Publisher’s Note: We are experiencing difficult times in California with the Coronavirus. I hope all is well with you and your loved ones, and our best wishes in the recovery of any of your businesses that have been impacted.

California businesses have been suffering and many have closed, either by direct mandate of the government or “voluntarily” for health/business reasons.  Most AIR CRE Leases require Lessees to obtain “business interruption” insurance.  For Lessees whose businesses are interrupted or closed as a result of the Coronavirus, does their “business interruption” insurance cover them for their loss of income?

Short Answer: Business interruption coverage typically requires “physical damage” to property, such as from a fire.  However, if a business is able to confirm (or make a plausible showing) that the virus was present at their business, it may constitute “physical damage” and trigger coverage.  Note: we are not insurance experts, and there are many nuances and technical insurance coverage issues involved, therefore please discuss with your insurance advisor.

Business Interruption Provision: Paragraph 8.4(b) of most AIR CRE Leases provides: “Business Interruption.  Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.”

Business Interruption Insurance in General: Business interruption insurance protects against economic losses that a business suffers relating to the closing of a business facility.

“Physical Damage” Typically Required: Common situations where business interruption applies are fires or other natural disasters, which cause visible damage to property.  However, California businesses are closing for safety/health reasons (or by government mandate), even though there is no visible damage to property.

Existence of Coronavirus In Facility May Constitute “Physical Damage”: Although the Coronavirus is not typically causing “physical damage” to a premises or building, some courts have broadly interpreted “physical damage.”  Courts have held that “physical damage” to property has occurred where hazardous chemicals are released into a facility, such as ammonia or asbestos, or where gasoline is in the soil under a building.  According to a National Law Review article by Jason Rosenthal, if “a business is able to confirm (or make a plausible showing) that the Coronavirus has been found at their premises [it] may be able to argue that this constitutes ‘direct physical loss’ to the property by a covered peril, . . . thereby triggering the resulting business income insurance, until the contaminant is remediated or eliminated.”

This article is intended to raise an issue that should be examined and discussed further between you and your insurance advisor.  It is not intended to provide legal advice.  Insurance coverage issues can be technical and nuanced, and whether there is coverage depends on your insurance policy, your particular circumstances, and other factors.