The coronavirus pandemic has put us in a unique situation with no easy answer. All aspects of our lives are being affected, including our businesses and expected income. One question we keep hearing is, how is this virus affecting the construction industry and business interruption insurance? In most cases, there will not be coverage for business interruption because there needs to be physical damage or loss to property, and viruses are most likely excluded. With that said, language in policies and contracts needs to be reviewed carefully. For instance:
- Communicable diseases, viruses, bacteria and fungi are most likely excluded from a policy¹
- Other broad form exclusions relating to microorganisms¹
- Depending on policy and coverage, sanitizing office might be covered¹
Will insurance cover COVID-19 claims?
Insurance property policies generally have a few things in common. One is that they provide coverage for some form of physical damage; it may be listed as direct physical damage, direct physical loss or damage, loss or damage caused by a particular peril, direct physical loss to property or similar phrasing.4
The commercial property building and personal property coverage form provides coverage for “direct physical loss of or damage to covered property.” The policy relies on separate causes of loss forms to determine what types of losses are covered and excluded. The cause of loss forms all provide some additional coverage for fungus, wet rot, dry rot or bacteria from certain causes of loss. However, a virus and bacteria are two different things, so coverage does not apply here. The broad form also excludes discharge, dispersal, seepage of pollutants–and pollutants is a defined term in the CP 00 10, Building and Personal Property Coverage Form.
The issue at hand with the virus is business interruption and action of civil authority. Is there coverage when local authorities require bars, restaurants, gyms and other establishments to close because of the changes of spreading the virus? For this, we need to look at an endorsement; for the sake of discussion, we’re looking at the Business Income (and Extra Expense) Coverage Form CP 00 30.4
Coverage is provided for the actual loss of business income due to a necessary suspension of business operations during the period of restoration. The period of restoration must be due to direct physical loss or damage to covered property. Also covered is loss triggered by a civil authority prohibiting access to the insured property because of damage to other property.4
Coverage is provided only when a property has been physically damaged. COVID-19 does not cause physical damage to property. Even if it is considered physical damage, then you have the pollution exclusion to deal with, and the virus is a pollutant. Pollutants are excluded when they are dispersed, discharged, seep, migrate, or otherwise escape. This is different from closing businesses because of the threat to exposure or spread of the virus; a threat is not physical damage, and therefore there is no coverage.4
Can force majeure assist in the current situation?
“Force majeure” is French for “superior force.” These types of clauses provide for a suspension or cancellation of a company’s performance of obligations under the contract should an extraordinary event occur that is beyond the control of either party. Force majeure generally describes such uncontrollable events (e.g., war or extreme weather) that are not the fault of either party and that make it extremely difficult, or impossible, to carry out normal business.2 Force majeure clauses are all different–so the coverage triggers will vary from contract to contract. For any of this to apply, there has to be a very specific force majeure clause as a part of the formal construction contract.
Employers analyzing force majeure clauses may consider the following:
- Document the specifics of your business interruption. This may be required to defend your invocation of a force majeure clause.2
- Consider modifying future contract language to include specific circumstances such as pandemics.2
- Review your current insurance coverage to determine whether your policies contain coverage that might assist in a force majeure situation.2
During these uncertain times, Perry & Carroll is here to answer any questions or concerns you may have.
1 Best’s Insurance News & Analysis – March 17, 2020, Observers Say Exclusions and Limitations Reduce Coronavirus Exposure in Property Lines by Loretta Worters
2 Zywave Article: Force Majeure and Coronavirus