Business Interruption Coverage for Coronavirus Shutdowns in Maryland

Small businesses in Maryland have been devastated by the state mandated shutdowns in response to COVID-19. Across the state businesses of all shapes and sizes are looking for ways to stay afloat financially. One potential lifeline that many struggling Maryland business owner’s have recently been reaching for is business interruption insurance. Unfortunately, however, most claims for businesses interruption coverage are getting denied.

In this page we will explain the basics of how business interruption coverage works. We will also examine the policy exclusions that insurance companies are using to deny business interruption claims and how these clauses have been interpreted under Maryland law. Finally, we will discuss the legal battle that is currently brewing over the business interruption coverage for COVID-19 and how it might play out in Maryland.

Business interruption insurance is a special type of commercial property & casualty insurance that compensates for lost revenues if a covered event (e.g., fire or property damage) forces a business to shut down temporarily. Business interruption insurance is usually not a separate, stand-alone policy. Rather, business interruption coverage is typically added as an endorsement to a commercial property insurance policy. Commercial property insurance only covers the cost physical damage to property. Business interruption insurance is also sometimes included as part of a comprehensive business insurance policy.

Business interruption clauses or endorsements come in a wide variety of formats, but the language creating the coverage is usually comparatively short. Business interruption insurance coverage covers a wide range of costs and expenses. These include not just lost income or revenue, but also operating expenses such as employee wages. It can even cover temporary relocation costs.

The major limitation with business interruption insurance is that the coverage is tied to property loss or damage. Business interruption coverage only kicks in when the interruption is directly caused by some sort of physical damage or destruction of property. For example, if the physical location of a business is damaged or destroyed by fire, windstorm, gas explosion or vandalism, this would be a covered property loss and business interruption coverage would be triggered. The insured business would get coverage for lost revenues and expenses until their property can be rebuilt.

The COVID-19 shutdowns have prompted thousands of Maryland businesses to file claims for business interruption coverage. To many business owners it seems only logical that their business interruption insurance would cover this major “interruption” of their business. This view is further bolstered by the fact that many business interruption endorsements specifically say that coverage is provided when the business is forced to shutdown by order of the government or civil authority.

Unfortunately, many of these desperate business owners are learning that their business interruption insurance may not be the lifeline they were hoping for. Business interruption insurance does not actually cover the COVID-19 shutdowns because they are not related to physical property damage that is covered by property insurance. Business interruption coverage is only triggered when the interruption is directly caused by property damage (e.g., a fire or explosion). As a general rule, the courts have held that there can be no recovery under a business interruption policy in the absence of some actual damage to or loss of physical property.

Even if the business interruption is caused by a government order, the coverage terms of the policy may still require a direct physical loss from a “covered peril” to be the underlying cause. This is proving to be a major roadblock for businesses seeking coverage for the coronavirus shutdowns. Although many businesses have been ordered to shutdown by government order, that shutdown is not related to any type of physical damage to their business property so its technically not covered. The Maryland Insurance Administration has issued a public notice which attempts to explain this to business owners and warn them not to expect coverage under their business interruption policies.

This view is strongly supported by case law. Where the insured's business was ordered closed by the authorities without having sustained any physical damage, the courts have consistently denied coverage by applying the general rule that damage to or loss of physical property is a prerequisite to recovery under a business interruption policy. See Business Interruption Insurance, 37 A.L.R. 5th 41 (§16). By contrast, however, some courts have held that business interruption losses attributable to closure of the insured's operations by order of civil authority were compensable notwithstanding the absence of actual physical loss or damage.

Even if business owners can somehow overcome the requirement of an actual physical property loss, they might find that their COVID-19 claim is denied based on a specific exclusionary clause. After the SARS pandemic in 2003, many insurance companies started including clauses in their business interruption endorsements which specifically exclude coverage for business interruptions caused by virus outbreaks or pandemic events. If a business interruption policy has one of these specific virus exclusions, there is no hope of getting coverage.

Even if the business interruption policy does not have a virus or pandemic exclusionary clause, the insurer may rely on other standard exclusions to deny COVID-19 claims. Virtually all casualty insurance policies specifically exclude coverage for certain major global events that the insurer cannot possibly afford to cover. For example, all commercial property insurance policies exclude coverage for loss or damage caused by war or nuclear fallout. The reason these types of exclusions are permitted is because the potential losses from these types of events would be so large that covering them would effectively bankrupt the insurance carrier.

Many insurance carriers are taking the position that the global COVID-19 pandemic falls under this global catastrophe exclusion. So far, both the U.S. Treasury Department and, to a less extent, the Maryland Insurance Administration agree with this position. In its public notice regarding business interruption claims for COVID-19 closures, the MIA references global catastrophe exclusions and states that “[g]lobal pandemics like COVID-19 usually fall into this category.”

Like so many other issues related to the coronavirus shutdown, the debate over whether business interruption insurers should be forced to cover COVID-19 claims has become highly political. President Trump has repeatedly voiced support for small business owners and suggested that insurers should be required to pay for COVID-19 business interruption claims.

Several states have new proposed legislation pending that would force insurance companies to cover coronavirus related losses under business interruption policies. States attempting to enact these new laws include New Jersey, Massachusetts, New York, Ohio, Pennsylvania, Louisiana, and South Carolina. So far, none of these proposed bills have passed on been voted on and they are expected to face very strong opposition.

Maryland has not proposed any similar bills and based on the position taken by the Maryland Insurance Administration it seems unlikely that Gov. Hogan’s administration would support any such effort.