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. In today's COVID-19 pandemic, policyholders across the country are reviewing their policy language to see if coronavirus falls within this definition.
The good news for these policyholders is that courts consistently hold that "physical loss or damage" is not limited to "structural damage." It is broader than that. Caustic chemicals and gases like ammonia and methamphetamine fumes, and even unpleasant odors like cat urine, that render a building uninhabitable, unfit for normal human occupancy, or unusable fall within the policy.
In each case in which non-structural damage crosses the "physical loss or damage" threshold, the loss arises from a circumstance unique to either the building or its environment. So the question of whether a deadly virus affecting not only a single building, but many buildings in the impacted areas, is to say the least novel and untested.
Here we survey the existing case law, and offer beginnings of a rubric for categorizing claims moving forward. We note at the outset that an analysis of "physical loss or damage" under a property policy does not necessarily implicate other coverages available—for example, under a civil authority coverage part—nor does it necessarily affect exclusions, such as ISO's virus and bacteria exclusion.
Two cases offer pithy, diametric holdings that will likely be cited in thousands of lawsuits in the next several years. In Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., the United States District Court for the District of New Jersey decided that "property can sustain physical loss or damage without experiencing structural damage." Civ. No. 2:12-cv-04418 (WHW)(CLW), 2014 WL 6675934, at *5 (D. N.J. Nov. 25, 2014). The court held that the loss plaintiff incurred due to a release of ammonia into plaintiff's facility constituted "direct physical loss of or damage" under its property insurance policy. Id. at **1, 8. Although plaintiff's facility did not suffer any structural damage, the "ammonia release physically transformed the air" within plaintiff's facility such that the unsafe level of ammonia "rendered the facility unfit for occupancy until the ammonia could be dissipated." Id. at *6. Therefore, the loss of property and interruption of business that resulted from the ammonia release constituted a direct physical loss or damage and qualified for coverage under plaintiff's property insurance policy. Id. at **2, 8.
Conversely, in Columbiaknit, Inc. v. Affiliated FM Ins. Co., the United States District Court for the District of Oregon stated that the "mere adherence of molecules to porous surfaces, without more, does not equate [to] physical loss or damage." No. Civ. 98-434-HU, 1999 WL 619100, at *7 (D. Or. Aug. 4, 1999). The court determined that some of plaintiff's garments and fabrics in its clothing manufacturing facility had suffered "direct physical loss or damage" caused by mold and humidity. Id. However, the garments without mold but with "heightened spore counts" would not meet this threshold unless they later "develop odor or other effects so as to require washing or such treatment that they may not be sold as first-quality goods." Id. The court seemed to be drawing a distinction between garments that were useable and therefore able to be sold on normal terms and those that were not.
Mold is a common issue in cases where courts find no "physical loss or damage." In Universal Image Prod., Inc. v. Fed. Ins. Co., the Sixth Circuit held that the insured did not suffer a covered "direct physical loss or damage" when the insured's office suffered mold and bacteria contamination, but the employees were not told to evacuate. 475 Fed. App'x 569, 572-74 (6th Cir. 2012). The court held that the insured "failed to present a genuine issue of material fact regarding the uninhabitability or unusability of the building." Id. Likewise with asbestos: in Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass'n, the Ninth Circuit agreed with the trial court's determination that "the contamination of [the insured's] building with asbestos was an economic loss and not a physical loss, bas[ed] . . . on the fact that the building remained physically unchanged." No. 90-35654, 1992 WL 16749, at *1 (9th Cir. 1992). The Third Circuit similarly held that "unless asbestos in a building was of such a quantity and condition as to make the structure unusable," there was no "physical loss or damage." Port Auth. of N.Y. & N.J. v. Affiliated FM Ins. Co., 311 F.3d 226, 231 (2002). The key issue in these cases seems to be whether, despite the presence of the contamination, the structure still was able to be used for its intended purpose.
The "uninhabitability" standard mentioned by the Sixth Circuit in Universal Image Prod. comes from the Supreme Court of Colorado's 1968 decision in W. Fire Ins. Co. v. First Presbyterian Church. 165 Colo. 34 (1968). In First Presbyterian, the court was asked whether a pervasive odor, later determined to be natural gas leaking from a gas line, was a "direct physical loss" to the church building. Id. at 38-39. The court answered in the affirmative: a direct physical loss occurred when the building "became so infiltrated and saturated as to be uninhabitable, making further use of the building highly dangerous." Id. at 39. There was no requirement of structural damage imposed—the test seemed to be whether the structure was able to be used.
Following First Presbyterian, several courts applied the "uninhabitability" standard to find coverage for the policyholder. In Motorists Mutual Ins. Co. v. Hardinger, the Third Circuit held that a genuine issue of fact existed as to whether the bacterial contamination of a home's water supply rendered the home uninhabitable and unusable such that the loss constituted a "physical loss" under the homeowners' insurance policy. 131 Fed. App'x 823, 825-27 (3d Cir. 2005). In TRAVCO Ins. Co. v. Ward, the United States District Court for the Eastern District of Virginia determined that the defendant's residence had suffered a "direct physical loss" when it was rendered uninhabitable by toxic gases that were released by drywall, even though the drywall remained intact. 715 F. Supp. 2d 699, 708, 709 (E.D. Va. 2010), aff'd, 504 F. App'x 251 (4th Cir. 2013). And in Mellin v. Northern Sec. Ins. Co., the Supreme Court of New Hampshire held that the odor of cat urine, sufficiently strong to cause a health inspector to advise plaintiffs to move out of the apartment, constituted a "direct physical loss" under a homeowner's insurance policy. 167 N.H. 544 (2015).
Some cases expand coverage beyond circumstances where the building is rendered entirely uninhabitable. In 1993, Oregon's intermediate appellate court issued its oft-cited opinion in Farmers Ins. Co. of Oregon v. Trutanich, 123 Or. App. 6. The Trutanich court found that odors caused by a methamphetamine lab were "direct physical loss" under a homeowner's policy and held that the "odor was 'physical,' because it damaged the house." Id. at 9. Citing Trutanich, Minnesota's intermediate appellate court in 1997 decided that asbestos contamination, which did not cause any "tangible injury to the physical structure of [the] building," nonetheless constituted "direct physical loss" under an all-risk policy because "a building's function may be seriously impaired or destroyed and the property rendered useless by the presence of contaminants." Sentinel Mgmt. Co. v. New Hampshire Ins. Co., 563 N.W.2d 296, 300 (Ct. App. Minn. 1997). And finally, in 2009 the First Circuit held that even an unpleasant odor that was "permeating and pervasive," resulting in the loss of use of a building, could constitute a "physical injury" to property. Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009). Thus, while these buildings might have been able to continue to be used, at least for certain purposes, the use was so materially impacted that coverage was triggered.
What rules, then, can we derive from these cases? First, it is well settled that "physical loss or damage" does not require structural damage to a building. Second, unseen forces, some of which originate off-site, such as humidity, fumes, and odors, can satisfy this coverage requirement. And third, the non-structural damage that renders the entire building or workspace uninhabitable, unfit for all or some human occupancy, or otherwise unusable, frequently triggers coverage.
A claim for business interruption coverage due to the COVID-19 virus arguably could meet the "physical loss or damage" standard. The unseen virus, like a harmful gas or odor, can render a building uninhabitable, unfit for human occupancy, or otherwise unusable, particularly in light of government orders preventing many buildings, such as restaurants, from operating in a normal manner. That it is carried from outside of the building into the interior, rather than emanating from the interior, is irrelevant in the absence of policy language that requires the substance rendering a property uninhabitable to start from within.
It is easy to imagine a court finding coverage for an insurance claim where an office was closed for cleaning as the result of a suspected or confirmed case of coronavirus—easy because those facts fit squarely into the rules stated above, and easy because that exposure rendered the office uninhabitable.
But will courts allow business interruption claims where no actual or suspected contamination occurred in the insured property? That is a harder case to make, but it is not impossible by any means, particularly in the absence of a specific exclusion. Our advice is that all policyholders should ask their broker or a coverage attorney whether their particular circumstances are covered by the language of their policy. In this ever-changing world, only time will tell where the courts net out on this issue.