Originally Published:
(Page 24 of PDF)
With businesses suffering unprecedented losses as a result of business closures related to Covid-19, many are asking if there could be any help from traditional insurance policies designed to pay for a business’s loss of income. In order to determine whether or not there could be coverage, we need to look at both the words of the insuring agreement, and how a jurisdiction interprets the words.
The importance of jurisdiction is seen in states like Iowa where a judge held that "The objectively reasonable expectations of applicants and intended beneficiaries regarding the terms of insurance contracts will be honored even though painstaking study of the policy provisions would have negated those expectations" C&J Fertilizer, Inc. v. Allied Mutual Insurance Co, 22 Ill.227 N.W.2d 169 (Iowa 1975). In such a jurisdiction, a court could find that there is coverage under a Business Interruption Policy if a policy holder reasonably believed there should be coverage even if reading the policy would prove otherwise.
Unlike Iowa, courts in California do not look to the reasonable expectations of the applicants or intended beneficiaries unless the contractual terms are ambiguous or unconscionable. If the terms of the written agreement are clear and explicit, courts will look to the writing alone to determine the intentions of the parties.
California Civil Code:
1638. The language of a contract is to govern its interpretation, if the language is clear and explicit, and does not involve an absurdity.
1639. When a contract is reduced to writing, the intention of the parties is to be ascertained from the writing alone….
1649. If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed, at the time of making it, that the promisee understood it.
Therefore, the starting point for whether or not there should be coverage in California under a business interruption policy is to look to the writing alone to see if it clearly communicates the intentions of the parties. For this, we need to look at the words of the insuring agreement.
Business Income (and Extra Expense) Coverage Form CP 00 30 10 12 Insuring Agreement:
We will pay for the actual loss of Business Income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration". The "suspension" must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss. [Covered Causes of Loss commonly include perils such as fire, lightning, explosion, windstorm, hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, volcanic action, falling objects, weight of snow, ice, or sleet, water damage, and sometimes collapse.]
As we see in the insuring agreement, coverage only applies if there is direct physical loss of or damage to property at premises described in the policy, and the loss must be caused by or result from a covered cause of loss. With Covid-19, the loss of business income has been caused by the suspension of operations, but it has not been caused by direct physical damage to property at the premises, and it has not been the result of a covered cause of loss like fire, lightning, or hail. Therefore, a plain reading of the policy would determine that there is no coverage under a standard Business Interruption policy for loss of income resulting from Covid-19.
There are two additional coverages where insureds can find coverage for a loss of business income even when there is no damage at the insured’s premises: Civil Authority and endorsement CP 15 08 06 07 Business Income from Dependent Properties.
Civil authority coverage will pay for “the actual loss of Business Income [the insured] sustain[s]…caused by action of civil authority that prohibits access to the described premises.” This sounds like it could provide coverage for businesses being forced to closed by the government’s mandates to reduce the spread of Covid-19, but the coverage only applies when the access is prohibited as a result of damage within one mile of the insured premises, and the damage must be the result of a covered cause of loss. With respect to closures caused by Covid-19, there is no physical damage caused by a covered cause of loss, and so there would be no coverage.
Similarly, endorsement CP 15 08 06 07 extends Business Income coverage to losses suffered away from the insured’s premises, but the locations need to be named—often a supplier, recipient, manufacturer, or anchor store—and the damage at these locations must be the result of a covered cause of loss. Again, with respect to closures caused by Covid-19, there is no physical damage caused by a covered cause of loss, and so there would be no coverage.
With traditional business interruption policies unlikely to pay for loss of income resulting from Covid-19, what kind of insurance should a business purchase to cover loss of income resulting from a pandemic such as Covid-19? The answer is pandemic insurance. After the SARS outbreak in 2003, the Wimbledon Tennis Tournament began purchasing pandemic insurance at a cost of roughly $1.9 million every year. In 2020, the tournament was cancelled due to Covid-19, and they filed a claim on the insurance policy. After paying a total of $31.7 million over the past 17 years, Wimbledon was expected to receive a payout of $142 million in 2020 from their pandemic insurance policy. Absent a specific pandemic insurance policy, traditional business interruption policies are unlikely to provide for business interruption losses because the losses do not arise out of damage to the premises, and they are not caused by what the policy considers a covered cause of loss.