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Coverage attorneys are in general consensus; insurance payments for business interruption losses due to COVID-19 shutdowns will likely turn on whether the courts determine if the business suffers direct physical damage. This is notwithstanding several pieces of legislation proposed to circumvent policy language and force carriers to pay for those losses despite the policy language.
Less examined is coverage for contingent business interruption (CBI) due to COVID-19. Typically, this coverage is triggered when a loss occurs at another business in the insured businesses’ supply chain. When an insured’s supply or customer chain is interrupted due to that physical loss and the insured sustains economic loss as a result, CBI coverage kicks in.
CBI coverages are a unique coverage not typically included on all commercial property policies. It is a relatively new concept in the insurance world, borne out of a line of cases that determined coverage should be provided when there was damage at the property of a mutually dependent – or interrelated and interdependent – business that had suffered a property loss. Mostly, CBI is offered as an extra coverage or in a manuscript policy. As such, most smaller businesses are unlikely to carry coverage for CBI. The coverage is most likely found in the policies for manufacturing businesses who rely heavily on their supply chain to continue work, especially in the event that the insured business relies heavily on a few suppliers. Often, the policy requires that the insured identify those suppliers in the policy.
Because the terms and conditions are often unique or rare and vary both from carrier to carrier and insured to insured, the case law interpretations of this coverage are each discrete and unique. Like all coverage interpretations, the court interprets coverage based on the plain language of the policy. Absent an ambiguity, the policy language controls. In the event the court determines the language is ambiguous is some way, coverage will be interpreted in favor of the insured.
But a frequently common element to CBI and more typical business interruption losses is that there be physical loss or damage. What the insured will have to show is that the business in the supply chain suffered physical loss or damage that is covered under the insured’s policy. For example, if the insured’s policy would not cover its own business losses stemming from COVID-19 shutdowns, coverage would also not extend to supply chain interruptions if the reason for the supply chain interruption was due to COVID-19. CBI coverage also requires cooperation by the supply chain company in the investigation of the loss as well as proof that it was the supply chain interruption – and not other market factors – that resulted in an actual loss of income.
Again, because CBI coverage is typically manuscript or unique, the policy language must be closely examined to determine whether coverage will extend in the event of COVID-19 losses. If a policy is “all risk” and does not specifically require the physical covered damage, it may be more likely that coverage is provided. Further, some courts have determined that bacterial contamination to a water supply, unpleasant odors, or toxic gases constitute physical damage. As such, those courts have found physical damage in the absence of structural loss. Likely, plaintiff attorneys may rely on these cases and other language extending coverage to pollution losses to argue for coverage for COVID-19 business interruption losses. As with any occasion in determining whether coverage extends, the policy must be closely examined alongside applicable jurisdictional interpretations.