COVID-19: First Party Property Insurance Coverage in California
Some interesting issues surface concerning a first party claim for Coronavirus-related losses. Under the standard property insurance coverage, losses must be “direct physical loss or damage.” The loss needs to be “physical,” which is widely held to exclude alleged losses that are intangible and therefore precludes any claim where an insured suffers a detrimental economic impact unaccompanied by a distinct, demonstrable, physical alteration of the property. (MRI Healthcare Center of Glendale, Inc. v. State Farm General Insurance Co. (2010) 187 Cal.App.4th 766, 779.) If the property, such as a restaurant, has been contaminated with the Coronavirus, is this a “physical alteration of the property?” Likely not under MRI Healthcare, supra.
Closure of a business by a governmental order presents its own quagmire. Although forced closure by a governmental order without any contamination of the property would not appear to be direct physical damage, it may constitute a “physical loss.” In American Alternative Ins. Corp. v. Superior Court (2006) 135 Cal.App.4th 1239, 1246, the California appellate court concluded that the term “direct and accidental physical loss,” could reasonably extend to a governmental seizure or confiscation. However, such a seizure or confiscation normally contemplates a total loss as that term is defined in the policy. Does a governmental order to close an establishment constitute a “seizure or confiscation,” and if so, must it be a “total loss” as defined in the policy versus a temporary closure? Moreover, many policies have an exclusion for confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any governmental, public or local authority.
What about “business interruption” coverage? To the extent the coverage requires a direct physical loss, see above.
Some business interruption forms also have an exclusion for viruses. Most business interruption coverage requires a “suspension” of operation which means a temporary, but complete, cessation of activity. There is frequently no coverage for a slowdown or reduction in operations. Insurance Services Offices (ISO) has recently released two optional endorsements for use with commercial business forms to provide limited business interruption coverage for losses related to coronavirus.