Is Coronavirus a “Physical Loss” Covered by Business Interruption Insurance?
Author: Thomas R. Lemens, Esq.
This is part one of an ongoing series of articles summarizing the current status of insurance coverage for losses arising from the coronavirus (COVID-19) pandemic.
Your business has been shut down by coronavirus – your customers aren’t coming in, your bills are mounting, and you’re wondering whether you can survive until the economy finally re-opens. You look at your property insurance policy, wondering if there’s any coverage for your losses – and you notice you have business interruption coverage. But when you file a claim with your insurer, the adjuster on the phone says no: “We’re sorry, but coronavirus losses aren’t covered under your policy.”
Can your insurance company really deny coverage when your business is facing total collapse? The answer, under the industry-standard Insurance Services Office (ISO) commercial policy, is “maybe.”
The form that may cover your losses is the Business Income (and Extra Expense) Coverage Form (CP 00 30 04 02). Under section A.1 of this form, your insurer promises that it:
- Will pay for the actual loss of Business Income,
- During the period of restoration,
- Due to the necessary suspension of your operations;
- Where that suspension is caused by a direct physical loss,
- That occurs at your property,
- And which is caused by a Covered Cause of Loss.
As you can see, there are a number of key terms in this coverage. In this article, we’ll break down what qualifies as a “Covered Cause of Loss” and whether coronavirus constitutes a “direct physical loss” as a matter of law.
What is a “Covered Cause of Loss”?
A “Covered Cause of Loss” is defined by your policy’s form entitled “Causes of Loss.” The ISO offers three standard forms to insurers, each of which defines “Covered Cause of Loss” differently: the Basic Form (CP 10 10 06 07), the Broad Form (CP 10 20 04 02), and the Special Form (CP 10 30 04 02). The Basic and Broad Forms both define a “Covered Cause of Loss” as only one of a limited list of risks – none of which are “viruses” or “diseases.” The Special Form, on the other hand, defines a “Covered Cause of Loss” as a risk of “direct physical loss” which is not otherwise excluded in the policy. This means that only the Special Form may ordinarily cover coronavirus losses.
Even under the Special Form, a loss is only covered if no other exclusions under the policy apply. Some property insurance policies – especially those issued shortly after the SARS, H1N1, Ebola, or Zika outbreaks – may contain a form excluding “viruses” or “communicable diseases” from coverage. The standard ISO form for this exclusion is the Exclusion of Loss Due to Virus or Bacteria (CP 01 40 07 06) form – if your policy has this form, you do not have coronavirus coverage. Forms addressing “communicable diseases” from an ISO-affiliated insurer or Lloyd’s underwriter may also exclude coverage for coronavirus-related losses. Other exclusions not covered in this article – such as “microorganism,” “pollution,” or “contamination” exclusions – may also apply to coronavirus-related losses. As always, check the specific language of your policy – the courts will interpret and apply that language to your specific situation.
Assuming you may have coverage, and that no exclusions apply, the next question is: what is a “direct physical loss” that triggers coverage?
What is a “direct loss?”
As one Texas court of appeals explained, “the language ‘physical loss or damage’ strongly implies that there was an initial satisfactory state that was changed by some external event into an unsatisfactory state.”  Thus, a “direct” loss is damage that couldn’t have happened without some external event. Other states’ courts follow the same basic rule: “the word ‘direct’ used in conjunction with the word ‘physical’ indicates the change in the insured property must occur [because] of the fortuitous event triggering coverage.”  Thus, for a coronavirus-related loss to qualify as a “direct loss,” the coronavirus must cause the damage – it can’t just worsen a pre-existing problem. 
For example: you run a restaurant, and a grill in your kitchen has been detected to bear coronavirus. Your inability to use that grill to serve customers may be a “direct loss,” because the coronavirus prevented you from using that grill. Thus, under a business interruption coverage, you may be able to recover the lost profits you would’ve made from that grill. By contrast, if your sales drop because customers simply don’t want to eat out during the coronavirus crisis, that’s probably not a “direct loss.” Even if your restaurant has detected the presence with COVID-19 particles, customers would likely stay home regardless whether your specific establishment is known to have coronavirus or not. These examples are merely illustrative – the specific harm you have suffered, and the specific sequence of events that caused you to file your insurance claim, will likely determine whether your specific loss is “direct” or not.
What is a “physical loss?”
Many policyholders assume a “physical loss” means a natural disaster – like fire, flood, or hurricane – that physically damages their property. However, a “physical loss” actually includes any “distinct, demonstrable, physical alteration” of property.  This term “physical loss” includes not only the destruction of property (which is also “damage”), but the complete “loss” of that property’s use.
The current hot-button dispute in the insurance world is whether a loss must be tangible to be “distinct” and “demonstrable.” While the effects of coronavirus are very real, the virus itself is not visible or tangible to the ordinary human senses. Thus, some courts hold that only a “tangible” loss will be “distinct” and qualify for coverage; in the absence of some physical damage to the property, no “loss of use” is actionable.  These courts vary in how “tangible” a loss must be: while some courts only require a physical, tangible loss (such as an odor) , a few courts claim that a “physical loss” means “a harm that adversely affects the structural integrity of the property” – necessarily excluding claims which do not directly damage the property itself . These courts are unlikely to find that the presence of coronavirus qualifies as a “physical loss,” even if a policyholder can conclusively establish that the presence of coronavirus caused a particular loss.
Other courts hold that a “direct physical loss” does not require a tangible loss if that loss is distinct and demonstrable. Courts following this rule hold that a tangible loss is sufficient to make a loss “distinct and demonstrable,” but that a loss is not required to be tangible to be “distinct and demonstrable.” Thus, odors or gases emitted from part of a structure – even if undetectable, and harmless to the property itself – can nevertheless cause a “direct physical loss,” as several courts have found in toxic drywall and ammonia-release cases.  These courts are likely to find that the presence of coronavirus – if no other exclusions apply – is a covered loss. These courts may also find that the impact of unconfirmed but suspected coronavirus may qualify as a “direct physical loss” – such as if your business is forced to close when an on-site employee tests positive for coronavirus.
Is coronavirus a “direct physical loss” in Texas?
Texas courts have not determined whether coronavirus qualifies as a “direct physical loss,” and have yet to decide whether a “direct physical loss” must be “tangible.” However, in other contexts, Texas courts have interpreted “physical losses” to include any loss “that relates to natural or material things.”  This suggests that Texas courts may be willing to consider coronavirus-related business interruption claims if a policyholder can clearly link the impact of coronavirus (especially its physical presence) to the claimed loss. Again, your case’s facts – especially the nature and extent of your loss and the precise language of your policy – will be critical in determining whether coverage exists.
In our next article, we will address the next element of the coverage equation: whether your claimed loss happened “on your premises,” including how your policy’s Civil Authority, Contingent Business Income, and “dependent properties” provisions may impact coverage.
About the Author: Thomas R. Lemens is an associate at Murr Law, PLLC, where he practices primarily in the fields of insurance, breach-of-contract, and trade secret litigation. He graduated from the University of Texas at Austin School of Law in 2018, where he was two-time state champion in the Giles Sutherland Rich Moot Court Competition. As his younger sister, mother, and paternal grandmother are all medical professionals, he has learned more than he ever wanted to know about the coronavirus pandemic. He spends his quarantine playing heavy metal on the piano, trying to deadlift furniture boxes, and forecasting which sports teams he can cause to lose by betting on them.
Disclaimer: This article is not intended as legal advice and does not create an attorney-client relationship with the author. The views presented in this article are those of the author and are not endorsed by or representative of Murr Law, PLLC or the legal community generally. As insurance policies vary in their terms and state-specific laws apply, your situation may vary – especially if you obtained a custom policy to meet your business’ specific needs. This article was published on April 24th, 2020; the law in this field is changing rapidly, and this article may be outdated when you read this. Consult with an attorney before taking any action on your insurance policy.
 Trinity Indus., Inc. v. Ins. Co. of N. Am., 916 F.2d 267, 270–71 (5th Cir. 1990), adopted by N. Am. Shipbuilding, Inc. v. S. Marine & Aviation Underwriting, Inc., 930 S.W.2d 829, 834 (Tex. App. – Houston [1st Dist.] 1996).
 Port Authority of N.Y. and N.J. v. Affil’d FM Ins. Co. et al, 311 F.3d 226 (3rd Cir. 2002).
 MRI Healthcare Ctr. of Glendale v. State Farm Gen. Ins. Co., 187 Cal. App. 4th 766, 778–81 (Cal. App. – 2nd Dist. 2010) (MRI machine damaged by ramp-up/ramp-down procedure suffered no “physical loss” from rainstorm); AFLAC, Inc. v. Chubb & Sons, Inc., 581 S.E.2d 317, 319–20 (Ga. App. 2003) (modifying computer system to avoid Y2K damage not a “physical loss” because cause of damage was software defect); Great Northern Ins. Co. v. Benjamin Franklin Sav. & Loan Ass’n, 793 F. Supp. 259, 263 (D. Or. 1990) (presence of asbestos in building according to building plan was not a “physical loss” to the lessor because it was intended, even though tenant left because of it).
 10A Couch on Ins. § 148.46 (3d ed. 2005)
 Univ. Image Prods. v. Chubb Corp., 703 F. Supp. 2d 705, 709-10 (E.D. Mich. 2010).
 Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App. 3d 23 (Ohio – 8th Dist 2008).
 Mellin v. Northern Sec. Ins. Co., No. 2014-020, at *4-7 (N.H. 2015); Newman Myers Kreines Gross Harris, P.C. v. Great N. Ins. Co., 17 Supp. 3d 323, 330 (S.D.N.Y. 2014).
 In Re Chinese Manu. Drywall Prods. Liab. Litig., 759 F. Supp. 2d 822, 831-32 (E.D. La. 2010); TRAVCO Ins. Co. v. Ward, 715 F. Supp. 2d 699, 708-09 (E.D. Va. 2010); Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 404-05 (1st Cir. 2009).
 De Laurentis v. United Servs. Auto Ass’n, 162 S.W.3d 714, 723 (Tex. App. – Houston [14th Dist.] 2005).