Business Insurance But No COVID-19 Coverage

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Would Transformers (robots in disguise) buy life insurance or car insurance? If they were filing a claim for COVID-19 damage, it seems that they wouldn’t be covered either way.

Background

In March of 2020, New York declared a state of emergency and ordered non-essential businesses to basically close. The order required that these businesses not have any in-person workers at their locations. The main effect of this was the explosion of virtual offices and digital work, which hopefully has forever changed our societies and eliminated some unnecessary customs such as a two hour commute.

The main negative effect of the order was the closing of the many businesses that could not transition to online workspace. This included a wide range of businesses, from hotels to medical specialists that require in-person interaction with customers, or at least open travel with few restrictions.

At that point, many businesses were relieved that they bought business insurance to cover lost income, business interruption, and damage. That sense of relief did not last.

Insurance Policies: The Fine Print

A happy insurance boss told his employees, “As a reward for your hard work this past year I’ll give you all checks for $5,000. If you work just as hard next year, I’ll sign those checks.”

Many businesses normally have a form of business insurance. These types of coverage provide financial protection against property damage or other issues that could reduce revenue. Insurance policies, however, are very specific about what damage or issues are covered. The devil is in the details. In many cases in New York, and throughout the United States, the details have really been the devil.

What Is Covered?

In both New York State Courts and the Federal Courts in New York, the insurance companies have been winning. Many contracts have largely standard language. The insurance policies at issue here are no different. These policies explicitly cover losses caused by, “direct physical loss or damage.” The contracts detail the specific categories of damage that they cover, but they virtually all include the “physical loss” provision. Therefore, the policies cover physical damage.

What’s Not Covered?

Many insurance policies also have specific carve outs to clearly state what the companies do not cover. The carve outs that are relevant here involved not insuring business loss caused by bacteria or microorganisms. The pandemic causing coronavirus fits right into that clause. Some insurance policies go on to specifically exclude business loss caused by communicable diseases, such as COVID-19.

The Law

New York courts have consistently held that the phrase, “physical loss or damage,” means actual physical damage. Being unable to use property is not physical damage. Before the COVID-19 pandemic, these cases dealt with minor government shutdowns. Now, however, the law is just as consistent, even with the statewide shutdowns. New York law maintains that the coronavirus does not cause physical damage by simply existing on property because it can simply be cleaned off.

The law is that damage caused by COVID-19 shutdowns is not physical damage and, therefore, these insurance policies do not need to cover the “insured” businesses. Whether an insurance policy has the virus carve outs is irrelevant if there is no physical damage. Actual physical damage triggers coverage. That is the law so far.

Will Things Change?

Maybe.

The New York State Legislature is trying to make laws to override these insurance contracts. The new laws would require coverage for COVID caused business loss. That would be a huge relief for many New York businesses.

As for the future of business insurance, time will show if things change.

Needing insurance is like needing a parachute. If it isn’t there the first time, chances are you won’t be needing it again.


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Andrew Rozo
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