Client Alert: Insurance Coverage for COVID-19 Pandemic-Related Losses

Posted on April 30th, 2021

The COVID-19 pandemic continues to present challenges to business owners across nearly all industries, even as a return to normalcy is in sight.  Widespread economic losses have been incurred, some of which may be covered by commonly held insurance policies.  In light of applicable statutes of limitation that vary state-to-state, as well as policy-imposed limitations on when claims may be made, it is vital that businesses suffering economic losses review their insurance policies and work with experienced legal counsel to determine whether coverage may extend to COVID-related losses.

There are various types of business-related insurance policies that may afford coverage for COVID-related losses.  One business-related insurance policy to examine is business interruption, which may contemplate losses in the circumstances faced throughout the pandemic.  In a notable decision, the North Carolina General Court of Justice in North State Deli, LLC, et al. v. The Cincinnati Insurance Company, et al., Case No. 20-CVS-02569, granted a summary judgment motion, finding that the policies at issue provided “coverage for Business Income and Extra Expenses for Plaintiffs’ loss of use and access to the covered property mandated by the Government Order as a matter of law.”  While North Carolina case law is merely persuasive in New Jersey, New York, and Pennsylvania, it is clear that courts are taking a close look at the language set forth in insureds’ policies — and claims made by restaurants, fitness centers, and other businesses affected by state Executive Orders may be particularly successful.

In addition to business interruption insurance, property, general liability, workers’ compensation, employers’ liability, and political risk insurance policies also may afford coverage for COVID-related losses.  By way of example, while one may not expect a property insurance policy to afford COVID-related coverage, the mere presence of the COVID-19 pathogen may constitute loss of or damage to property, thus triggering coverage.  In Motorists Mutual Insurance Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005), the Third Circuit Court of Appeals addressed e-coli contamination of the property and whether the presence of that pathogen excused performance under the subject lease.  The Court in that matter found that there was a question of fact as to whether the insured’s property was “nearly eliminated or destroyed, or whether their property was made useless or uninhabitable” by the contamination.”  Similarly, in Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, 2014 WL 66675934 (D.N.J. Nov. 25, 2014), the District Court for the District of New Jersey found that a property insurance policy covered property damage resulting from the release of ammonia into the subject building, rendering the building unsafe until the ammonia could be fully removed and the property cleaned.  Crucially, the court held that “property can sustain physical damage without experiencing structural alteration.” Whether the presence of COVID-19 constitutes loss of or damage to property is likely to be an issue of first impression to most courts, and will be a key part of any court’s analysis.  It is important to note that most policies impose a requirement that insureds mitigate their damages — and a failure to make reasonable efforts to do so may damage efforts to seek compensation under insurance policies.

In the more recent matter of Optical Services USA/JC1, et al. v. Franklin Mut. Ins. Co., Docket No. BER-L-3681-20 (N.J. Super. Ct. Bergen Cnty. Aug. 13, 2020), the court declined to dismiss an insured’s complaint based on the insurance carrier’s assertion that “loss of physical functionality and use of [a] business” does not constitute “direct physical loss.”  It is crucial in reviewing insurance policies, however, to ensure that anti-concurrent causation provisions are not present which might serve to exclude claims for viruses and bacteria.  In another recent case, Mac Property Group LLC v. Selective Fire & Casualty Insurance Co., Docket No. CAM-L-2629-20 (N.J. Sup. Ct. Law Div. Nov. 5, 2020), the court declined to find coverage where an anti-concurrent causation provision excluded coverage “regardless of any other cause of event that contributes concurrently or in any sequence to the loss.”

The New Jersey Superior Court, Appellate Division holding in Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co. is likely to be instructive as COVID-related claims are litigated, as that court held:  “The fact that the term ‘physical damage’ is capable of at least two different reasonable interpretations convinced us that it is ambiguous.  And well-established precedent teaches us that such an ambiguous provision must be construed favorably to the insured.”  406 N.J. Super. 524, 541 (App. Div. 2009).  By contrast, in Causeway Automotive LLC v. Zurich American Insurance Co., C.A. No. 20-8393-FLW-DEA (D.N.J. 2021), Chief Judge Wolfson of the United States District Court for the District of New Jersey found that a virus exclusion in an insurance policy barred the plaintiff from obtaining COVID-related losses, and rejected the plaintiff’s argument that the virus exclusion is contrary to public policy.  Of course, in that matter, the virus exclusion itself, and not any policy ambiguity, was found to control.

Case law addressing disputes arising from the COVID-19 pandemic is limited, and is evolving regularly as litigations progress on this novel issue.  Indeed, the limited pre-2019 cases concerned the 1918 Spanish Flu epidemic, and are rarely applicable to the modern circumstances facing businesses.  Ansell Grimm & Aaron’s attorney have been at the forefront of litigating pandemic-related matters of first impression, and are well positioned to protect our clients’ interests in an ever-changing environment.