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“Direct Physical Loss” in Business Interruption

Martinez Law Office, Inc Oct. 3, 2023

The impact of the COVID-19 pandemic on California businesses is unprecedented. In its wake, businesses are still attempting to recover from losses, and courts are trying to determine whether business interruption insurance providers should pay for them.

In Marina Pacific Hotel & Suites, LLC v. Fireman’s Fund Ins. Co.,the appellate court sent a case back to the trial court, ruling that the plaintiffs were entitled to present their case in court after the lower court dismissed it prior to trial. More recently, the California Supreme Court agreed to provide guidance for cases filed in the state’s courts by policyholders whose pandemic-related claims were denied outright by their business insurers. 

The key issue in these cases for claims for benefits under the companies’ business interruption policies is the interpretation of “direct physical loss.” At Martinez Law Office, Inc., I don’t just represent business clients on matters where the law and case law are settled. I represent those in Santa Ana, California, and throughout Southern California, including San Diego, Los Angeles, and Orange counties, when there is a chance that a claim denied should not have been.  

I Have Business Interruption Insurance. What Does it Cover? 

Business interruption insurance is coverage usually added to a business’s property insurance and liability policy. The coverage is designed to compensate insureds for profit and other monetary losses they incur while they cannot operate the business.

However, business interruption insurance coverage only applies to certain situations and explicitly excludes some situations that could result in profit loss while a business cannot operate as usual. 

This coverage typically applies when a business is forced to shut down due to property damage, such as that caused by fires, floods, and storms. It may also pay claims related to government-mandated events, such as closing the street in front of your business for events or construction.  

What Constitutes “Direct Physical Loss” in Business Interruption Insurance? 

“Direct physical loss” relates to the event that causes your business to be inoperable. During that period, you may want compensation for lost profits, to keep employees on the payroll during the interruption or to move to a temporary location, to pay taxes, suppliers, utilities, and other operating expenses.

Insurance companies, as well as some courts, interpret “direct physical loss” to mean physical damage to the business location which makes it impossible for it to continue normal operations. 

For example, you own a retail store in Santa Ana. A fire breaks out after a short-circuit in the electrical system. Most of your inventory, storeroom, fixtures, and interior finishes sustain fire, smoke, and water damage. You are forced to close your doors while the building is gutted and then rebuilt, new fixtures are purchased and delivered, and inventory is replaced. During this period, you also want to keep some key employees on the payroll, so you don’t lose them to other jobs. 

You will file a claim against your property insurance to pay for the physical damage to your store. However, to garner compensation for the expenses you incur because you cannot be operational, you will file a claim against your business interruption insurance. 

Of course, even for claims that are clearly related to “direct physical loss,” getting the insurance company to pay won’t be easy. You will have to provide proof of profit loss, of employee wages, salaries, and benefits, and all other losses and expenses you seek payment for. Working with an experienced business attorney can help make this process easier on you. 

How Does This Interpretation Factor Into COVID-Related Loss? 

Insurance companies and the courts have largely found that COVID does not cause physical damage and therefore, does not constitute “direct physical loss.” On that basis, claims have been denied and denials upheld in litigation. 

Moreover, many business interruption insurance policies specifically exclude viruses from coverage, along with bacteria, disease, and death by natural causes. Insurance companies have used these exclusions to covered perils as reasons to deny claims. 

Not even insurance industry actuaries predicted a worldwide pandemic. So, while policy language may appear to exclude certain coverage or interpret coverage terms differently now, that doesn’t mean the issues regarding coverage are settled law at this point.  

Understand Your Rights and Options 

As a business attorney serving clients in Santa Ana and Southern California, I understand the devastating impact COVID might have had on your business. I also understand that insurance companies are far more concerned about their own profitability than they are about their insureds.  

You paid for the coverage. You should pursue your options for getting the benefits promised every time you pay the policy premium. I can help you do that. 

Call Martinez Law Office, Inc. today to schedule a time to talk about your business interruption insurance.