Business interruption insurance, also known as business income insurance, is commercial property insurance designed to cover loss of income incurred by an organization due to a slowdown or suspension of its operations at its premises, under certain circumstances. Business interruption insurance may include coverage for a suspension of operations due to a civil authority or order, pursuant to which access to the policyholder’s premises is prohibited by a governmental authority. Business interruption insurance is often paired with extra expense insurance, designed to provide coverage for additional costs in excess of normal operating expenses an organization incurs in order to continue operations following a covered loss. Contingent business interruption insurance is a related product and is designed to provide coverage for lost profits resulting from an interruption of business at the premises of a customer or supplier. The contingent property may be explicitly named, or the coverage may apply to all customers and suppliers.
Business interruption coverage is generally triggered when the policyholder sustains physical loss or damage to insured property by a covered loss as defined in the policy. In the event of a claim for a business interruption related to COVID-19, insurance carriers and policyholders will dispute whether the physical loss requirement has been satisfied. In the aftermath of previous viral outbreaks early this century (e.g., SARS, rotavirus, etc.), the insurance industry responded by adding exclusions designed to preclude coverage for such losses. The insurance coverage arguments are many, and those arguments will be the subject of litigation over the coming years.
Most business first-party property insurance policies include coverage not only for the property damage but also for loss in profits resulting from that damage.
The coverage for profits often covers loss resulting from:
- Damage to the policyholder’s own property (business interruption)
- Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
- Government action such as evacuation orders (order of civil authority)
- Damage to properties that attract customers to the policyholder’s business (leader property)
The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first-party property policy.
In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.
In reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.
Thus, many may argue that property damage has occurred in places where the virus is present.
Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles. Arguably, these closures have caused economic collapse and significant losses, particularly for companies that make their money trading securities.
That poses the question as to whether securities firms can use business interruption insurance to claim losses from the collapse of markets. Certainly, a more direct correlation arises from losses suffered because the trading firm physically shut down. While of course insurance companies will defend such claims on multiple grounds, these claims are much more direct.
But, what about trading losses or lost banking deals caused by the market meltdown arising from the pandemic, and related governmental shutdowns? While less direct, an answer could lie in the banks of the Mississippi River.
In the summer of 1993, the Mississippi and its tributaries experienced unprecedented flooding that affected nine Midwestern states. Twenty million acres of farmland were damaged, resulting in $6.5 billion in crop damage (See Doc. 35, Tab 28 at A172) (The Great Flood of 1993 Post-Flood Report U.S. Army Corps of Engineers September 1994). Total damage from the flood is estimated to be between $15 and $20 billion. Id. River, road, and rail transportation systems were disrupted on a large scale. Id.
Archer Daniels Midland Company and its subsidiaries (collectively, “ADM”) process farm products for domestic and international consumption. As a result of the Great Flood of 1993, ADM incurred substantial extra expenses and losses of income because of increases in both transportation costs and the cost of raw materials. ADM submitted claims to its insurance providers, who paid ADM approximately $11 million for losses sustained from the flooding. (See Compl., Doc. 1, Exhs). The insurance companies denied approximately $44 million in additional claims submitted by ADM. ADM brought suit, under multiple policies in the Southern District of Illinois, and the insurance companies defended.
According to the Southern District of Illinois, business interruption insurance is insurance under which the insured is protected in the “earnings which insured would have enjoyed had there been no interruption of business.” Archer-Daniels-Midland Co. v. Phoenix Assurance Co. 975 F. Supp. 1124 (S.D. Ill. 1997). In other words, business interruption insurance protects earnings that are lost or diminished because of a business interruption. ADM prevailed at the District Court.
On a related appeal, the 8th Circuit took up the issue. Archer-Daniels-Midland Co. v. Aon Risk Services. 356 F.3d 850 (8th Cir. 2004). The insurance companies argued that ADM could not recover because it did not suffer any business interruptions as a result of the flood. The insurance companies argued that Archer had actually continued production at its plants.
The 8th Circuit stated that “interruption of business” did not require ADM to show that its corn processing plants stopped or slowed down. “An interruption of business means some harm to the insured’s business” but the damage could have been caused to the property of a supplier. Most hedge funds, broker-dealers, and RIAs continued to trade during the governmental shutdowns, but the interruption to their business through the market meltdown, other than those hedged on short, was significant.
Under the ADM decision, coverage may be available, even where the policyholder incurred lost income or losses unrelated to the shutdown of its premises. While these issues are complicated, the flood of the Mississippi may provide securities trading firms with arguments that the shutdown of the economy is damage done to a supplier, above and beyond losses incurred from the physical closing of any offices. Thus, the trading losses caused by the government shutdown arising from COVID-19 could be seen as “harm to the insured’s business.” Of course, these issues will develop once the crisis subsides, but a battle looms on the scope of the insurance and the economic losses covered, including trading and securities losses.