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There has been – and will continue to be – a tsunami of legal issues and claims resulting from the COVID-19 pandemic. The lawsuits started almost immediately after insurers started denying business interruption claims. A growing number of state legislatures are proposing legislation to require insurers to cover interruption claims while members of the House of Representatives sent an open letter to the insurance industry, nudging the sector to cover interruption losses. The industry politely declined in its own open letter.
This post will briefly explain the issues involved.
What exactly is the issue?
The legal controversy centers on a few key aspects of the commercial property coverage. The first is the definition of “property damage,” which the policy defines as, “direct physical loss or damage.” Direct means, “Stemming immediately from a source,” while physical means, “having material existence; perceptible through the senses.” This definition is understandable in the case of a natural event like lightning, fire, or a tornado.
But what about the pandemic? Here the issue is murkier. In the case of COVID contamination there is a legitimate question of whether or not “direct physical damage” of the type contemplated by the policy exists. Visually compare a fire with viral contamination. The former is clearly visible while also requiring a large amount of restoration. That latter can’t be seen and can be remediated for far less expense then with the case of a fire.
The controversy doesn’t stop there. Some insureds are arguing that the inability to use their property as a result of the government shutdown qualifies as property damage. While this is clearly not typical “direct physical damage,” it is in line with some state law cases that ruled an event rendering property uninhabitable or unusable is a direct physical loss as required by the policy. Expect this argument to be fought tooth and nail to the highest legal in a jurisdiction.
Some policies contain a virus exclusion that would place the insured at a tremendous disadvantage when filing a claim. But the plaintiff is not without recourse, as he could simply say, “prove it.” Without actual proof, the insured would have a good argument at trial argument, as he could simply say, “the insurer said there was contamination, but they never inspected the property.”
And then we get to the issue of business income, which is defined as “net income” which is, ”net profit or loss before income taxes” and, “continuing, normal operating expenses incurred, including payroll.” If ever there was an area ripe for a battle of the experts, this is it. Expect the insured to argue for maximum net income while the insurer will claim a lower amount.
This is just a brief overview of the issues. Please contact me if you'd like to discuss this in more detail.
 ISO CP 00 99 10 12
 Online Merriam-Webster Dictionary, last visited on April 28, 2020 (https://www.merriam-webster.com/dictionary/direct.)
 Online Merriam-Webster Dictionary last visited on April 28, 2020 (“https://www.merriam-webster.com/dictionary/physical”)
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