March 19, 2020

COVID-19 and Commercial Real Estate Insurance: Are You Protected?

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In the last few weeks, we have received several calls from our commercial real estate clients asking if their insurance provides coverage for the impacts of COVID-19. They are right to worry about a loss of income with tenants out of work and several businesses closing their doors temporarily. Unfortunately, our answer to the simple “Am I covered” question is, well, “It’s complicated.” 

Not exactly the response anyone wants, but we’re here to help. In this article, we’ll uncomplicate things by providing guidance on clauses to look for in policies and things to discuss with your insurance agent when it comes to business disruptions caused by COVID-19. 

Business Interruption and Contingent Business Interruption Coverage

Business interruption coverage as part of your commercial property insurance is worth a review for financially guarding against the effects of COVID-19. The insurance covers losses from direct interruptions to a company’s operations. Contingent business interruption expands coverage to include loss of income from disruptions to suppliers, vendors, or partners. Losses generally include things like revenues, rent, and utilities.

Most standard policies pay for “direct, physical loss,” which generally refers to property damage that creates an income deficiency. Many policies exclude economic losses not directly tied to a tangible inability to use a business property caused by things like fires or flooding. Because policies vary widely, coverage may rely on whether business interruption is a basic term of the standard policy or written as an endorsement that sometimes provides broader coverage. 

So, does COVID-19 cause “physical” damage? US courts have not agreed on a uniform rule and the interpretation still is being litigated. Some jurisdictions ruled that the physical damage must render a property uninhabitable or unfit for its intended use. Others have been more liberal in their judgments including contaminated indoor air as meeting the coverage requirement. 

The Exceptions

While standard commercial property policies likely do not offer coverage for COVID-19, there are some exceptions worth checking:

  • Communicable and infectious diseases – commercial property policies typically written for hospitality and health care businesses sometimes include communicable and infectious diseases as a covered insurance peril. These policies do not always require physical property damage to trigger a loss. However, they may narrow coverage by excluding specific diseases or pandemics.
  • Civil authority – this policy provision, also known as the public authority clause, applies to income losses resulting from the government’s denial of access to a commercial property. In general, the clause only is triggered when income loss is caused at least partially by the government’s order. Governmental limitations on building access due to the spread of infectious diseases may qualify for coverage even without the presence of a physical loss.
  • Pollution – disease as a pollutant or contaminant capable of causing physical loss is up for debate. Unless your policy specifically excludes viruses, bacteria, and diseases, COVID-19 might apply as pollution and be a permitted insurance peril. 
  • Builders risk – this is a separate policy from commercial property and covers damage to residential and commercial structures while under construction. Depending on how the policy is written, coverage also may provide for lost sales, taxes, rental income, and loan interest resulting from construction delays. This may apply to a loss of workforce caused by COVID-19. Like business interruption insurance, coverage generally is tied to a physical loss, but policy language can vary and is worth a look.  

Next Steps for COVID-19 Coverage

If COVID-19 is affecting your business, seek counsel from your insurance agent on how your policies might help. It’s hard to prepare for or anticipate events like these. If you find your coverage does not apply to COVID-19, consider updating the policy. While none of us can predict the future, we can learn from the past.Loss prevention can feel like a moving target. The myCOI team serves as a partner to help you hit the mark. We’re all in this together. Stay safe everyone.

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