COVID-19, business interruption and physical damage

Donald Dinnie, Norton Rose Fulbright

In South Africa and the United Kingdom, coronavirus coverage disputes are centring around the interpretation of various non-damage extensions provided under the policy’s business interruption section.

In North America, both in Canada and the United States, the focus has been whether COVID-19 caused direct physical loss or damage to the insured property triggering business interruption coverage.

In the first ruling on the issue in the US, in Gavrilides Managing Company v Michigan Insurance Co the plaintiff restaurant owner contended that his business interruption coverage should include COVID-19 related losses. The insured did not allege that the property had been damaged or lost. The insured plaintiff argued that the Governor’s stay at home order interfered with the use of his restaurant business which was sufficient to trigger coverage.

The court held:

• Only direct physical loss is covered.
• Direct physical loss or damage to the property must be something with material existence, something that is tangible and something that alters the physical integrity of the property.

The claim for coverage pursuant to the civil authority provision of the policy was also dismissed because that provision also required physical loss or damage to trigger coverage.

The policy contained a virus exclusion which provided that the insurer ‘will not pay for loss or damages caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease’. The court found that the insurer was entitled to reply on that exclusion.

The approach is consistent with South African judgments requiring physical alteration to the structural integrity of the property for there to be physical damage. See these previous posts on insurance claims and COVID-19 and the impact of COVID-19 on the insurance market.

First published by: Financial Institutions Legal Snapshot