As a result of the Coronavirus, many businesses, large and small, have been forced to close for a time, resulting in a loss of revenue. Commercial property policies often contain business interruption coverage which is intended to provide coverage in the event of a disruption of business as a result of a covered peril. Generally, a covered peril requires a direct physical loss; however, dependent upon the specific language of the policy and the jurisdiction whose laws apply to interpretation of the policy, a loss of use may alone be sufficient to trigger coverage under the policy.
A Minnesota court rejected a loss of use argument and therefore denied business interruption coverage in a case involving a loss of beef product that occurred when a border was closed due to mad cow disease. Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co., 465 F.3d 834, 837-38 (8th Cir. 2006). Similarly an Iowa court held that the loss of use of a premises as a result of the risk of flooding, as opposed to actual flooding, did not constitute a direct physical loss entitling the insured to business interruption coverage. The Phoenix Ins. Co. v. Infogroup, Inc., 147 F.Supp.3d 815, 824-25 (S.D. Iowa 2015).
However, a Michigan appellate court held that business interruption coverage was available as a result of the closure of movie theaters due to a state order during a period of riots. Sloan v. Phoenix of Hartford Ins. Co., 46 Mich.App. 46, 50-51, 207 N.W.2d 434, 436-37 (1973).
In each of these cases, the outcome depended upon the specific language of the policy and the controlling state law. But the Sloan case in particular indicates that with favorable policy language and case law, there is the potential for coverage to exist for losses incurred during the period that a business is shut down as a result of COVID-19 and related restrictions. As with any other claim under an insurance policy, the existence of coverage ultimately remains subject to the terms, conditions and exclusions contained in the policy.
Given that many businesses already have been or likely will be impacted by the Coronavirus, now is the time for insureds to evaluate their policies and applicable state law to determine whether a basis exists for business interruption coverage. Further, it is recommended that, in the event of a closure due to the Coronavirus resulting in a loss of business, the insured place the insurance company on notice of the loss.
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