Business Interruption and Loss of Use Insurance Claims Resulting from COVID-19
In Michigan, as in most states, the state authority has significantly limited access to public places, stores, restaurants, movie theaters, offices, and other businesses through the issuance of executive orders prohibiting such access. For businesses whose viability depends on the public’s ability to access that business’ physical location, the issuance of such orders has resulted in a loss of use of the property and a severe interruption in business. For some, their insurance policies may appear to insure against loss of use of the insured property when a civil authority prohibits the insured from using the insured property, such as through issuance of an executive prohibiting such access, or there is damage to the property resulting in its loss of use. While it may seem as though the business climate created by the Coronavirus (COVID-19) is unique to our generation, this is not the first time a Governor’s executive order has impacted businesses in Michigan and there are several cases from the Michigan Court of Appeals which can provide guidance.
Physical Damage Requirement
In construing these cases and more recent cases on the same topic, it appears that some of these claims may be covered, but only if the policies applicable to such claims do not require physical damage to the property of the insured (for loss of use claims) or to another (for civil authority claims). Further, even if the policy does not require physical damage, the insured will likely be required to connect the underlying event (i.e., the coronavirus (COVID-19) pandemic) precipitating the order prohibiting access with an insured loss or occurrence under the policy.
Physical Damage Requirement Under Michigan Cases Arising Out of 1968 Executive Order
In 1968, due to civil disturbances which had taken place in or around the city of Detroit following the death of Dr. Martin Luther King, Jr, the Governor of the State of Michigan issued an executive order which closed all “places of amusement” until further notice. Several businesses that had been forced to close submitted business interruption claims which resulted in litigation. By 1973 a handful of these cases had wound their way through the trial courts and that year the Michigan Court of Appeals decided three cases which considered whether an interruption in business resulting from the Governor’s executive order was a covered loss, even if there was no physical damage to the insured’s property. These cases reflect policy language that has since evolved and changed with time, but the factual circumstances underlying the basis for a potential COVID-19 claim based on Governor Whitmer’s 2020 executive orders are not dissimilar to the factual circumstances of the claims based on the 1968 executive orders.
In Sloan v Phoenix of Hartford Ins Co, 46 Mich App 46, 51; 207 NW2d 434, 436–37 (1973), the Court of Appeals concluded that direct physical damage to the underlying property was not required if the underlying cause of the executive order denying access to the premises was, itself, covered, even if it did not result in direct physical damage to the premises. In its decision, the Court stated:
In short, a plain reading of the policy would lead the ordinary person of common understanding to believe that, irrespective of any physical damage to the insured property, coverage was provided and benefits were payable when, as a result of one of the perils insured against, access to the insured premises was prohibited by order of civil authority, and we so hold.
Here one of the perils insured against was riot. A riot ensued, the governor imposed a curfew, and all places of amusement were closed, thus preventing access to plaintiffs’ place of business. Therefore plaintiffs suffered a compensable loss under the terms of the policy. Accordingly, the Wayne County Circuit Court did not err by concluding that physical damage to the premises was not a prerequisite for the payment of benefits under the business-interruption policy.
Sloan, 207 NW2d at 436–37. In Southlanes Bowl, Inc v Lumbermen’s Mut Ins Co, 46 Mich App 758, 760; 208 NW2d 569, 570 (1973), a separate panel of the Court of Appeals relied upon the Court’s decision in Sloan to conclude that direct physical damage was not required if not expressly required by the underlying policy:
This Court has recently had occasion to consider whether under the language of the business-interruption policy here in question, physical damage to the insured premises is a condition precedent to the insurer’s liability to pay benefits. We held that where the insured businesses were closed by order of a civil authority, physical damage to the insured premises was not a prerequisite to the insurer’s obligation to reimburse the insured for the net losses resulting therefrom.
Southlanes Bowl, Inc, 208 NW2d at 570 (citing Sloan, 207 NW2d at 434).
In the third decision, Allen Park Theatre Co, Inc v Michigan Millers Mutual Insurance Co, 48 Mich App 199; 210 NW2d 402 (1973), the plaintiff owned a theater impacted by the executive order and had sought coverage under the civil authority provision of their police which covered a loss ““[w]hen as a direct result of the peril(s) insured against, access to the premises described is prohibited by order of civil authority.” Id. at 404. In Allen Park Theater Co, as with Sloan and Southlanes Bowl, Inc, the main issue was whether the civil authority provision relied on by the insured required actual damage to the insured premises as a direct result of the conduct referenced in the civil authority order. Based on the prior ruling in Sloan, the Court of Appeals found coverage under the policy even in the absence of physical damage to the insured property, stating “[u]nder these circumstances I am compelled to hold with the Sloan Court. If the insurer wanted to be sure that the payment of business interruption benefits had to be accompanied by physical damage it was its burden to say so unequivocally.” Allen Park Theatre, 210 NW2d at 403.
Modern Cases Interpreting Physical Damage Requirement
More recently, however, insurance provisions which could potentially be construed to provide coverage for loss of use for business interruption claims have been interpreted to expressly require physical damage to insured property. In Universal Image Productions, Inc v Chubb Corp, 703 F Supp 2d 705 (ED Mich 2010), Judge Julian Abele Cook, Jr, of the Eastern District of Michigan, applying Michigan law, agreed with the insurer’s position that such a claim required physical damage and concluded that the insured was not entitled to coverage for loss of use because there had been no physical damage to the property, stating:
In [the insurer’s] view, Universal cannot recover under the “Business Income with Extra Expenses “ section of the Policy unless the interruption of its business results from a direct physical loss. In support of its argument, Federal points to policy language which indicates that the insurance company “will pay for business income loss [Universal] incur[s] due to the actual impairment of [its] operations….” (Policy at 3 of 12, “Business Income With Extra Expenses “) (emphasis in original). However, such impairment must “be caused by or result from direct physical loss or damage by a covered peril to property….” Id. Federal also points out that Patricia Dial testified that no mold damage occurred to any of the company’s equipment or property.
Federal’s analysis here depends entirely on its earlier argument that Universal has not suffered a “direct physical loss.” Because the Court, in adopting its above rationale, believes that Universal has failed to establish that such a loss occurred, Federal’s request for the entry of a summary judgment on this issue will be granted. Section IA, supra.
The requirement of direct physical damage to the insured property is consistent with other recent cases that have considered business interruption claims. In United Airlines, Inc v Insurance Co of State of Pa, 385 F Supp 2d 343, 348 (SDNY 2005), the court interpreted two provisions, the first a loss of use provision which covered “loss resulting directly from the necessary interruption of business caused by damage to or destruction of the Insured Locations . . .” and the second a civil authority provision under which coverage was “specifically extended” to “a situation when access to the Insured Locations is prohibited by order of civil authority as a direct result of damage to adjacent premises[.]” The court concluded that both potential sources of coverage required physical damage, either to the insured property (loss of use), or to an adjacent premises (civil authority provision).
The requirement of physical damage is recognized by some courts as the “general rule” for business interruption claims. For example, in Dickie Brennan & Co, Inc v Lexington Insurance Co, 636 F3d 683 (5th Cir 2011), the Fifth Circuit Court of Appeals noted the “general rule” that “[c]ivil authority coverage is intended to apply to situations where access to an insured’s property is prevented or prohibited by an order of civil authority issued as a direct result of physical damage to other premises in the proximity of the insured’s property.” Id. at 686–87.
Based on the reference to the requirement of physical damage as the “general rule,” and the decision of the Eastern District of Michigan in Universal Image Productions, Inc, it may appear as though every business interruption claim requires physical damage. It is more accurate, however, to instead consider, as the Michigan Court of Appeals did in Sloan and Southlanes Bowl, the underlying event necessitating the civil authority order prohibiting access and determine whether that event is covered under the policy. In other words, “the language of the business interruption endorsement must be read in light of the underlying property damage coverage and the enumerated causes of loss to determine whether a particular interruption will trigger coverage.” Basics of Business Interruption Insurance: The Ins and Outs of Tricky Coverage, 69 Def Couns J 307 (2002).
Contamination of the Premises as Physical Damage
Significantly, Judge Cook had also rejected the insured’s contention that the contamination of the property itself could constitute physical damage warranting coverage. See Universal Image Productions, Inc, 703 F Supp 2d at 710 (“Universal has not shown that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of Universal’s argument relies upon proof that it suffered such intangible harms as strong odors and the presence of mold and/or bacteria in the air and ventilation system within its Building which, in its judgment, rendered the insured premises useless.”). However, it is possible that an insured could claim that the presence of COVID-19 within the insured premises constitute physical damage to the insured premises so as to warrant coverage.
In Universal Image Productions, Inc, 703 F Supp 2d at 710, Judge Cook did not consider the entire premises uninhabitable, and used this finding to distinguish that case from others that had found physical damage to have occurred under similar circumstances. See id. at 710 (“Although Universal cites testimony which indicates that the entire first floor of its insured premises had been engulfed by an appalling odor, there is no evidence that this stench was so pervasive as to render the premises uninhabitable.”). For example, in Matzner v Seaco Ins Co, No 96–0498–B, 1998 WL 566658, *3 (Mass Super Aug 12, 1998), the court had found that carbon monoxide contamination constituted direct physical loss even though it did not produce tangible damage to the structure of the insured property. In Columbiaknit, Inc v Affiliated FM Ins Co, No 98–434–HU, 1999 WL 619100 at *6–7 (D Oregon August 4, 1999) (unpublished), the court had found that physical damage could be demonstrated by the presence of strong pervasive, persistent or noxious odor where the odor stemmed from mold damage caused by the leakage of water and moisture inside the clothing warehouse. And in Western Fire Ins Co v First Presbyterian Church, 165 Colo 34, 39; 437 P2d 52 (Colo 1968), the court determined that direct physical loss had occurred after receiving evidence of extensive accumulation of gasoline around and under a church building that rendered premises uninhabitable. These three cases were each considered by Judge Cook, but distinguished on the basis that the insured had not shown the premises to be uninhabitable and, therefore, even under the potentially “more liberal standard” presented by these three cases, the insured had not demonstrated physical damage to the property.
It remains to be seen whether the plaintiff would have succeeded in Universal Image Productions had it been able to demonstrate that its premises had been uninhabitable. In addition to those cases considered by Judge Cook, several more cases throughout the country have recently found physical damage to property under similar circumstances. In Mellin v Northern Security Insurance Co, 167 NH 544 (NH 2015), the New Hampshire Supreme Court held that in the context of evaluating the effect of an odor on the insured premises, “physical loss may include not only tangible changes to the insured property, but also changes that are perceived by the sense of smell and that exist in the absence of structural damage. These changes, however, must be distinct and demonstrable. Evidence that a change rendered the insured property temporarily or permanently unusable or uninhabitable may support a finding that the loss was a physical loss to the insured property.” (emphasis added). In Motorists Mutual Ins Co v Hardinger, 131 Fed App’x 823 (3rd Cir 2005), in the context of evaluating a claim that the presence of bacteria had caused physical damage to insured premises, the Third Circuit applied a standard which would find physical loss or damage due to contamination where the insured was able to demonstrate that the property had been contaminated to such a degree “that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable, . . . or if there exists an imminent threat of the release of [the contaminant] that would cause such loss of utility.”
Even with respect to COVID-19 explicitly, in Friends of DeVito, et al v Tom Wolf, Governor, et al, (Case No 68 MM 2020), the Supreme Court of Pennsylvania, Middle District, issued an opinion which could support a finding that the presence, or potentially even the possibility of the presence, of COVID-19 constituted physical damage because it rendered property unusable. In Friends of DeVito, four parties had brought an emergency petition challenging the Governor’s order that shut down “non-life sustaining” businesses. In finding in favor of the Governor’s order, the Court ruled that COVID-19 qualified as a “natural disaster” justifying the Governor’s action because, it found, COVID-19, like other natural disasters that were part of the same statute, involved “substantial damage to property, hardship, suffering or possible loss of life.” The Court recognized that COVID-19 “can live on surfaces for up to four days and can remain in the air within confined areas and structures.” Based on these findings, it is not too much of a stretch to foresee circumstances where a court could conclude that the presence of COVID-19 within a building constitutes “physical damage” to an insured premises.
Accordingly, notwithstanding the “general rule” that physical damage is required for coverage to exist, there are several circumstances under which the contamination of a building could potentially be found to constitute “physical damage” to property, though this likely requires that the property be unusable or uninhabitable.
Assuming that an insured is able to demonstrate coverage, there is still the possibility that the insurer would be able to rely on one or more exclusions under the policy in order to avoid coverage. The most likely exclusion to be relied on in a COVID-19 claim is a policy’s pollution exclusion which ordinary excludes loss caused by a contaminant. In Motorists Mutual Ins Co v Hardinger, for example, the insurer had attempted to apply the policy’s pollution exclusion to the presence of bacteria within the premises where the exclusion itself was to apply to “loss caused by ‘solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids [,] alkalis, chemicals and waste.’.” The Motorists Mutual court noted that cases appeared divided as to whether the presence of bacteria would constitute a contaminant within the meaning of the exclusion. Motorists Mutual, 131 Fed App’x at 827 (comparing Keggi v Northbrook Prop and Cas Ins Co, 199 Ariz 43, 47; 13 P3d 785 (Ariz App Div 2000) (holding that bacteria does not constitute a pollutant under an identical pollution exclusion clause), and E Mut Ins Co v Kleinke, Index # 2123–00, RJI # 0100062478 (NY Super Ct Jan 17, 2001) (holding that similar pollution exclusion is ambiguous on whether e-coli bacteria falls within the policy’s definition of pollutant), with Landshire Fast Foods of Milwaukee v Employers Mut Cas Co, 269 Wis 2d 775; 676 NW2d 528, 532 (“bacteria, when it renders a product impaired or impure” falls within “the ordinary, unambiguous definition of ‘contaminant’”). Ultimately, though, the Motorists Mutual court did not address the issue and rendered no opinion on the matter, but the presence of the argument raises the possibility that it will be raised again in the future.
While there are other exclusions may also be relied on by an insurer, an insured should anticipate that an insurer will attempt to rely on the pollution exclusion and should review this exclusion before submitting a claim.
For most businesses in Michigan any claims for business interruption will rise and fall with the insured’s ability to demonstrate a business interruption arising out of physical damage to the insured’s property. Any insured who believes that there may be a covered loss under their policy should put their insurer on notice of the possibility of a claim in order to avoid a later effort by the insurer to avoid coverage based on a lack of notice.
For any businesses physically contaminated by COVID-19, a claim may succeed so long as the insured is able to establish that the presence of COVID-19 within the insured premises constitutes “property damage” as defined by the policy. This type of argument, however, has already been rejected at least once, with Judge Cook finding in Universal Image Productions that the presence of a contaminant in or on property was different than damage to that property. For such an argument to succeed, the insured would likely need to demonstrate a level of contamination beyond that described in Universal Image Productions which renders the property unusable or uninhabitable, as suggested by Motorists Mutual Ins Co and Mellin. The mere threat of the presence of COVID-19 would likely be insufficient, but a contamination of the entire premises necessitating closure could potentially be considered property damage. Alternatively, and though unlikely, if the insured is able to connect the COVID-19 pandemic itself with an enumerated cause of loss, it could be possible for the insured to satisfy the standard articulated in Southlanes Bowl, much like the plaintiff in Southlanes Bowl was able to establish that the civil authority coverage applied, even in the absence of property damage to adjacent property, because a riot was a covered event under the policy and a riot was the precipitating event for the civil authority order. If the insured is able to establish coverage, then the insured should also anticipate one or more exclusions being raised by the insurer, such as the policy’s pollution exclusion.
For many businesses the executive orders requiring closure have caused significant financial disruption, and many of these businesses will look to their business insurance policies as a means of attempting to recover some of this loss. However, these policies are unlikely to provide much relief unless the insured is able to demonstrate that the losses suffered as a result of the interruption in business arise out of property damage to the insured’s property or are connected to an enumerated cause of loss contained in the insured’s policy. Any business which is considering the submission of a COVID-19 loss of business claim should have its policy reviewed by a qualified attorney to assist in determining whether there is a basis for coverage.
Matthew W. Heron is a Member at Hirzel Law, PLC where he concentrates his practice in real estate, community association law, condominium law, real estate litigation, and zoning and land use. Mr. Heron also has extensive experience in a variety of litigation matters, including insurance coverage, non-compete agreements, automotive supplier disputes, and breach of contract. He routinely appears in both federal and state courts throughout Michigan and has argued before the Michigan Court of Appeals and the Court of Appeals for the Sixth Circuit.