COVID-19, Business Income Interruption & “Direct Physical Loss” Requirement

COVID-19, Business Income Interruption & “Direct Physical Loss” Requirement

By Burg Simpson
April 21, 2020
3 min read


By Thomas W. Henderson – Burg Simpson Shareholder

In this time of business shut downs and slow-downs due to COVID-19, many businesses are asking whether the business interruption coverage in their Commercial Property policies can be used to help them survive until they can re-open their doors. The insurance industry is trying hard to discourage their policyholders from making these claims by citing to language in the policy that does not necessarily mean what they are claiming.

A requirement to getting coverage for business income interruption is that it be caused by a “direct physical loss”. Over the past couple of weeks, the insurance industry has been aggressively perpetuating the myth that the property of a business must suffer some physical change to it (such as through a fire, flood or other visible calamity) before coverage is triggered. Simply put, this is not true in many states.

In Colorado, the presence of gasoline fumes in a building that rendered it uninhabitable was found to meet the “direct physical loss” requirement.  Western Fire. Ins. Co. v. First Presbyterian Church, 165 Colo. 34, 437 P.2d 52 (Colo. 1968).  In New Jersey, the release of ammonia in a facility that rendered it unfit for occupancy was a “direct physical loss”. Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of America, 2014 WL 6675934, 2014 U.S. Dist. LEXIS 165232 (Dist. N.J. 2014). In New Hampshire, the smell of cat urine making the building uninhabitable was a “direct physical loss”. Mellin v. N. Sec. Ins. Co., Inc., 167 N.H. 544, 115 A.3d 799 (N.H. 2015). In Oregon, smoke from forest fires that impacted an outdoor Shakespeare festival was a “direct physical loss”, as was odor from a methamphetamine lab. Oregon Shakespeare Festival Ass’n v. Great Am. Ins. Co., 2016 WL 3267247, 2016 U.S. Dist. LEXIS 74450 (D. Ore. 2016 (reversed on other grounds), and Farmers Ins. Co. of Oregon v. Trutanich, 123 Or. App. 6, 858 P.2d 1332 (1993).  In Massachusetts, the presence of carbon monoxide was sufficient to be a “direct physical loss”. Matzner v. SEACO Ins., 1998 WL 6675934, 1998 Mass. Super. LEXIS 407 (Mass. Super. 1998).

Public Health Orders from Colorado and other states include language supporting the argument that the presence of COVID-19 constitutes a “property loss”/”damage”. See Colorado Public Health Order 20-24 (“COVID-19 also physically contributes to property loss, contamination, and damage due to its propensity to attach to surfaces for prolonged periods of time”); New York City Emergency Executive Order No. 100 (“this order is given because of the propensity of the virus to spread person to person and also because the virus physically is causing property loss and damage”); and see Texas Dept. of Ins. statement (“For a business that does have contaminated tangible property, then that contamination may qualify as direct physical loss of or damage to the property”).

Insurance policies do not define what is meant by “direct physical loss”. While some courts have held that there must be a visible change to property to qualify, there are also quite a few states that have previously interpreted these words as including losses that do not require a visible change – such as through fumes, vapors, and other matter not plainly “physical” – as falling within the scope of insurance coverage.

As of now, no court anywhere has yet decided the question of whether the presence of COVID-19 at a business, or a closure or slow-down of businesses due to governmental orders, satisfies the “direct physical loss” requirement. What should be apparent from the above is – there is hope! Do not allow the powerful insurance industry to discourage you from making a claim.

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