“Direct Physical Loss” in Business Interruption Insurance

When the COVID-19 threat forced governments to order lockdowns, essentially crippling or halting altogether the operations of thousands of businesses in California and across the nation, owners turned to their commercial property insurance, or to their separate business interruption insurance, to see if they could recoup their losses from the pandemic.

The insurers underwriting these policies naturally pointed to the typical language requiring that the business interruption must have caused “physical loss or damage” to the policyholders’ property to be valid. Claims based on the virus were routinely denied.

Many courts sided with the insurance companies, but in early 2021, a federal court in California ruled that “direct physical loss without physical damage,” such as would occur in the presence of a global pandemic, would be sufficient to justify a claim under business interruption policies.

The insurance companies are still fighting, and not all courts have necessarily adopted the ruling in the above-referenced Pez Seafood DTLA, LLC v. Travelers Indemnity Co.

If your business has been denied a claim under your business interruption policy, or the business interruption clause in your commercial property insurance, and you’re in the greater San Francisco area (including Santa Clara, San Jose, San Mateo, Oakland, or throughout Alameda County), contact the Law Offices of David H. Schwartz, INC. 

Attorney David Schwartz has 45-plus years in the field of business litigation, and he is ready to help you fight the insurance giants for what you perceive to be a fair claim.

Business Interruption Insurance

Business interruption insurance can be obtained as a stand-alone policy, or included in your larger commercial insurance package. Either way, it is meant to reimburse your business for losses that result because you were forced to interrupt your operations. Generally, these policies or insurance riders contain the specific language that the interruption must result in “physical loss or damage.”

To many policyholders, COVID-19 represented a business interruption caused by government actions — partial or full lockdowns — and by the presence of the virus on the business’s premises. They cited these as factors triggering payment for losses under their policies, but insurers routinely denied these claims because there was no “physical loss or damage” to the property itself.

Even the Insurance Commissioner of California cautioned policyholders that: “In general, business interruption insurance policies require a direct physical loss or damage to a property caused by a covered peril (i.e. fire, water damage, etc.) in order for business interruption coverage to apply.”

The interpretation above held sway for the most part in lawsuits brought by policyholders until January 20, 2021, when U.S. District Judge Dolly M. Gee issued a ruling that reinterpreted the meaning of physical loss.

Judge Gee dismissed the claim by the plaintiff, a restaurant owner, that government shutdown orders triggered payment under the policy. The judge ruled that government actions did not represent an external force entering the premises and causing “physical loss or damage.”

The judge did note that, had the policyholder alleged the presence of the virus on its premises, that would have represented “direct physical loss of or damage to property.” She coined the phrase “direct physical loss without physical damage,” which she said was equivalent to “some physical intrusion that compromises the physical integrity of property, such as toxic gasses released by drywall, gasoline accumulation in a building, ammonia discharge, or a computer virus attack.”

Even with this ruling, however, policyholders must read the fine print of their policies carefully because many specifically exclude coverage for viruses.

Notably, in a case in February 2021, a federal court in Massachusetts contradicted Judge Gee’s ruling. Their ruling affirmed that business interruption policies do not “cover a mere threat to property without any physical damage having occurred.”

Not surprisingly, insurers across the country are running with the Massachusetts court’s interpretation rather than Judge Gee’s.

Legal Experience You Can Trust

If you want to pursue a claim under your business interruption policy or larger commercial policy, be sure to read the fine print. If the policy does not explicitly preclude claims brought on by viruses, there is always the possibility to cite Judge Gee’s standard in pursuing a claim, or in seeking a reversal of a prior denial. Most likely, though, this would be a matter for the courts to decide.

If you own a business in or around San Francisco, or in the neighboring areas of San Jose, Santa Clara, San Mateo, Oakland, or throughout Alameda County, and you wish to pursue a claim under your business interruption coverage, contact the Law Offices of David H. Schwartz. INC.

Attorney David Schwartz is a seasoned business litigation attorney who will meet with you, review your policy and the circumstances of your claim, and advise you of your best options.


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