By Hugo Dorta, Founder + Principal of Brickell Capital
The global economy has been halted as the coronavirus (Covid-19) pandemic spreads around the world. A vaccine for this virus has not yet been discovered, so the extent of its impact and its duration is still uncertain. Information about the virus, its effects on businesses and markets, and speculation of its permanent consequences on the economy continue to dominate the news as people attempt to respond to the uncertainty and the future foreseeable damages. One of the most obvious questions that businesses are asking themselves is whether COVID19-related business interruptions and losses will be covered by their commercial insurance policies.
Certain industries, such as traveland leisure, will be greatly impacted by the pandemic, so much so that the direct effect of the virus on their financial health will be evident and unmistakable. As a result, specialized forms of insurance designed to address a public health crisis of this magnitude will be accessible to hard-hit industries. Most companies in other industries that experience business interruptions and losses due to the pandemic, however, will have to rely on commercial all-risk property insurance programs.
Generally, commercial insurance policies offer coverage all risks of loss or damage associated with properties,including related losses like business interruptions, if not explicitly excluded. Although business interruption coverage comes in different forms,these insurance policies usually provide that the insurance carrier pays for lost profits or any fixed business costs and expenses during the period of restoration, which begins after a business suffers direct physical loss and coverage terminates when the business resumes normal business activities.
Since Brickell Capital offers private loans on commercial properties, a point of interesting discussions has been whether owners (and borrowers) can recoup their covid-19 losses ? … and whether the commercial insurance policies offer coverage for COVID-19 losses?
This article is a summary of the applicable issues that may arise when trying to get coverage for business interruption losses during the pandemic. Since each property insurance policy is different, policies and programs should be analyzed based on their individual qualities. Furthermore, commercial property insurance policies will utilize distinctive language that will differentiate one insurer/insured from another.
A common misconception associated with property insurance policies is that the policy affords coverage for business interruption losses. Generally, coverage is only provided for business interruption losses if they occurred as a direct result of actual physical property damage.
For example, if a fire destroys a retail store, the commercial policyholder could get coverage for business interruption losses that result from the period of time that it may take the retail store to rebuild the property site (or business) cover from the fire(i.e. a covered loss). The policyholder, however, will not be covered for business interruption losses that are not related to the covered property damage.
In order to get business interruption coverage for losses related to covid-19 from commercial all-risk property insurance policies, “direct physical loss of or damage” to a covered property is necessary.
Another point of discussion which arises is whether the insured has suffered a “physical loss” or a “loss of use”. It should be noted that there is a distinction between physical loss vs.loss of use. In the past, insurance companies have argued that the losses sustained by the insured, which policyholders deemed as direct physical loss or damage, were just a loss of use. For example, insurers have argued that if a policy holder had to remove inventory from a warehouse facility and sell it at a loss because the warehouse had structural issues and was about to collapse, would be deemed loss of use, and thus, they would attempt to deny insurance coverage under the policy.
Under the current circumstances and in the context of the coronavirus pandemic, the question of whether insurance policies will cover business interruptions is surely to be extensively litigated. Does the presence of the covid-19 virus constitute “direct physical loss or damage” or a “loss of use” ?
Generally, the Covid-19 virus spreads mainly from person-to-person between people in close contact with one another or when an infected person coughs, sneezes, or talks to one another. Although this is believed to be the principal method of transmission, contact with an infected person or surfaced touched by an infected person will also spread the virus.Depending on which surface the virus is on, studies have shown that the virus can last up to several days, more so if on metal, glass, or plastic.
The idea that the presence of microscopic organisms such as the coronavirus can cause direct physical loss or property damage is reinforced by the fact that at least one commercial property insurer is already offering specialized forms of property insurance designed to address coverage for transmittable disease response and business interruption caused by diseases.
This particular property insurer will offer insurance recovery to cover expenses to clean up, remove and dispose of a communicable disease, plus public relations expenses. Moreover, it will provide“coverage for business interruption loss and costs to clean up your property site if the business shuts down due to the presence of communicable disease.
If a property suffers direct physical loss or damage, it is possible that a policyholder gets coverage even if the property is uninsured. This is because commercial property insurance usually provides coverage for “civil or military authority,” an extension that provides coverage if military or civil authority – such as local, state, or federal government – prohibits partial or total access to certain areas or businesses in the insured locations provided that the prohibition is the direct result of the type of physical damage insured at or within a range from the location. This could apply in situations where no property has been lost or damaged.
Commercial property insurance policies can also cover losses from contingent business interruptions. This loss will occur if a third-party such as a customer, supplier, manufacturer,distributor, etc. experiences direct physical loss or damage, and this interrupts policyholder’s business.
During the coronavirus pandemic,keeping in mind contingent business interruption coverage may be particularly useful for businesses that rely on global supply chains. Some locations are more affected by the virus than others, and disruptions in supply chains could significantly hinder a business’s ability to perform. For example,coronavirus-related disruptions in China, a huge manufacturer of industrial parts, will most likely cause many business interruptions.
Once it is established that the coronavirus constitutes a direct physical loss or damage to the policyholder’s insured property, the insured should review whether there are applicable exclusions.
Pollution and/or contamination are usually explicitly excluded from commercial all-risk property insurance policies. Policyholders must determine whether words like “pollutant” or“contaminant” are defined. If they are not, it could be argued that viruses apply to either of the terms. If they are defined, however, policyholders must assess whether the definitions explicitly exclude a virus or whether they reference it as a constituent of pollution and/or contamination.
In other words, they must (1) find out if pollutants and/or contaminants are excluded, (2) determine whether these terms are defined, and (3) assess whether any definitions include or do not mention a virus. After gathering this information about the policy’s language,commercial policyholders must assess the laws of relevant jurisdictions. This will help them determine whether policies properly exclude coronavirus-related losses.
Policyholders must make sure to examine language in order to determine whether the coronavirus could be determined as a pollutant. Even if a policy does not explicitly say that a pollutant is a “virus” some courts have held that it can be considered a pollutant,especially since policy terms are usually ambiguous.
Nevertheless, there have been many pollution exclusions in the past, so the policyholders must pay careful consideration to whether insurers have chosen not to define the terms or have defined them without mentioning viruses.
With all of this in mind, it is important to remember that information about the virus and its possible solutions continue to develop every day. With every new piece of information come new opinions regarding the status of the virus in the eyes of insurers and policyholders. Whether it constitutes property damage and/or whether it can require insurance restoration for business interruptions are debated topics.
Since the presence of coronavirus could constitute property damage, policyholders affected by the pandemic could receive coverage for business interruptions caused by the pandemic. Moreover,commercial all-risk property insurance could cover damages to uninsured properties. Nevertheless, in order to determine the extent to which insurance policies can cover the losses caused by a coronavirus, it is important that policyholders carefully analyze their insurance provider’s policy language,speak with their insurance agents, and seek legal advice from a licensed attorney.
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Hugo Dorta, the author of this article, is the Founder and Principal of Brickell Capital.
Brickell Capital is a Florida “private bridge” mortgage lender. We specialize in residential and commercial loans for Self-Employer Borrowers and Foreign Nationals, New Construction Loans for Builders + Developers and Loan Servicing for Performing (and Non-Performing)Loans. Brickell Capital also purchases and services distressed mortgage loans. We purchase seasoned performing (and non-performing) first and second mortgage lien loans; sub-performing mortgage loans; mortgages in bankruptcy and foreclosure; investor fallout loans; scratch and dent loans, and aged mortgage loans on warehouse lines.
For the last 3 years, Brickell Capital was voted "Top 20" Commercial Lenders and Brokers by the South Florida Business Journal (South Florida's leading news outlet for residential and commercial real estate, banking, finance and business news).
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