Coronavirus coverage tied to physical damage definition: Experts

Open questions about coverage surrounding the coronavirus may well turn on the definition of physical damage and whether the virus or its presence meets that threshold, legal experts say.

“We start with the threshold issue of ‘Is coronavirus or the presence of coronavirus property damage,” said Finley T. Harckham, a senior litigation shareholder in the New York office of Anderson Kill who represents and advises corporate policyholders and other entities in insurance coverage matters.

Mr. Harckham said cases that have dealt with similar situations lead him “to believe there’s a good chance that the presence of coronavirus is property damage.” He added that the issue of the coronavirus as physical damage has yet to be “directly addressed by the courts.”

Viruses, pandemics and contagious/infectious diseases such as COVID-19 are generally not designated perils in a standard form commercial property policy, said Paul S. White, a partner in Los Angeles with Wilson Elser Moskowitz Edelman & Dicker LLP. He said such policies typically contain at least two conditions precedent to coverage, that the loss arise from a designated peril, such as a fire or earthquake, and it result in a direct physical loss to property.

While standard policy language may limit coverage for disease and pandemic, “there are also specialized commercial property policies that may include ‘communicable and infectious diseases’” as a designated peril, Mr. White said.

Such policies are most common in industries like hospitality or health care, Mr. White said. They are often written on a manuscript or bespoke basis for individual policyholders and may not require direct physical loss to property in some circumstances; however, it is also common for the policies to contain limitations or exclusions regarding specific diseases, viruses, bacteria or pandemics.

Some policyholders purchase coverage for losses arising from civil authority orders that impair or prohibit access to property and may or may not require a direct physical loss. 

Such coverage is usually limited to local government orders rather than a general proclamation such as the World Health Organization’s declaration of a worldwide pandemic, and is often underwritten on a manuscript basis and may provide, limit or exclude coverage based on a variety of factors such as expense, geography, disease, direct physical loss or designated risks, Mr. White said.

As an example of a case in which the presence of a contaminant was found to be physical damage, Mr. Harckham cited Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, in which a U.S. district court in New Jersey in 2014 found that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.

In reaching its decision in the case, the court stated that “property can sustain physical damage without experiencing structural alteration,” Mr. Harckham said.

In another case, however, a physical damage claim based on “mad cow” disease was rejected

In Source Food Tech., Inc. v. U.S. Fidelity & Guar. Co. in 2006, the policyholder argued that the closure of the U.S.-Canada border to its imported beef products due to “mad cow” disease concerns qualified as “direct physical loss” because it was unable to transport its products. The 8th U.S. Circuit Court of Appeals, disagreed, finding that Source Food’s inability to transport its beef product across the border did not constitute product that was physically contaminated or damaged, and to hold otherwise would render the word “physical” meaningless.

Most businesses that are suspending operations are doing so based on the policy of social distancing, to contain or mitigate against the spread of COVID-19 by limiting social contacts., Mr. White said.

“The vast majority of businesses suspending operations are not doing so due to the coronavirus causing physical damage to the building,” he said. “We are generally confronting circumstances where we are suspending operations as a means of preventing infected individuals from transmitting COVID-19 to other individuals.”

Definitions such as those for biological contaminants or those contained in pollution exclusions, which sometimes can be “very broadly written,” may become very important, Mr.  Harckham said, emphasizing that policyholders should read all of their policies carefully.

Anderson Kill, he said, is in the process of “advising clients” about coverage matters relating to coronavirus.

More insurance and risk management news on the coronavirus crisis here.