The COVID-19 pandemic has been with us now for almost two years. During this period, this has led to difficulties and loss of profits in many sectors of the business world, from hotels to restaurants to physical stores. As a result, a popular question has arisen among business owners: Are my business losses covered by my business insurance? While the facts and circumstances underlying any individual insurance claim can vary widely, federal and state courts in New York have largely answered this question in the negative.
Generally, losses related to the cessation or limitation of commercial activities are covered, if necessary, by a clause of interruption of activity. Unfortunately, many business interruption clauses contain language limiting coverage to loss of income, additional business expenses, or general business interruption caused by “loss of or damage to real or personal property caused per peril covered during the period of insurance”. See, for example, Mangia Restaurant Corp. vs. Utica First Ins. Co., 72 Miscellaneous. 3d 408, 413 (Sup. Ct. Queens County 2021). With no direct physical loss, courts in New York have routinely denied coverage due to shutdowns based on the COVID-19 pandemic. For example, in Rainbow USA Inc. vs. Zurich Am. Ins. Co., — Various. 3d–, 2022 NY Slip. Op. 22019, at *4 (Sup. Ct. Kings County 2022), the court asked New York courts about the interplay of COVID-19 closures and business interruption clauses and found “that There was unanimity that without any direct physical loss, there can be no claims for business interruption insurance due to government shutdowns as a result of COVID-19. See also 10012 Holdings, Inc. c. Sentinel Ins. Co., Ltd.21 F.4th 216, 222 (2d Cir. 2021) (“We therefore believe, in agreement with … each court in the State of New York having decided the matter, that under New York law the terms “direct physical loss” and “physical loss” damages” in the additional business income and expense provisions do not extend to mere loss of use of a premises, where there has been no no physical damage to such premises; rather these terms require actual physical loss or damage to the property of the insured.
Courts have come to this conclusion, particularly with respect to COVID-19, because even with evidence that the virus attaches itself physically to property, such attachment “would not  constitute direct physical loss or damage necessary to trigger policy coverage, as such presence can be eliminated by “routine cleaning and disinfection”. Mangia Restaurant Corp., 72 Miscellaneous. 3d at 415. Further, even if an insured could establish the physical presence of COVID-19 on the property, “any loss of business income was caused by the precautionary measures taken by the state to prevent the spread of COVID-19, rather than direct physical loss or damage to property”. See ID. The presence or absence of a virus exclusion clause does not affect this analysis. See Kim-Chee LLC v. Philadelphia Indem. Ins. Co.2022 WL 258659, to *2 (2nd Cir. 2022).
Policyholders also sought coverage for business losses under “civil authority” clauses. Such clauses are typically triggered when a civil authority (or government entity) prohibits access to the insured’s business premises based on covered damage to property in the immediate area of the insured’s property. The courts have rejected this argument for two reasons. First, as with the more traditional business interruption clause, civil authority locks generally require that a direct physical loss to the property or surrounding area be triggered. See Mario Badescu Skin Care Inc. v. Sentinel Ins. Co., 2022 WL 253678, at *6 (SDNY 2022). Second, state and local ordinances did not prohibit, but rather limit, business access. Identifier.; see also Mangia Restaurant Corp., 72 Miscellaneous. 3d to 416. For example, in Mangia Restaurant Corp., the court ruled “that an essential element of civil license coverage was not demonstrated” because the insured “could have continued to operate his restaurant under a ‘limitation’”. 72 Misc. 3rd at 416.
Therefore, an insured’s claim will generally not be covered unless they can establish direct physical loss associated with the COVID-19 pandemic or a government order prohibits, as opposed to restricts, access to property of the insured. To underscore this, only 4.5% (3/66) of business interruption cases filed in New York State or federal courts alleging business losses resulting from the COVID-19 pandemic survived. a motion to dismiss intact. To see https://cclt.law.upenn.edu/judicial-rulings/. Nationally, only 8.8% (67/756) pursued discovery.
However, there is a silver lining for those seeking coverage for business losses related to COVID-19. As with all contracts, determining insurance coverage begins with the plain language of the policy itself. In New York Botanical Garden v Allied World Ins. Co. (USA) Inc., Index no. 803872/2021E, doc. 34 (Sup. Ct. Bronx County), the relevant insurance policy contained a business interruption clause which reduced recovery under the policy “to the extent that the insured may resume business, in whole or in part”. Based on this wording, the court concluded that “a complete denial of access to the plaintiff’s property is not necessary to trigger potential business interruption coverage.” Identifier. at 9. The court further determined that the wording of the policy did not require physical damage to the insured’s property to be triggered. As a result, the insured’s claim survived the dismissal and was discovered. Identifier.
It is important that an informed attorney review all policies that could potentially cover business losses arising from the COVID-19 pandemic. While coverage may exist, other exclusions could impede your ability to recover under a given policy.