Miller, Lewis and Kozak, ‘COVID-19 and Business Income Insurance: The History of “Physical Loss” and what Insurers Intended it to Mean’

In thousands of cases filed throughout the United States, policyholders are seeking Business Income coverage for losses arising from the presence of SARS-CoV-2, the COVID-19 pandemic, or consequent orders of civil authority. Typically, the Business Income clause is triggered by some variation of ‘direct physical loss of or damage to’ the policyholder’s property. Policyholders argue that the presence or suspected presence of SARS-CoV-2 on their property, or Civil Authority orders, prevent them from using their property as intended, causing a ‘loss of’ that property.

Often, the insurer-side response in these disputes champion the principle that insurance policies are ‘ordinary contracts’ and that courts therefore must seek to ascertain and enforce the parties’ ‘intent’. This argument rests on a legal fiction – even the largest commercial entities rarely negotiate or consciously agree to the core terms of their insurance policies, which are standard forms drafted by insurance industry drafting organizations or use language drafted by such organizations.

For courts – and particularly state courts – seeking to accurately interpret insurance policies, a close look at history and insurance-industry intent is critical. Otherwise, insurers will receive a windfall: they will have charged premiums for broader coverage only to have the courts narrow it based on readings that insurers know are incorrect. In this Article, we trace the history of Business Income coverage forms, starting with the old ‘use and occupancy’ coverages of the early 1900s. We explain that ‘physical loss’ was incorporated into mainstream business-income forms in ISO’s 1980 ‘all risk’ revisions. Consistent with the case law extant at the time, these forms were intended to make the policies cover circumstances where a physical force interfered with a right of possession and use. The available drafting history from ISO’s development of the 2006 virus exclusion confirms this.

Insurance-policy drafting history in general, and this drafting history in particular, is not widely known. It exists, in print, in a small number of libraries – and is virtually nonexistent online, where most lawyers and judges do their research. Most drafting history never becomes important. But here, billions of dollars are at stake. It is critical that courts be fully informed of the industry’s intent as the COVID-19 litigation winds its way through the state appellate courts.

Miller, Charles Murray and Lewis, Richard and Kozak, Chris and Kozak, Chris, COVID-19 and Business Income Insurance: The History of ‘Physical Loss’ and what Insurers Intended it to Mean (June 8, 2022), 57 Tort Trial and Insurance Practice Law Journal (forthcoming 2022).

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