As the country and the world grapple with the severity of the coronavirus pandemic and the necessary steps governments, businesses, and citizens are taking to mitigate the crisis and the spread of COVID-19, businesses are dealing with an unprecedented slowdown and/or shutdown of operations across many economic sectors.

With the extent of the fallout from this abrupt stop to the world’s economy becoming apparent, it is anticipated many business owners will seek insurance coverage to blunt the financial impact of this public health crisis. Coverage litigation over coronavirus-related business interruption claims already filed in other jurisdictions has garnered national news attention. These cases are likely the first of many filed around the country seeking coverage for business losses. The issues that claims professionals and insurers need to be aware of concerning business interruption claims and coverage in Pennsylvania include:

I. Standard Business Interruption Coverage

The purpose of business interruption coverage is to place a business owner whose business is forced to close in the same place he or she would have been absent the interruption to the business. When an insured business suffers an interruption to its operation, it may be entitled to insurance benefits equaling the amount of lost earnings the business suffered during the time it reasonably took to bring the business back online.

In almost all commercial insurance policies, this business interruption coverage is only available when the business interruption is caused by a covered loss. In most standard policies, business interruption is covered when it is caused by direct physical damage to insured property. The specific terms and conditions of the policy may further limit the grant of coverage. For example, certain policies only provide coverage for accidental (i.e., fortuitous) physical damage or the physical damage is caused by a named peril identified within the policy.

Part and parcel to business interruption coverage, civil authority coverage is also available in most policies for business closures mandated by governmental action. However, the scope of civil authority coverage is limited in most policies to closures mandated due to physical damage or law enforcement activity within a limited physical radius and is limited to a short time period.

The multibillion dollar question facing both insurers and insureds is whether closures related to the coronavirus pandemic are entitled to coverage under the business interruption coverage afforded by insurance policies? In Pennsylvania, the answer is likely no.

Pennsylvania Courts have not considered the specific issue as to whether the general presence of a contagion in a large geographic area constitutes physical damage to property in that area. However, while ostensibly an open legal issue, courts have found the presence of an ephemeral, potentially harmful substance does not constitute physical damage to real property.

For example, the Third Circuit Court of Appeals has held the presence of asbestos fibers at an insured property does not constitute physical damage to property such that an insured could be entitled to coverage for damage to property[1]. The court noted physical damage connotes a demonstrable, physical alteration of insured property, and the temporary presence of asbestos fibers does not constitute physical damage under this definition. Similarly, courts have indicated the mere presence of E.coli bacteria at a property does not necessarily constitute damage to real property unless the functionality of the subject property was eliminated or destroyed. Based on this precedent, it stands to reason the temporary presence of coronavirus does not constitute physical damage to property.

Furthermore, the vast majority of businesses closed due to the COVID-19 pandemic did not do so because of the direct and verified presence of coronavirus at their insured property. Rather, these businesses have closed because of governmental directives intended to stop the spread of the virus. Accordingly, even if Pennsylvania courts hold the presence of coronavirus at an insured location constitutes physical damage, most businesses would still struggle to show they were entitled to coverage because the presence of coronavirus itself did not cause the closure of the property.

In addition to standard business interruption coverage, many policies afford coverage for contingent business losses. This coverage is triggered when an insured loses income due to disruptions or interruptions suffered by vital suppliers, distributors, or customers. The grant of coverage for contingent business interruption coverage typically requires the underlying disruption to be caused by an otherwise covered loss (i.e., direct physical damage to property). Therefore, under most policies, if the cause of the interruption would not be covered for first-party business interruption losses, the loss would also not be covered under contingent business-loss coverage.

Finally, exclusionary language in policies may also apply to coronavirus-related business interruption claims. Bacteria/virus and pollution exclusions contained within commercial policies may apply and serve to exclude coronavirus-related claims. The applicability of specific exclusions will be highly dependent on the specific language and construction of the exclusion contained within a policy.

II. The Handling of Coronavirus Claims

Coronavirus-related insurance claims for business interruption losses will involve complexity and uncertainty above and beyond those present in a typical business interruption claim (which are themselves usually multilayered, complex claims). Thorough, detailed, and prompt claims-handling will be essential to comply with good-faith claims handling obligations.

First, the initial wave of coronavirus claims will involve issues that are unsettled under Pennsylvania law. Either in-house or outside coverage counsel should be engaged from the outset of the claim to provide an evaluation predicting how Pennsylvania courts will interpret the business interruption policy language unique to your insurance policy.

Second, claims personnel must be intimately familiar with each insured’s coverage policy as a whole. In addition to being aware of the policy language germane to business interruption coverage, counsel must be familiar with contingent business-loss language contained within the policy, exclusionary and loss-payment language that may apply to the insured’s claim, and all endorsements or riders attached to the insured’s policy. This last aspect is especially important, as specialized policies and endorsements (particularly coverages obtained by insureds in the health care or long-term care fields) may contemplate coverage for harm or loss caused by infectious diseases.

Third, as different states and federal courts evaluate coverage issues posed by the coronavirus pandemic, it is possible different jurisdictions may resolve issues differently. Claims handlers and coverage counsel should be aware of the geographic scope of an insured’s business and their business interruption claims and also of any conflict-of-law provisions contained within the insured’s policy. If an insured has operations in different jurisdictions or seeks contingent business-loss coverage related to the operations of a supplier or customer in a different jurisdiction, a factual and legal conflict-of-laws analysis will be necessary to determine whether a patchwork of judicial rulings and interpretations may alter a coverage analysis for all or part of an insured’s claim.

Fourth, and finally, it is important to obtain comprehensive factual information about the alleged loss and not reflexively rely on the assumption that business interruption coverage does not exist for coronavirus-related claims. Even if coronavirus-related closures are generally not covered under a policy, a factual investigation into the alleged cause of loss is still essential in every claim to determine whether facts and circumstances unique to the claim could be covered under the policy.

In sum, coronavirus-related business interruption claims will be held to the same good-faith claim-handling standards as any other claim. Each one must be assessed on its own merits, and the complexity and uncertainty involved in claims dictate good-faith handling will be sufficiently prompt and thorough to yield a comprehensive and reasonable claim investigation and decision.

III. Reasonable Expectations of an Insured Doctrine

Coverage litigation has already been initiated in other jurisdictions seeking business interruption coverage for losses caused by coronavirus-related closures, including two newsworthy cases involving shuttered restaurants owned by a prominent chef. Trade groups have also begun pressuring legislatures around the country to compel insurers to provide coverage for business losses. The main thrust of the arguments raised in support of these claims is that business owners expected insurance coverage to be available to compensate them in situations like this.

Pennsylvania has long recognized the reasonable expectations of an insured may be pertinent to the determination of the scope of coverage available under a policy.[2] However, that does not mean a business owner who anticipated coverage would exist for a coronavirus-related interruption is entitled to coverage not provided by his or her policy.

Under Pennsylvania law, the explicit and unambiguous terms of the subject policy control the coverage determination and must be enforced.[3] Conversely, the reasonable expectations of the insured are pertinent only when (1) the insurer affirmatively misrepresents the terms of an insurance policy, or (2) negligently or intentionally issues a policy different than what was requested and applied for by the insured.[4] Even when the reasonable expectations of the insured are considered when evaluating coverage, the pertinent policy language remains one factor courts will consider when determining whether the insured’s subjectively genuine expectations were reasonable.

As the grant of coverage offered under standard policies offering business interruption coverage (i.e., business interruption due to direct physical damage to insured property) is clear and explicit, the expectations of an insured are likely irrelevant to a coverage analysis. The unambiguous language in the policy controls. Unless an insurer faces a situation where an insured explicitly requested (and did not receive) highly specialized business interruption coverage for infectious diseases when purchasing a policy, the reasonable-expectations doctrine will not apply to coronavirus-related business interruption claims.

It is also unlikely estoppel principles will afford insureds’ business interruption coverage for coronavirus-related closures even if they expected coverage to be afforded for coronavirus-related business interruption claims. Estoppel principles can preclude an insurer from enforcing a term or condition under their policy based on contrary representations from their agents or representatives.[5] Estoppel principles are not used to expand the scope of coverage available under an insurance policy.[6]

IV. Will Agents or Brokers Face Claims Related to Business Interruption Coverage?

If and when insureds are unable to recover benefits under their policy for business interruption claims for losses not covered per the terms of the policy, insureds may seek to hold their agents or brokers liable for lack of coverage. In Pennsylvania, they are likely to be unsuccessful.

Under Pennsylvania law, an insurer generally does not owe a duty to its insured to advise regarding the sufficiency of the insured’s coverage.[7] An agent is under no duty to (1) explain the type or amount of coverage available; (2) ensure the insured has obtained total or full coverage; or (3) explain the policy itself and its coverages or exclusions.[8]

This general rule is tempered when an agent or broker offers or agrees to provide specialized advice or recommendations for coverages needed by the insured.[9] If an agent or broker presents him or herself as an insurance consultant and offers to recommend necessary coverages, an agent or broker can be held liable for failing to obtain reasonably necessary coverages.

Even considering this principle, it is unlikely agents or brokers will be held liable for failing to obtain business interruption coverage for coronavirus-related closures. General professional negligence principles apply to agent negligence claims, and it would be difficult to convince a jury an agent who did not obtain business interruption coverage contemplating infectious diseases prior to the outbreak of COVID-19 acted unreasonably or that such harm was foreseeable. Coronavirus-related business interruption claims are not likely covered under standard policies. Insureds would struggle to prove they suffered any harm based on their agent’s actions unless they operate in a highly specialized sector where business interruption coverage for infectious diseases would be a reasonable expectation.

V. Conclusion

While coronavirus pandemic-related business interruption claims are likely not covered under standard commercial insurance policies as a matter of Pennsylvania law, the claims raise significant and complex legal and claim-handling issues, and involve questions of great social importance. It is important to remember these claims must be handled on their own merits, and coverage determination is always predicated on the specific language of an insured’s policy and unique facts and circumstances underlying the insured’s claim.

If you have any questions concerning coverage for coronavirus-related business interruption claims, appropriate claim-handling procedures, or potential litigation claims that may be raised against insurers, agents, and brokers, please do not hesitate to contact John Berry or Lee Westbrook to discuss the significant and complex issues these claims pose.