Property Exposed to the Ebola Virus - Are Associated Business Income Losses Covered Under First Party Policies?

Can policyholders expect coverage for loss of Business Income if (1) they must close their business and decontaminate it after the property is exposed to persons with the Ebola virus or (2) civil authorities prohibit access to their property because of such exposure?

In the first circumstance, policyholders would seek Business Income coverage, which covers policyholders for lost income and unavoidable continuing expenses when damage to property causes a suspension of business operations. In the second circumstance, policyholders would seek coverage under Civil or Military Authority clauses, covering loss of income where an action or order of an authority, taken or issued on account of property damage, prevents access to the policyholder’s premises. The key question under either coverage is whether the property exposed to an Ebola patient has suffered “property damage.”

Case law supports coverage in either circumstance. First, the Ebola virus, while not particularly hardy, can survive on dry surfaces for hours after exposure, and for days in expelled fluids kept at room temperature. Accordingly, cleanup must be undertaken in a thorough manner by professionals wearing protective equipment. 

Courts and insurance companies have found that property infused with radioactive dust, bacteria or other contaminants has suffered property damage sufficient to trigger Business Income coverage. American Alliance Insurance Co. v. Keleket X-Ray Corp., 248 F.2d 920 (6th Cir. 1957) (radioactive dust and radon gas); Brand Mgt., Inc. v. Maryland Cas. Co., No. 05-cv-02293, 2007 WL 1772063 (D. Colo. June 18, 2007) (listeria); Cooper v. Travelers Indem. Co., No. C-01-2400, 2002 WL 32775680 (N.D. Cal. Nov. 4, 2002) (e-coli); Schlamm Stone & Dolan, LLP v. Seneca Ins. Co., No. 603009/2002, 2005 WL 600021 (N.Y. Supr. Mar. 16, 2005) (dust from the WTC). Under these authorities, property exposed to the Ebola virus has suffered “property damage.”

Business Income coverage should exist until the property can be decontaminated, and is found to be safe to inhabit by the authorities. Urology Clinic of New Orleans, Inc. v. United Fire & Cas. Co., 993 So. 2d 803 (La. App. 2008) (finding Business Income coverage existed until the fire marshal approved re-occupancy). Thereafter, policyholders should have coverage for continuing losses due to reputational injury under Extended Business Income coverages.

Civil Authority coverage should exist through the duration of the order of the Civil Authority. To the extent that the policyholder’s loss is covered by both Business Income and Civil Authority coverage, it can choose to claim under either, both, or one then the other, so as to maximize recovery. Audubon Internal Medicine Group v. Zurich Am. Ins. Co., No. 07-4874, 2008 WL 2718928 (E.D. La. July 10, 2008).

Insurers Denied De Facto Win After Losing Daubert Motion

This post was written by John B. Berringer and Michael N. DiCanio.

In a recent decision Magistrate Judge David A. Baker rejected insurance company Daubert motion to exclude the expert testimony of an architect, a structural engineer, and an accountant designated in an insurance coverage case. Bray & Gillespie v. Hartford et al, Case No. 6:07-cv-00326 –DAB (M.D. Fla. April 20, 2009).

The defendants’ had moved to exclude the testimony of B&G’s accountant and his conclusions regarding the amount of business interruption loss suffered. They did not challenge the methodology of his calculations, but rather took issue with the fact that he allegedly used the wrong numbers and did not provide a period of restoration. Denying the motion, Judge Baker held that this was not a proper ground for excluding the testimony under Daubert, see Quiet Technology, 326 F.3d at 1345-46 (using incorrect numbers in a reliable formula is not grounds for exclusion), and held that the particular issue of limiting the damage calculation with respect to a period of restoration is a matter of factual and legal dispute in this case.

The defendants’ also attacked the proposed testimony of B&G’s architect as unreliable, alleging that he misapplied the pertinent development codes. The court denied the motion, holding:

Interpreting code requirements and estimating building damage and repair or rebuild costs is exactly the sort of thing architects do, well within an architect’s expertise for Daubert purposes. To the extent Defendants disagree with his analysis or find it factually unsupportable, they can challenge these conclusions by cross examination or offer the testimony of their own expert witness, and the jury can decide the matter by weighing the testimony of the competing experts. 

Finally, the defendants argued that B&G’s engineering expert could not testify as to the existence of mold and asbestos in a building, could not rely upon second-hand knowledge to make conclusions and should have performed all testing personally. Denying these arguments, Judge Baker found that a professional engineer is qualified to testify as to a generally accepted proposition such as the existence of mold and asbestos in a building. In addition, the court held that defendants’ remaining arguments regarding the expert’s first hand knowledge were not a proper Daubert challenge:

There is no requirement that an expert has to have first hand information as to all relevant facts and verify same; nor is there a requirement that the expert must perform all testing personally. Just as a physician may reliably interpret an X-ray taken by a technician, a Professional Engineer is qualified, by training and experience, to review the work of others and opine to matters within his expertise. To the extent Defendants find fault with the assumptions underlying the opinions, that is not an attack on the methodology, but on the application of an established methodology to a disputed set of facts.

Trial is scheduled for September 14, 2009. 

2003 Blackout Held to Involve 'Property Damage' Sufficient to Support Claim Under Property Policy

This post was written by Douglas R. Widin.

On April 22 , 2009, the Appellate Division of the New Jersey Superior Court published its March 9, 2009 opinion holding that the massive Aug. 13, 2003 electrical blackout of the eastern United States and portions of Canada inflicted “property damage” sufficient to support a property insurance claim. The court held that the loss of functionality that resulted when protective safety equipment shut down the power grid and caused the blackout of August 2003 qualified as “physical damage” for property insurance purposes. See Wakefern Food Corporation v. Liberty Mutual Fire Insurance Company, No. A-2010-07T3 slip op (March 9, 2009). As a result, insurers were not entitled to summary judgment in their favor on Wakefern’s claims for food spoilage and business interruption at their supermarkets resulting from the blackout.

On Aug. 14, 2003, three sagging power lines contacted trees in northern Ohio and, ultimately, caused a cascading power outage in the Eastern Interconnection of North American power grid. The Eastern Interconnection encompasses the eastern two-thirds of the United States and much of Canada. The cascading outage was caused by successive overloading of portions of the grid as other portions were taken off-line by protective devices within the grid designed to prevent dangerous overloading and damage to equipment. The protective devices in the system performed their functions well and prevented destruction of the expensive transformers and other transmission equipment interconnected into the power grid, but those same protective devices also locked up this equipment and prevented it from being restarted for as long as four days after the outage began. This deprived customers of electricity for extended periods. “The event contributed to at least 11 deaths and cost an estimated $6 billion.” 

Many businesses, including the supermarkets that were plaintiffs in Wakefern Food, suffered property and business interruption losses from the outage. The Wakefern Food plaintiffs claimed the cost of food spoilage and loss of business as a result of the power outage under their all-risk policies, which provided coverage for off-premises electrical power interruptions. That coverage applied “only if the interruption results: … [f]rom physical damage by a peril insured against.” The insurers denied the claims, stating that there had been no physical damage to the power grid apparatus, only a lack of operation. In the ensuing litigation, the Appellate Division overturned the trial court ruling in favor of the insurers, and held that the loss of functionality of the power grid equipment constituted “physical damage” for purposes of insurance coverage.

Undoubtedly, many policyholders faced similar denials of their property insurance claims arising out of the blackout. The general New Jersey contract statute of limitations is six years, so there is still a small window of time in which to challenge denials of coverage subject to that limitation period. Even in situations where there is a shorter suit-limitation period applicable to the insurance, there may still be a chance to challenge a denial, because New Jersey, as well as some other states, follows a practice whereby the statutorily mandated one-year suit limitation period in fire insurance policies is tolled from the time of reporting the claim to the insurer, until there is a definitive denial of the claim. If there was never any definitive denial, there may still be time remaining in which to resurrect the claim.

If you had a claim for damage to your property as a result of the 2003 blackout that was denied, it may be time to take another look. 

Internet Interruption May Trigger Insurance Coverage

This post was written by Doug Cameron, John Ellison, and Richard Lewis.

On Dec. 19, 2008, underwater Internet cables in the Mediterranean Sea were cut, causing major connectivity issues to most Middle Eastern countries, as well as to South Asia. News reports are noting that while ships have been deployed to correct the issue, it could be upward of 10-14 days before connectivity is returned to normal.

If your business is affected by this event, you may have insurance coverage for any losses of income under your first-party or property insurance forms. Most such policies contain “Service Interruption” clauses, which cover policyholders for loss stemming from interruption of various services, including transmission of incoming or outgoing voice, data or video services. Such coverage is typically subject to a waiting period of a couple of days (equivalent to a deductible), but it appears the interruption in question will exceed the waiting period in most forms. If the event occurring Dec. 19 has had a negative impact on your ability to do business, you should immediately check whatever first-party property cover your company purchased to determine what insurance cover is available to respond to this situation.

Service Interruption forms vary greatly from policy to policy, with some limiting coverage to loss stemming from damage occurring at the “facilities” of suppliers, or to transmission equipment within a certain distance from the policyholder’s premises. Others, however, cover loss caused by damage to service lines wherever they are located; such policies would appear to cover loss stemming from the severed Internet lines. For this reason, it is critical that a prompt review of your insurance policies be undertaken, and, if appropriate, you should consult with experienced insurance counsel who can assist in understanding the available options your business has to mitigate the damage caused by this interruption.

Another important step is that you begin to document immediately and contemporaneously the financial impact this event has caused your business. Establishing a system for capturing the economic impact on your business is crucial to being able to demonstrate properly the financial consequences suffered from this event. Consultation with appropriate professionals will enable you to ensure that the full scope of your claim is captured and presented to the insurance company for reimbursement.

If your business is affected by this interruption of Internet service, you should review immediately your insurance policies to determine the scope of your coverage. The attorneys at Reed Smith, with decades of experience in counseling clients on first-party coverage, and litigating and resolving first-party claims, are available to assist in evaluating your coverage. Since time is of the essence for claims of this type, we urge you to undertake these activities as promptly as possible.

Recent Storms and Flooding in Midwest and Great Plains Threaten Property Damage, Loss of Business and Extra Expenses

This post was written by Jim Davis, Paul Walker-Bright and Thomas Marrinson

Recent severe storms in the Midwest and Great Plains have caused extensive flooding in several states, with levees and dams breached, roads and interstates washed out or impassible, and cities and towns under water. Corn and other crops have been damaged and destroyed, pushing prices to record highs on commodities exchanges. Power has been lost in many areas. Indiana has asked the United States to declare farm disasters in 44 counties because of crop and livestock losses blamed on the storms, and what is being described as flooding worse than the previous record set back in 1913. Flood concerns exist for the Mississippi River as well, which is expected to crest at 10 feet above flood stage over the next two weeks. See Levees break as Midwest floods worsen.”

Many farms and businesses undoubtedly have been affected by the flooding. Fortunately, insurance policies may provide coverage for policyholders’ damaged property, loss of business and extra expenses incurred to recover from the floods. First-party property insurance may respond to repair or replace property directly damaged by storms and floods. Business interruption insurance protects earnings that businesses would have obtained had there been no interruption of business caused by covered perils, and contingent business interruption insurance covers losses to policyholders’ business caused by damage to suppliers’ or customers’ property from covered perils. Similarly, extra-expense insurance covers additional expenses incurred to allow policyholders to continue to operate during the period of interruption. In the aftermath of widespread and devastating flooding from the Mississippi River in 1993, courts held that increases in transportation and raw materials costs caused by the flooding, and other losses, were covered under extraexpense and contingent business interruption insurance. See, e.g., Archer-Daniels-Midland Co. v. Phoenix Assur. Co. of New York, 936 F. Supp. 534 (S.D. Ill. 1997).

If policyholders have experienced damage or loss to their property, or interruptions to their businesses and extra expenses caused either directly by the storms and floods or because the property of their customers and suppliers has been lost or damaged, they should be encouraged to review their first-party property and business interruption insurance to determine whether they should submit claims to their insurers. Reed Smith’s 60+ insurance recovery lawyers have extensive experience in assisting policyholders to maximize their property and business interruption claims, including in large-scale disasters such as hurricanes, tornadoes, floods and fires