Over the past two months, numerous state legislatures introduced bills targeted toward voiding the virus exclusion included in most business interruption insurance provisions in commercial property policies.  None of the bills have made significant advances, likely due to a combination of lobbying efforts by the insurance industry and the constitutional challenge to any law that would interfere with an existing contract.  The virus exclusion, however, is not the only impediment to achieving coverage under these insurance policies. In fact, there are many policies that either do not have a virus exclusion or do not contain a clear and unambiguous exclusion required for enforcement.

Insurance companies have been responding to their policy holders who have submitted claims for business income loss due to COVID-19 either by an outright denial of coverage or under a reservation of rights stressing that any claim for loss must have occurred due to “direct physical damage or loss to covered or dependent property.”  That phrase appears dozens of time throughout these policies and remarkably, in most policies is not even a defined term. Accordingly, when challenged, a court will be called upon to determine the meaning of the phrase.  Dozens of individual and class action cases have now been filed, all of which, will be challenging the meaning of that key policy term.  In each of those cases, policy holders will be relying on precedent that has held that direct physical loss does not require a physical alteration of insured property requiring repair, which the carriers contend, but can exist based upon the impact that the causation event (here the virus) had on rendering insured property unusable.  The Pennsylvania Senate introduced a bill that is intended to define that key phrase in favor of insureds leaving no room for judicial interpretation.

The Pennsylvania bill, S.B. 1127, a bipartisan piece of legislation, is different that the other bills that have been introduced because it does not seek to compel the insurance companies to pay claims nor does it attempt to alter or interfere with an existing contract.  Its focus is to adopt the reasonable interpretation of the phrase “direct physical damage” to include the presence of Covid-19. The bill proposes that, “If a person positively identified as having been infected with COVID-19 has been present in, or if the presence of the COVID-19 coronavirus has otherwise been detected in, a building, an office, a retail space, a structure, a plant, a commercial establishment or other area of business activity, that area of business activity shall be deemed to have experienced property damage. The bill also provides that the Governor’s  executive order closing all non-essential businesses constitutes an order of civil authority under a first party insurance policy and is to be deemed to be the direct result of physical damage at or in the vicinity of those businesses.

The bill also addresses the “loss of market exclusion” included in many policies – i.e. there is no coverage because the policyholder lost the market for his goods or services due to the pandemic. The bill provides that this exclusion, “may not be interpreted to apply to preclude coverage for COVID-19-related losses if one of the reasons for reduced customer demand for a policyholder’s good or services is the same COVID-19 pandemic that gives rise to the policyholder’s losses for which coverage is sought.

This proposed legislation, if enacted, could be a significant step in ultimately compelling insurance companies to honor claims for business income losses caused by the pandemic.  It is likely this bill will be a model for other states and that similar bills will be proposed to protect businesses harmed by the crisis.


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.