States across the nation are ordering restrictions to hinder the spread of COVID-19 – such as limiting crowd size and closing a myriad of businesses. These measures are resulting in immediate business income loss claims that lead to a critical preliminary question – is the presence or threat of COVID-19 “direct physical loss or damage” to property?
Business income coverage is a first-party insurance form and is generally intended to cover losses from direct interruptions to a company’s operations, such as a fire, natural disaster or other event. Coverage may include lost revenues, rent, or utilities, among other things. As always, policy wording is critical. For example, a typical business income coverage provision reads:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations.
Source: Insurance Services Office, Inc. Business Income (And Extra Expense) Coverage Form, CP 00 30 10 12, Copyright 2011 (emphasis added). As emphasized in the above provision, in order to trigger this type of coverage, direct physical loss of or damage to covered property is required.
Courts have been interpreting the meaning of “direct physical loss or damage” for many years and these interpretations will have a direct impact on the COVID-19 business income loss claims. Although most all-risk commercial property policies do not define “direct physical loss or damage,” generally accepted definitions are akin to “distinct, demonstrable, and physical alteration.”
In Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., the Third Circuit Court provided an analogous asbestos example. It held that “physical loss or damage” occurs only if an actual release of asbestos fibers from asbestos containing materials has resulted in contamination of the property such that its function is nearly eliminated or destroyed, or the structure is made useless or uninhabitable. The Third Circuit opined that “sources unnoticeable to the naked eye,” such as asbestos in the air, can be direct physical loss if it makes the building “uninhabitable and unusable.” Importantly, the Court held that the mere presence of asbestos, or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for coverage.
In Source Food Tech., Inc. v. U.S. Fid. and Guar. Co., a cow not belonging to the insured tested positive for bovine spongiform encephalopathy in Canada. The insured could not bring its products into the United States when The US Department of Agriculture prohibited the importation of beef products from Canada. The Eight Circuit Court held that the insured did not experience a direct physical loss to its property since its beef was not physically contaminated or damaged in any manner.
There are instances where courts have found “direct physical loss” in the context of non-structural or invisible “direct physical loss or damage.” In Motorists Mut. Ins. Co. v. Hardinger, the insureds became ill, experiencing infections, as well as respiratory, viral, and skin conditions. It was determined that the insureds’ well was contaminated with e-coli bacteria. In vacating and remanding the District Court’s summary judgment ruling in favor of the insurer, the Third Circuit Court held that the presence of e-coli bacteria in the well of the house could constitute physical loss or damage.
Similarly, the U.S. District Court of New Jersey found that “courts considering non-structural property damage claims have found that buildings rendered uninhabitable by dangerous gases or bacteria suffered direct physical loss or damage.” Utilizing this proposition in Gregory Packing Inc. v. Travelers Prop. Cas. Co. of Am., the District Court held that ammonia-induced incapacitation constituted “direct physical loss of or damage to” the insured’s property where the facility was rendered unusable for a period of time.
Even if there are instances where COVID-19 could be deemed to have caused a direct physical loss, business income coverage is not provided for an unlimited period of time following the loss. Instead, the coverage is limited to the period of restoration which is generally defined as follows:
3. “Period of restoration” means the period of time that:
Source: Insurance Services Office, Inc. Business Income (And Extra Expense) Coverage Form, CP 00 30 10 12, Copyright 2011 (emphasis added). In other words, the period of restoration will typically run from the date of the loss (or 3 days after) until the property is (or should be) repaired, rebuilt, or replaced with reasonable speed and similar quality.
Courts interpret this language to mean “the time by which an insured acting as quickly as possible would have completed repairs to its property. This is a theoretical calculation reflecting the length of time required with the exercise of due diligence and dispatch to rebuild, repair or replace the damaged premises. Where the actual restoration period exceeds the theoretical period or where the premises are not restored, the theoretical period becomes the computation period.”
In Broad St., LLC v. Gulf Ins. Co., for example, the court limited the period of restoration to 1 week where the insured’s tenants moved out during the cleaning of the apartment building after the September 11 attacks. The court held that all other loss of income sustained after this period was not covered.
In the context of COVID-19, if the business income coverage is tied to the theoretical period of time it should take an insured, acting with due diligence, to clean the property to remove traces of the virus, the period of restoration is likely to be relatively short. Indeed, if a policy’s definition of “period of restoration” begins the period at 72 hours after the loss, then the theoretical time to disinfect the premises may be complete before the restoration period even begins.
At the outset, we asked ourselves the question of whether the presence of the COVID-19 threat will constitute “direct physical loss or damage” to property in the context of business income loss coverage. Naturally, the answer will hinge on the respective states’ interpretations, but we can state some common themes that will emerge. First, courts will likely hold that COVID-19 must be demonstrably present at the insured property. Second, the presence of COVID-19 must render the insured property uninhabitable or unusable. As noted above, the mere threat of COVID-19 or the preemptive closure of businesses should not be considered “direct physical loss or damage” to property.
 Port Auth. of New York and New Jersey v. Affiliated FM Ins. Co., 311 F.3d 226, 235 (3d Cir. 2002) (quoting 10 Couch on Insurance § 148:46 (3d ed. 1998).
 Port Auth. of New York and New Jersey, 311 F.3d at 236.
 Source Food Tech., Inc. v. U.S. Fid. and Guar. Co., 465 F.3d 834, 835 (8th Cir. 2006).
 Source Food Tech., Inc., 465 F.3d at 835.
 Id. at 838.
 Motorists Mut. Ins. Co. v. Hardinger, 131 Fed. Appx. 823, 824 (3d Cir. 2005)(unpublished).
 Hardinger, 131 Fed. Appx. at 824.
 Id. at 826.
 Gregory Packing Inc. v. Travelers Prop. Cas. Co. of Am., 2:12-CV-04418 WHW, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014)
 Gregory Packing Inc., 2014 WL 6675934 at *6.
 G&S Metal Consultants, Inc. v. Contl. Cas. Co., 200 F. Supp. 3d 760, 769 (N.D. Ind. 2016).
 Broad St., LLC v. Gulf Ins. Co., 832 N.Y.S.2d 1, 7 (N.Y. App. Div. 1st Dept. 2006).
 Broad St. LLC, 832 N.Y.S.2d at 7.