Wagner: Policy endorsements may unlock COVID-19 coverage

By Bill Wagner

Restaurants have been devastated by shutdown orders that closed the use of their dining rooms and bars. Many had insurance policies that provided a combination of coverages, including “all risks” commercial property insurance from fortuitous events not specifically excluded. The policies provide coverage for lost net income, employee wages and continuing expenses. When restaurants turned to their insurers to offset their losses because they were unable to use their property as intended, many of us thought the prospects for coverage were good, especially under policies that did not have virus exclusions.

But the insurance industry response was fierce. Although the insurance industry has recognized “$800 billion in surplus” from the pandemic, it feared that paying such claims would be devastating, wrote Paul Carroll in “A ‘Touch and Go’ Moment for the Industry,” in Insurance Thought Leadership (Jan. 23, 2021). So the industry created a campaign to prove it “did its part as good citizens: providing more than $14 billion in rebates just in auto premiums, making $300 million in charitable contributions, paying claims in new and innovative ways and committing to keeping employees on the payroll.” Id. A pittance, you might say, of less than 2% in comparison to the surplus.

So what’s the main coverage issue? Plaintiffs have pursued claims under their commercial property Business Income and Civil Authority (collectively, “BI”) coverages. Many of these policies state that BI coverage is triggered upon “direct physical loss of or damage to” covered property. (Some insurers, like Cincinnati Insurance, use the phrase “direct physical ‘loss’ to property,” where loss is defined as “accidental loss or damage.”) The insurers argue that “direct physical loss” requires actual property damage to trigger coverage, meaning tangible structural damage. They argue that the presence of the virus on the restaurants’ furniture does not result in tangible structural damage so coverage is not triggered. Policyholders, however, argue that the policies cover loss or damage, and “direct physical loss” can include loss of use. They turn to dictionaries that plainly define “loss” as being deprived of the use of one’s property. They argue the government shutdown orders resulted from a fortuitous, non-excluded event that caused them direct physical loss because they were deprived of the use of their property for its intended purpose, so coverage is triggered.

Wisdom cautions against missing the forest for the trees. Plaintiffs have generally focused on the language of the commercial property coverage form rather than the policy as a whole. The restaurants bought combined coverages, meaning the policies include coverages for commercial property, commercial general liability, liquor liability, business automobile liability, umbrella and excess coverage, and other endorsements.

When the insurers say “direct physical loss” means property damage, which requires tangible structural damage, that is not how their policies define “property damage.” Each of the liability coverage forms mentioned above defines “property damage” in two ways: (a) physical injury to tangible property, including all resulting loss of use of that property; or (b) loss of use of tangible property that is not physically injured. So in every coverage section, “property damage” includes “loss of use of tangible property that is not physically injured.” So would an ordinary policyholder, reading the policy as a whole, reasonably expect “direct physical loss of or damage to” property to include the “loss of use of tangible property that is not physically injured”? We think so, and if the phrase is susceptible to this interpretation it is ambiguous, requiring courts to construe the language for the policyholders and against the insurers in favor of coverage.

But there’s more. Some insurers who argue that “direct physical loss of or damage to” property does not include loss of use have an endorsement that explicitly states the policies cover loss from “direct physical loss of or damage to property, including loss of use.” For example, Society Insurance has a “Top Choice Extension Endorsement” for “Guest’s Personal Property,” that states “We will pay those sums that you become legally obligated to pay as damages because of direct physical loss or damage, including loss of use, to Covered Property caused by accident and arising out of any Covered Cause of Loss.” So would an ordinary policyholder who bought an “all risks” policy reasonably expect that the same phrase used in another part of the policy has the same meaning when it appears in the commercial property coverage form without the added words “including loss of use”? We think so, and by focusing on how this phrase is defined in an endorsement may establish COVID-19 business interruption insurance coverage.

As another example, Cincinnati Insurance has “The Bridge Endorsement” that provides coverage for “Temporary Meeting Space Expense,” due to the temporary unavailability of your primary meeting space. The endorsement states “The unavailability of your primary meeting space must be the result of direct physical loss to a climate control system or hot water heater … .” Experience shows that HVAC systems and water heaters often just stop working without anything physically damaging them, which means this coverage must be intended to cover loss of use in the absence of physical injury to tangible property.

But what about an exception to an exclusion? Some policies have endorsements that exclude “Electronic Vandalism or Corruption of ‘Electronic Data’ or Corruption of ‘Computer Equipment.’” An exception to this particular exclusion states, “But if direct physical loss or direct physical damage occurs to Covered Property … we will pay for that resulting direct physical loss or direct physical damage. Mere loss of use or loss of functionality of any property is not considered physical loss or physical damage.” Does the fact that this particular exclusion has a carve-out for loss of use mean that the term when used in the commercial property coverage part includes loss of use?

Read your endorsements, because they may unlock your clients’ COVID-19 BI insurance coverage.•

• Bill Wagner — [email protected] — is a partner at Taft Law and member of the firm’s litigation, environmental and insurance groups. Opinions expressed are those of the author.