policies include Contingent Business Interruption coverage, not only for physical property damage but also for lost profits due to things like:
- Damage to the policyholder’s own property (“Business Interruption” insurance)
- Damage to the property of a supplier, supplier’s supplier, or customer (“Contingent Business Interruption”)
- Damage to “leader properties” that attract customers to the policyholder’s business
- Civil authority coverage dealing with government action such as evacuation orders and shelter in place orders
News media continually refers to the global pandemic as “unprecedented times,” so we can expect insurance providers to grapple with fundamental questions like, “Does the environmental presence of the virus constitute as property damage?” and “Does the property damage caused by coronavirus create a direct loss of income?”
The Case for Non-Structural Property Damage As A ‘Business Interruption’
COVID-19 does not cause structural damage as a fire might, but in the past coverage has been extended to businesses contaminated by asbestos (in Port Auth. of New York & New Jersey v. Affiliated FM) and contaminated by unpleasant odors (in Essex v. BloomSouth Flooring Corp).
In Total Intermodal Services v. Travelers Property Casualty Company of America, a federal court California broadly interpreted “loss of property” to mean “physical loss of use,” without regard to whether it was damaged. Coronavirus does not result in permanent physical damage to a property, but it can render the property useless until remedied.
Given the legal uncertainties, it’s worth filing a claim early if your business has experienced a facility shutdown or other interruption due to a government order or pathogen contamination by a person infected with COVID-19. The validity of your assumed coverage will boil down to the controlling state laws that apply at the time of your filing, as well as the specific language included in your insurance policy statement.
No doubt insurers will move to limit liability in the coming days to evade an onslaught of claims. Depending on what happens with lawmakers, insurance companies, and courts in these early days, we could see this helpful window for filing such claims closed forever. Keep in mind, if your claim is filed prior to policy changes and you have substantial underlying facts, you could qualify for coverage.
Business Losses Covered
Assuming Contingent Business Interruption insurance does apply to your situation, there will be finer points to haggle. For instance, does the extension apply to loss of income, or just to the additional expense of evacuating, sanitizing, and testing?
Extended Period of Indemnity
Even if the extension is allowed, coverage will be subject to the policy indemnity period. The time for “recovery” is generally the length of time it takes to “repair” or “replace” the damaged property– or, in this case, sanitize. If sought, an extended period of indemnity could cover the business in the event there are surges of infections, or in the event that sustained civil authority mandates certain sanitization and testing procedures in order to resume operations.
Supply Chain Contingent Business Interruption
A substantial portion of the losses suffered by American businesses will fall under the category of “Contingent Business Loss”– meaning that there has been a loss of overseas or cross-border suppliers and customers. Supply chain losses may include raw material manufacturers, distributors of goods, third-party contractors, and even transportation modes that bring customers to the business.
Leader Property Business Interruption Insurance
Ordered closures of public gathering spaces and nonessential businesses could trigger coverage for “order of civil or military authority,” as well as “leader property insurance” – which covers the policyholder’s lost earnings from a primary property, within a specified distance, that attracts customers to the policyholder’s business. For instance, the suspension of major league sports could trigger contingent business income loss coverage for nearby restaurants.
Defenses Against Coronavirus Coverage
A range of defenses may allow insurers to dodge or limit their exposure to liabilities and losses stemming from coronavirus:
- Broad exclusion clauses – Some policies broadly limit “damage caused by biological agents.” This has typically been interpreted to mean pollution or chemical contamination but could potentially apply to the virus as well.
- Sublimits – Many policies have mandatory waiting periods before coverage is triggered.
- Time clauses – Even if the sanitization is covered, losses may not be covered once the facility resumes operations again or subsequent losses that arise after recontamination.
Grants Prove Difficult To Access
The State Compensation Insurance Fund recently offered grant money to employers who have had workers test positive for COVID-19, to cover some medical costs and up to six weeks of lost wages– but these will likely be very competitive to access, as many of the other lifelines. The Insurance Services Office recently announced that they will provide grants for preventive closures, but they will not retroactively apply to businesses that have already been forced to close for sanitization.
Is Loss Mitigation Covered?
Even though policyholders have an obligation to mitigate property loss and personal injury, insurers may claim coverage is triggered by an actual loss. Therefore, purely prophylactic measures to avoid potential loss may not be covered by insurance. Extra expenses like face masks, sanitization products, closures, and remodeling efforts can be argued, but it might be an uphill battle, depending on the language in your policy.
Do You Need a Los Angeles Contingent Business Interruption Insurance Lawyer to Recover Your Coronavirus losses?
If you need a Los Angeles business interruption insurance lawyer, call for a free consultation with Salamati Law. We focus on helping L.A. businesses with over $200,000 in gross monthly income seek business interruption and contingent business interruption insurance coverage. Since 1995, we have successfully taken on some of the most complex, challenging cases with excellent results. Our familiarity and experience in both state and federal courtrooms will prove an asset to your developing case.