On April 20, 2020, Colorado Governor Jared Polis laid out an ambitious plan to dramatically reduce the restrictions on personal movement and business operations created by last month’s “Stay-at-Home” Order. Dubbed the “Safer-at-Home” Order, this modification (and others like it in various other states) provided a glimmer of hope to citizens who have been largely confined to their residences since March 26.
The push to safely restart the American economy does not alter the fact that a growing number of businesses have already suffered — and are continuing to suffer — devastating economic losses as a consequence of the COVID-19 public health emergency. They are increasingly looking to their insurance policies for coverage. Despite the well-intentioned efforts of some state legislatures to require insurance companies to pay business interruption claims, it currently appears unlikely that federal, state and local governments will mandate that carriers pay these claims.  Accordingly, the courts will be the primary mechanism for assessing policyholders’ rights to business interruption coverage under their policies. Since late March, more than 75 lawsuits seeking business interruption coverage have been filed against insurance companies. This post will examine one of the seminal cases likely to be relied upon in challenging insurers’ failure to provide coverage under these policies. It will also discuss a recent decision from the Supreme Court of Pennsylvania that should provide plaintiffs some hope as this emerging body of case law develops further.
a. Typical Business Income Interruption Policy
Before delving into the case law, it’s worth briefly considering two potential obstacles to a viable claim for coverage, and reviewing the typical language found in a business income insurance policy.
Given the variety of circumstances insurance policies cover, the portions of policies providing for what is covered are usually written broadly. By contrast, the sections of insurance policies dealing with what isn’t covered, such as the policy exclusions and sub-limits, are often more specific, and may be the best place to begin in assessing a potential claim for business interruption coverage. Two specific policy exclusions that businesses evaluating their options in this arena should be particularly wary of are communicable disease exclusions and pollution/contamination exclusions.
Policies containing communicable disease exclusions, which gained popularity with insurance companies following the 2002 SARS outbreak, do not cover losses “…arising out of, contributed to by, or resulting from…any communicable disease which leads to (a) the imposition of quarantine or restriction in movement of people or animals; (b) any travel advisory or warning being issued by a national or international body or agency; and in respect of a or b any fear thereof (whether actual or perceived).” It is often the case that these exclusions tie their definitions of “communicable disease” to the declaration of an epidemic or pandemic by the World Health Organization or some other public authority. Since COVID-19 has been deemed a pandemic by both the World Health Organization and governments across the globe, businesses with communicable disease exclusions in their insurance policies may want to consider seeking other forms of relief.
Unlike insurance policies with communicable disease exclusions, policies with pollution/contamination exclusions may be deemed to cover losses caused by COVID-19. These exclusions prevent recovery for losses caused by “contaminants/pollutants” and any resulting damage. Ultimately, a decision on whether a pollution/contamination exclusion would apply to bar recovery for lost business income would hinge on the specific definition of “contaminant/pollutant” in the policy, and how a court would determine if COVID-19 fits, or does not fit, within that definition. Thus, any business with a pollution/contamination exclusion in its insurance policy should closely scrutinize the relevant language.
Assuming no on-point exclusions or sub-limits apply, generally, commercial property insurance policies state that they will pay for the “actual loss of Business Income” sustained due to the necessary suspension of operations during the “period of restoration.” The critical language usually requires that the suspension be caused by some “direct physical loss of or damage to property.” Courts across the country will be asked to interpret this type of provision, so it is important to understand the leading existing precedent.
b. What is “Direct Physical Loss”?
Interestingly, there is substantial case law mandating coverage in a variety of circumstances in which structural damage in the classic sense is absent, but where “direct physical loss or damage” exists nonetheless. See, e.g., Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52 (Colo. 1968) (concluding that gas leak rendering use of building highly dangerous constituted “direct physical loss”); Mellin v. Northern Security Insurance Company, Inc., 167 N.H. 544 (N.H. 2015) (holding that physical loss includes “not only tangible changes to the property that can be seen or touched”, but also “changes that are perceived by the sense of smell and that exist in the absence of structural damage); Motorists Mutual Ins. Co. v. Hardinger, 131 Fed. Appx. 823 (3d Cir. 2005) (reversing summary judgment in favor of insurer based on question of fact as to whether e-coli contamination constituted “direct physical loss” based on Court’s definition of the “function [being] nearly eliminated or destroyed, or the structure[being] made useless or uninhabitable…”); Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 6675934 (D. N. J. 2014) (granting businesses’ motion for summary judgment based on Court’s finding that ammonia discharge inflicted physical loss of or damage to covered property, noting that “[w]hile structural alteration provides the most obvious signs of physical damage…property can sustain physical loss or damage without experiencing structural alteration.”); Yale Univ. v. Cigna Ins. Co., 224 F. Supp. 2d 402 (D. Conn. 2002) (acknowledging “substantial body of case law in which a variety of contaminating conditions have been held to constitute ‘physical loss of or damage to property’.”). The facts and legal reasoning in one such case, Sentinel Management Co. v. Aetna Cas. And Sur. Co., are instructive. See 615 N.W. 2d 819, 819 (Minn. 2000).
In Sentinel, the Plaintiff sought to recover lost profits stemming from the threatened release of asbestos fibers in several buildings. Id. The opinion addressed three important issues: 1) whether asbestos contamination could constitute “direct physical loss” sufficient to trigger the plaintiff’s business income interruption insurance; 2) if so, what the necessary evidence was to demonstrate a direct physical loss caused by asbestos; and 3) whether the plaintiff in fact suffered a direct physical loss to its insured property as a result of the asbestos problem. See id. at 828.
After the defendant’s motion for summary judgment on the first issue was denied, the trial court certified the issue to the appellate court, which decided that asbestos contamination could constitute direct physical loss sufficient to trigger business income interruption coverage. Id. at 822.
Following this ruling, the defendant filed a motion in limine seeking to prevent the introduction of the testimony of plaintiff’s air quality expert. Id. The crux of the defendant’s motion was that the expert’s testimony was unreliable for all but one of the plaintiff’s buildings because the only samples he took were from that single building. Id. at 823. Rather than ruling on the motion in limine, the trial court granted summary judgment to the defendant as to all of the buildings other than the one from which the expert’s sample was drawn. Id. At trial, the jury returned a verdict for the plaintiff of nearly $4.5 million. Id. The jury rejected defendant’s arguments that a direct physical loss does not exist absent airborne asbestos and that a sample taken in one area of a building does not prove direct physical loss to the whole building. Id.
Both parties filed post-trial appeals. Id. at 824. The defendant sought a new trial based on the admission of the testimony of plaintiff’s air quality expert, and plaintiff appealed from the trial court’s summary judgment in favor of the defendant as to the other buildings. Id. The Supreme Court of Minnesota determined that no proof of active airborne asbestos or of contamination across every corner of an insured property was required for business income interruption coverage to be triggered. Id. at 826. The court relied upon the appellate court’s determination that while “‘asbestos contamination does not result in tangible injury to the physical structure of a building, a building’s function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants,’ thereby satisfying the definition of direct physical loss.” Id. at 825¬-26. Additionally, the court granted plaintiff’s motion seeking a reversal of the trial court’s summary judgment to defendant as to the other buildings. Id. at 828. While the Court did not rule that coverage was required, it held that plaintiff’s allegation that the same asbestos-based materials that were used in all of its buildings raised a genuine issue of material fact and remanded to the trial court. Id.
c. Friends of DeVito and a Growing Flood of Litigation
While cases like Sentinel provide injured businesses that are denied coverage with ammunition to obtain payment in court, the insurance industry will likely seek to distinguish the limited factual scenarios of unpleasant odors, e-coli contamination, the release of dangerous contaminants, etc., from the pervasive viral spread of a pandemic with ubiquitous governmental stay-at-home orders. Nevertheless, businesses notched a critical early victory in a recent Supreme Court of Pennsylvania opinion upholding Governor Tom Wolf’s emergency powers to close the physical operations of non-life-sustaining businesses via executive order. The Court’s decision in that case turned on whether COVID-19 constituted a natural disaster sufficient to trigger the Governor’s powers under the state’s Emergency Code. See id. The Code’s definition of a natural disaster requires in part, “…substantial damage to property, hardship, suffering or possible loss of life.” Id. at 21. In denying Petitioners’ Emergency Application for Extraordinary Relief and upholding Governor Wolf’s power to enact the challenged Executive Order, the Supreme Court of Pennsylvania held that COVID-19 met the Emergency Code’s definition of natural disaster. Id. at 24. Further, after noting the virus’ ability to spread rapidly and without detection, the Court stated “any location (including Petitioners’ businesses) where two or more people can congregate is within the disaster area.” Id. at 26. This is an important judicial acknowledgement that actual proof of COVID-19 at a location was not necessary; under current circumstances, one can presume businesses are subject to damage, hardship, or suffering sufficient to deem them a disaster area.
It is likely that pro-policyholder and pro-insurance prognosticators alike will seek to “spin” this case, with the former declaring the end of the war before it has even begun and the latter dismissing the case as an unrelated and irrelevant aberration. Though the truth may fall somewhere in between, it is clear from the volume of cases already filed that this will be a fertile litigation battleground for the foreseeable future. With the number of cases filed on this issue growing exponentially, we can expect the battle over what constitutes “direct physical loss or damage” to rage on.
 See https://www.thedenverchannel.com/news/coronavirus/gov-polis-outlines-plan-to-lift-colorado-stay-at-home-order-strict-measures-will-remain-in-place.
 See https://www.bostonherald.com/2020/04/01/insurance-companies-could-collapse-under-covid-19-losses-experts-say/.
 See Friends of DeVito et al. v. Wolf, 68 MM 2020, 2020 WL 1847100 (Pa. 2020).