Business interruption insurance typically covers financial losses to organizations caused by physical damage — a flood, a fire, high winds, or other covered perils outlined in the policy. Although some policies may include special endorsements that provide coverage for lost income due to disease or government shutdown, they do not typically cover operational shutdowns due to communicable disease contamination or infection. In fact, some business interruption insurance policies specifically exclude coverage for losses due to viral spread, especially those policies created after the 2003 SARS outbreak.
Under certain circumstances, some state courts have ruled that contamination of an insured property is enough to establish a physical loss. There are currently more than 1,300 lawsuits concerning COVID-19 business interruption insurance that are winding their way through state and federal courts. In early October, a North Carolina state court became the first in the U.S. to determine that government shutdown orders caused a “physical loss” to a group of restaurants.
In that case, the insurer’s policy covered business income losses and extra expenses incurred as the result of “accidental physical loss or accidental physical damage.” The court held that since the restaurants were shut down by government order, the owners did in fact suffer direct “accidental physical loss” since they were unable to access their property for the purpose for which the property was insured — to generate income.
However, there are several states where insurers have prevailed in federal courts, including cases in California, Florida, Texas, Michigan, Pennsylvania, Georgia, Minnesota, Kansas, Illinois, and Iowa.
Business Interruption Coverage for Nonprofits
Property insurance policies typically include business interruption coverage for loss of income and extra expenses if a nonprofit is unable to operate normally because of damage to or destruction of property. For example, many nonprofits have suffered economic losses due to the inability to hold income-generating events and provide services like childcare.
Whether a nonprofit will be compensated for these losses under business interruption insurance coverage is largely dependent on specific policy language. For example, business interruption coverage may be available for nonprofits whose insurance policies include coverage due to “civil authority” orders, communicable diseases, or have “ingress/egress” provisions that do not necessarily require physical damage to property.
In spite of the current uncertainty, nonprofits should not delay in notifying their insurers of any potential claims since business interruption policies typically have stringent notice provisions. Coverage may be denied if claims are not filed according to policy time limits.
Nonprofits need to examine their policies carefully to determine if they include a virus or communicable disease exclusion. In the absence of such an exclusion, nonprofits will need to carefully document any proof of loss when filing a claim.
Provident Law’s nonprofit attorneys can help churches and religious organizations with any questions about their business interruption insurance. We stand ready to counsel and serve churches, charities, and foundations, as well as private schools, colleges, universities, and other types of nonprofit organizations—providing broad transactional and general counsel services in Arizona and surrounding areas. Contact us to learn more.