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Will COVID-19 Pandemic Shutdowns Trigger Business Interruption Insurance Coverage?

By James L. McGovern, CPA/CFF, CVA, Fellow
May 2020

Mandatory state shut down orders may trigger business interruption coverage if a Pennsylvania Court’s interpretation is widely accepted.

With thousands of businesses around the world being shutdown pursuant to government mandates designed to slow transmission of to the COVID-19 virus, many business owners are looking to their insurance policies for a lifeline.

As a forensic accountant, I am often engaged to identify the cost impacts associated with business interruptions which traditionally have stemmed from shutdowns associated with fires and floods, but occasionally include less common occurrences such as plant explosions, power failures, or facility contamination.

CDC COVID-19 virus

The existence of “physical damage” to a facility resulting in complete or partial business interruption is common in most of the business interruption matters I have worked on. To date, several news reports indicate many insurers are denying claims for business interruption stemming from shutdowns mandated by state and local governments in connection with the COVID-19 Pandemic. The reports indicate, absent specific coverage for pandemics, many carriers are denying claims based on the determination the shutdowns did not result in “direct physical loss” to insured property.

However, a recent ruling by the Pennsylvania Supreme Court in a case that did not even involve an insurance claim may offer hope to business owners and their attorneys seeking recoveries and a warning to insurance carriers.

In Friends of DeVito, et al v. Tom Wolf, Governor, et al, (Case No. 68 MM 2020) three parties brought an emergency petition for relief against the Pennsylvania Governor’s order that shutdown “non-life sustaining” businesses due to the Coronavirus. The petitioners included a real estate agent, a public golf course/restaurant, and a committee for U.S. House of Representatives candidate.

In each instance, the Petitioners contended the Governor lacked authority to issue the Executive Order and claimed the shutdown order violated their constitutional rights under both the United States and Pennsylvania Constitutions. Petitioners further argued the Executive Order is unnecessary, as their businesses may be operated to employ COVID-19 prevention and mitigation practices in their physical offices.

In response the State argued the Pennsylvania Constitution and statutory enactments charge the Executive Branch of the state government with combating public health emergencies and provide it with broad powers to do so. Moreover, the State argued strict application of social distancing practices is the only potentially effective means for reducing the spread of the disease.

Ruling in favor of the State, the Court found, the Governor is granted broad powers to protect people and communities of Pennsylvania from “damage, injury and loss of life and property resulting from disasters.” The court next ruled that COVID-19 qualified as a “natural disaster”. This is the part of the decision that could potentially impact business interruption claims.

Citing the Pennsylvania Emergency Code, the Court defined a “natural disaster” as:

“Any hurricane, tornado, storm, flood, high water, wind-driven water, tidal wave, earthquake, landslide, mudslide, snowstorm, drought, fire, explosion or other catastrophe which results in substantial damage to property, hardship, suffering or possible loss of life.”

The Court found that the COVID-19 pandemic shared commonality with the other natural disasters listed because they all involve “substantial damage to property, hardship, suffering or possible loss of life.” The phrase that offers hope to potential claimants is “damage to property”. The Court stated that “the virus spreads primarily through person-to-person contact, has an incubation period of up to fourteen days, one in four carriers of the virus are asymptomatic, and the virus can live on surfaces for up to four days. Thus, any location (including Petitioners’ businesses) where two or more people can congregate is within the disaster area.” Moreover, the Court rejected the premise that presence of the disease at a specific location needs to be proven before it can be shutdown.

While this case does not directly address a claim for business interruption coverage, the ruling finds Pennsylvania’s shut-down order to be essentially a declaration that business properties have been damaged and are unsafe due to the COVID-19 virus and the pandemic is not distinguishable from other natural disasters. If the Pennsylvania Court’s interpretation is widely accepted, businesses across the Country may now have a strong argument business interruption coverage has been triggered by their state’s mandatory shut-down orders.

Click here pdf document for a copy of the Court’s decision in Friends of DeVito, et al v. Tom Wolf, Governor, et al.

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