Author: Chris Boggs
Several lawsuits have already been filed across the US attempting to prove the business income policy is triggered by the presence of COVID-19 or the government shutdowns as a result of COVID-19. Many, many more are sure to come.
Plaintiffs in these suits argue and will argue that the presence of a virus can and does cause property damage. If such an assertion can be proven, and if there is no exclusion related to viruses, the insurance carrier may be required to pay the business income and/or civil authority loss suffered by the shuttered operations.
Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America is a favorite precedent put forth by these plaintiffs and their lawyers - and every insurance carrier and defense attorney should be happy when this case appears. Why? Gregory Packaging proves or, at the very least, strongly supports the fact that there is ultimately no business income coverage for COVID-19 business closures.
Forget the realities of the business income insuring agreement and the triggers required before the additional coverage civil authority responds, these facts are just “noise" the plaintiffs don't want to hear or consider. Even in the absence of these facts and realities, Gregory Packaging is the defense attorney's friend.
Property Damage
A review of the Gregory Packaging case reveals the first point of contention between the insured and the insurance carrier – property damage. Gregory Packaging claimed that an explosion caused the ammonia-containing pipe to leak. The insurance carrier asserted that a worker for a contractor turned a nut the wrong way causing the leak.
Either way, the piping (the property) was altered in some physical way to cause the leak. And the court opined, “The ammonia discharge was occasioned by a fortuitous event, whether it was an explosion or worker's error, which produced an actual change in the content of the air in Gregory Packaging's facility."
Property damage is generally understood by the court to mean “a distinct, demonstrable, and physical alteration of a property's structure necessitating repair." Some courts have defined property damage to mean, “distinct and demonstrable alteration of the insured property." Whether the pipe exploded before or was damaged after the leak is irrelevant, it required repair and thus property damage was present.
Further, Gregory Packaging claimed that the leak made the refrigeration system inoperable necessitating repair. In short, the release damaged the system – which is property damage.
The basis for Gregory Packaging's claim was property damage. Because or if property damage was present, this case does nothing to support the plaintiffs' arguments that the presence of a virus produces property damage. There is no fortuitous event causing physical differences, this is a biological event.
Not Buying It
Regardless whether there was or wasn't property damage preceding or leading to the ammonia release, plaintiff attorneys fighting to find business income coverage hang their hopes on other arguments presented in and decided upon in this case. Most specifically that the presence of ammonia made the building uninhabitable and thus the insured suffered property damage.
This assertion does not help their case either. Plaintiff attorneys don't buy the property damage, or rather lack of property damage, argument presented above, and the insurance policy can't buy the “polluted air" argument.
The Presence of a Virus Causes Property Damage?
Even if the assumption can be made that a virus can cause property damage simply because its presence makes the building uninhabitable, the facts of Gregory Packaging prove there is no business income loss in most COVID-19 cases. Note the court's reasoning in Gregory, beyond the presence of actual property damage, “the ammonia-induced incapacitation constituted 'direct physical loss of or damage to' Gregory Packaging's facility."
“Ammonia-induced incapacitation" is the key phrase. The building was deemed damaged only while the ammonia levels were dangerous to life and health – the period of the ammonia-induced incapacitation. Once the danger from the ammonia was gone, there was no more “damage" as defined by this court.
If the presence of the COVID-19 virus can cause property damage, by application of Gregory Packaging the damage only exists for the time period the virus is viable (dangerous). Once the danger (such as it is) is gone, there is no longer damage. Two ways to remedy the dangers created by the presence of the coronavirus: 1) clean the property with disinfectants; or 2) wait for the virus to die.
Once the surface is cleaned and disinfected, or the virus ceases to be dangerous there is no longer damage as defined by this case. Cleaning can be done in a day or less.
If the surface is not cleaned, how long will the virus live? A recent University of Alabama study published in the New England Journal of Medicine stated that the maximum amount of time the virus can live on certain surfaces is three days – which is 72 hours . Most surfaces see the virus dying within 24 hours. (As a sidebar, the same study asserted the virus lives in the air only three to four hours.)
Most business income polices have a 72-hour waiting period before the period of restoration and business income payments begins. This same 72-hour period applies to civil authority claims.
Even if the virus can be said to cause property damage, the damage ends when the surface is cleaned or the virus dies. Rarely will business income payment ever be triggered because of the waiting period.
Yes, the waiting period can be reduced by endorsement, but even if the time was reduced to 0 hours (if the underwriter could be convinced to do that), the business income payments would be limited to the point in time when the property is cleaned or the virus dies, the same day or within three days.
If plaintiff attorneys want to depend on Gregory Packaging to say that the presence of a virus triggers property damage and thus business income coverage, that's fine. They just need to remember how long (or short) the period of “damage" really is.
Prove the Building is Unsafe or Unusable
Court documents state, “Beyond the parties' apparent agreement that the ammonia rendered the building temporarily unfit for occupancy and use, Gregory Packaging has put forth substantial evidence that the ammonia discharge physically incapacitated its facility. Multiple witnesses have testified that the facility was evacuated after the ammonia release because it was unsafe."
In addition to the plaintiff attorney's problems with the short life of the virus even in the absence of cleaning, they must PROVE the virus was in the building so that property damage could result. In Gregory Packaging there was NO question that ammonia was present; but can it be proven that the virus existed in the building creating property damage? Not likely unless testing was immediate.
This same requirement applies for civil authority claims. Any argument that the virus caused damage can be considered legitimate only if there is proof the building surfaces of surrounding buildings were contaminated by the virus.
Proving any building is unsafe or unusable will be or is nearly impossible. In light of the business shutdowns in 42 states, any virus that did or might have existed in these buildings is long dead – if the building wasn't cleaned.
Unless proof can be provided that the virus exists within the building, there is NO proof of damage. Also, Gregory Packaging and cases like it require the building to be unusable for “damage" to exist. “Unusable" is not a function of the civil authorities (as that is excluded and then granted coverage under certain circumstances), it is a function of inhabitability. If there is no damage, there is no coverage.
One of, if not the first, business income suit involved a restaurant in New Orleans. Remember that even the civil authorities are allowing the restaurants to operate, the only difference is customers can't stay. The building is not unusable nor is it considered unsafe – it's the people who are supposedly unsafe.
Thank You Gregory Packaging
Gregory Packaging should be used in every COVID-19 case – by the defense. This case supports the policy and the reality that there is no business income loss resulting from COVID-19. Every defense attorney should hope the plaintiff attorney references it.
Beyond Gregory Packaging, which obviously doesn't help the plaintiff attorneys as much as they hoped or thought, several other cases also prove the lack of business income coverage in COVID-19 situations:
- Mama Jo's, Inc. v. Sparta Ins. Co.: A restaurant did not sustain direct physical loss when dust and debris from nearby roadwork could be remediated by cleaning;
- Mastellone v. Lightning Rod Mut. Ins. Co.: Mold which could be removed by cleaning was not physical damage as it did not alter or otherwise affect the structural integrity of the building's siding;
- Universal Image Prods. v. Chubb Corp.: Intangible harms such as odors or the presence of mold and bacteria in an HVAC system did not constitute physical damage to property; and
- Great N. Ins. Co. v. Benjamin Franklin Fed. Sav. & Loan Ass'n: Asbestos contamination was not a physical loss as the building remained unchanged.
Finally, But Most Importantly
Business income is a secondary coverage meaning that it covers the indirect loss (the loss of income) resulting from or arising out of a direct loss – property damage. No insured can have a “stand-alone" business income loss, a business income loss is dependent upon there first being direct property damage.
Gregory Packaging focused on proving direct property damage to force Travelers to pay: 1) The cost to repair the ammonia piping system; 2) the cost to repair the refrigeration system; 3) the cost to clean all traces of ammonia from the building and all surfaces; and 4) any loss of income that resulted from the delayed opening. Everything was dependent on there being a direct property loss.
With COVID-19, every business income claim requires there be direct property damage. Without direct property damage, there is no business income loss. The same principle applies to civil authority losses, but civil authority losses are excluded from COVID-19 claims for a different set of reasons (not the focus of this article).
If it can be proven that the coronavirus does cause property damage at the described premises, the insured is required to make and prove a property damage claim BEFORE a business income claim is triggered. In proving a direct property loss, the insured is required to comply with all policy conditions which includes:
- Giving the insurance carrier a description of the property involved;
- Providing a description of how, when a where the loss or damage occurred;
- Protecting the covered property from further damage (which means cleaning it in the case of a virus);
- Providing an inventory of all damaged and undamaged goods when requested by the insurance carrier;
- Allowing the insurance carrier to take samples of the damaged property for inspection, testing and analysis
- Providing a signed, sworn proof of loss containing the information requested to investigate the claim;
- Cooperating with the insurance carrier in the investigation or settlement of the claim; and
- Repairing or replacing the damaged property as soon as reasonably possible when replacement cost is sought. This means cleaning the “damaged" property.
These are conditions subsequent. If the insured does not comply, it has violated the contract. And if “damage" no longer exists, the business income coverage is no longer triggered.
For a more in depth analysis of the business income exclusions see, “Coronavirus (COVID-19): Does Business Income Respond?"
As much empathy as society has for the individuals who have suffered greatly from this pandemic, the industry is forced to and must follow the insurance contract. Given the facts as they are understood there is no coverage for COVID-19 business income losses; even the most popular case being held out as proof does nothing but prove the lack of or a severely limited amount of coverage. This is biological not physical.
Other COVID-19 Business Income Articles:
Last Updated: April 13, 2020
