Small businesses around the nation have suffered an enormous body blow, as a result of the COVID-19 pandemic. Beginning in mid-March, New York officials shut down all non-essential businesses to mitigate the spread of the coronavirus.
As a result, many small businesses have filed claims under their business interruption insurance policy. However, for most companies, business interruption insurance derives from their property policy. The property policy, in turn, requires that the covered property suffer a "physical loss or damage" before the insurance coverage will apply. Two recent decisions have addressed the issue of whether COVID-19 sufficiently meets the standard for "physical loss or damage".
On July 1, 2020, a Michigan State Court handed down the first, substantive COVID-19 business interruption coverage decision of its kind. In Gavrilides Management Co. et al. v. Michigan Ins. Co., Judge Joyce Draganchuk sided with an insurance carrier on a threshold motion to dismiss, dismissing the complaint as a matter of law. Judge Draganchuk reasoned, “There has to be something that physically alters the integrity of the property.”
Up until the Michigan decision, only one other U.S. Judge had ruled on the issue of business-interruption losses caused by COVID-19. In Social Life Magazine v. Sentinel Ins. Co., U.S. District Court Judge Valerie Caproni for the Southern District of New York denied a preliminary injunction requested by a magazine publisher to force its insurers to pay for financial losses caused by a coronavirus closure order. Judge Caproni reasoned, “It damages lungs. It doesn’t damage printing presses.”
In response to the financial needs of many small business owners, the New York State Assembly introduced a bill (“10226-B”) and its identical companion Senate bill (“8211-A”), which would require certain commercial property insurance policies to cover business interruption during a period of a declared state emergency due to the COVID-19 pandemic. The bill would expressly void any exclusion in such a policy for losses based on a virus-caused disease. These requirements would extend to any policy meeting all of the following criteria:
1. In force on or after March 7, 2020;
2. Issued to an insured with fewer than 250 eligible employees (defined as employees working a “normal week of 25 or more hours”); and
3. Covering business interruption.
The bill was returned to the Insurance Law Committee for review, which cited in its report, “While we recognize and appreciate the interest and need within the business and nonprofit sectors to address the availability of business interruption coverage for pandemics, we believe, unless amended, the bill would present numerous ambiguities in practice, raise potential questions of Constitutional interference with contract issues, and produce an unacceptable level of uncertainty and potential insolvency in insurance markets.” While small business relief is undeniably needed in New York and throughout the nation, the recent decisions in Michigan and New York create precedential case law that COVID-19 is unlikely to sufficiently meet the “physical loss or damage” requirement for coverage to apply.