Business interruption insurance claims: A potential source of funds for landlords and tenants

Brought to you by the McDonald Hopkins’ Real Estate Recovery Team:

The COVID-19 epidemic presents unique and unprecedented challenges for the commercial real estate industry. Landlords and tenants alike are scouring through their respective lease agreements reviewing whether contractual performance is excused under “force majeure” clauses, and what the respective remedies of the landlord may be in the event the tenant stops paying rent. In looking for creative solutions to funding problems, some landlords and tenants have looked at making business interruption insurance claims under their property insurance policies.    

Often, commercial leases require that the tenant acquire business interruption insurance (naming the landlord as an additional insured) in amounts which equal a certain number of months of base rent. Typically, under standard business interruption policies, the following is required for a recoverable business interruption loss: (1) physical damage, (2) to insured property, (3) caused by a covered peril, (4) resulting in quantifiable business interruption loss, (5) during the period of time it takes to restore the damaged property.

This subject has received some press recently, with insurance companies denying such claims for a myriad of reasons. Mitchell Brothers Ice Cream, Inc., a well-known Cleveland area ice cream chain which was required by the state to shut down all of its retail locations, recently filed a declaratory judgment lawsuit in Cuyahoga County Court of Common Pleas because its insurance carrier denied business interruption coverage contending that there was no “direct physical loss” from the COVID-19 epidemic. In addition, many policies contain express exclusions from coverage from loss or damage resulting from a virus, bacteria, pandemic or epidemic. Thus, up to this point, business interruption insurance claims have been a dry well. 

Yet, several state legislatures (including Ohio) have introduced legislation which would require insurance carriers to cover business interruption claims made due to the COVID-19 epidemic.  House Bill 589, introduced in the Ohio Legislature shortly after the epidemic outbreak, would require every property insurance policy which provides business interruption insurance coverage to provide coverage for “business interruption due to global virus transmission or pandemic during the state of emergency.” This bill (and many others) is facing significant challenges from the insurance industry, who will likely argue both practical and constitutional considerations of such legislation.

Notwithstanding the resistance from insurance companies, every insurance policy is specific and tenants and landlords should read their policy. If a policy does not contain standard provisions, or have riders or endorsements that alter standard provisions, or if one or more employees of the tenant became ill with the virus, or the policy does not contain express exclusions from coverage relating to virus, epidemic or pandemic, then it may be worthwhile to attempt and make a claim. 

If you are a landlord or tenant impacted by the massive dislocations caused by the economic shutdown, and would like to know how we can help you find creative solutions to resolving lease disputes and funding problems, please reach out to any of the attorneys listed below.