Several states have already attempted to pass legislation declaring that shutdowns caused by COVID constitute property damage under insurance policies. That, of course, will probably run afoul of the Contract Clause of the Constitution. The Contract Clause of the Constitution provides that that “No state may enter into any …law impairing the obligation of contracts.” It is difficult to see how legislation passed that would retroactively alter insurance coverage afforded by the insurance contract could be constitutional.
However, some states and local governments may attempt to bypass that issue entirely by virtue of the “civil authorities” coverage offered under some insurance policies. Most insurance policies offer coverage for lost income that results from shutdowns by civil authorities, but those shutdowns must be caused by property damage.
The civil authorities coverage contained in the standard ISO Commercial Property Coverage form also includes a property damage requirement:
5. Additional Coverages
a. Civil Authority – “We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises, caused by or resulting from any Covered Cause of Loss.”
Even if civil authorities act to close businesses as a result of COVID-19, unless that is also coupled with some physical damage to property (which is obviously unlikely), that will not be sufficient to trigger the business interruption coverage.
What if the state or municipal authority declares that the shutdown is the result of property damage, even when those shutdowns are really for social distancing? For example, in Dallas County, Texas, the Amended Order of County Judge Clay Jenkins’ “Safer At Home Order” issued April 16, 2020 states that “Whereas, this Emergency Order is necessary because of the propensity of the virus to spread person to person and also because the virus is physically causing property damage due to his proclivity to attach to surfaces for prolonged periods of time.”
This appears as if it is drafted to directly bring the shutdowns within the ambit of the civil authorities coverage. This will certainly be an interesting battleground. There is some authority in Texas regarding the preclusive effect of governmental orders as to the cause of loss. For example, a building inspector has the authority to declare property a total loss even in situations where the insurer disagrees. The Texas Supreme Court has recognized that when property has been condemned by a third party, the insured does have to establish that each piece of “bricks and mortar” has been physically compromised. See Glens Falls Ins. Co. v. Peters, 386 S.W.2d 529 (Tex. 1985) (citing cases wherein buildings that have been condemned by local building officials are deemed a “total loss”). A Court following this logic may conclude that the declaration by Dallas County that the shutdown was “due to direct physical loss or damage to property” to trigger the civil authorities coverage.