The widespread shutdown of operations within commercial properties and the looming problems with collecting rent from idled tenants has left some CRE companies wondering if they might get some financial relief through the business interruption provision of their insurance policies.
During a NAIOP webinar this week, George Pincus –
Shareholder with Stearns Weaver Miller, PA – provided an assessment of those
prospects. “Business interruption insurance. This is not going to be pretty
folks, so strap yourselves in.”
While most commercial property insurance includes the
provision, that coverage is restricted to interruptions caused by physical
damage, such fires or hurricanes.
“It’s too soon to tell just how courts are going to
interpret the COVID-19 social distancing and government shutdowns of private
property as to whether or not these are casualty events within the language of
the insurance policy,” Pincus said. Furthermore, “the case law that we found is
all over the place.”
In some cases, courts have ruled that mold contamination qualifies
as physical damage and warrants business interruption coverage. Other courts
have ruled that disease outbreaks, such as incidents of Legionnaire’s Disease
in Philadelphia in the 1980s, did not qualify, he said.
In many policies, claims would face an additional hurdle.
“Assuming that COVID-19 is a covered casualty, you then
have to see if your policy contains the ISO exclusion for loss due to virus or
bacteria,” Pincus said. Developed
several years ago in response to cases of contamination in commercial
buildings, the exclusion states “the insurance company will not pay for loss or
damage caused by or resulting from a virus…that is inducing physical distress,
illness or disease.”
In late March, the Maryland Insurance Administration
addressed questions about business interruption insurance in a written
Some policies cover interruptions “when a business is
shut down due to an order by a civil authority,” the advisory said. However,
“all insurance policies have exclusions of coverage for risks that are too
great to be underwritten at an affordable price…[such as] war, nuclear action
and radiation… Global pandemics like COVID-19 usually fall into this category.”
But the Maryland Insurance Administration added that
“policies can be different. We recommend that businesses review their policies
and reach out to their insurance professionals with any questions.”
Noting that such insurance matters are a very specialized
area of law, Pincus recommended that CRE companies consult with lawyers who
have expertise in the subject. Insurance claims, he said, will likely become
the topic of disagreements and legal actions in the coming months and years.
Writing in the National Law Review, Thomas Drennan and
Joseph Tucker of Dinsmore & Shohl LLP noted that those disputes may be
impacted by government efforts to compel insurance providers to cover business
interruption losses resulting from COVID-19. On March 18, members of the U.S.
House of Representatives wrote to CEOs of four major insurance trade
organizations, urging them to cover such claims.
“Members of Congress state business interruption
insurance is intended to protect businesses against income loss as a result of
operational disruption and covering losses resulting from COVID-19 would ‘help
sustain America’s businesses through these turbulent times, keep their doors
open and retain employees on the payroll,’” Drennan and Tucker wrote.
According to the article, the CEOs responded that
“business interruption policies do not, and were not designed to, provide
coverage against communicable diseases such as COVID-19… The proposed
retroactive application legislation would fundamentally change the agreed-upon
transfer of prospective risk-of-loss exposure to coverage for a known and
presently occurring loss, something the parties did not agree to, the insurer
did not rate for, and the policyholder did not pay for.”