Despite Their Insurance Policies, Small Businesses May Never Recover From COVID-19

Brennan Giese

The coronavirus was declared by the World Health Organization to be a global pandemic on March 11, 2020.[1] Doubtless is the fact that COVID-19 has inflicted widespread negative effects. Aside from the sheer volume of lives lost, another area which COVID-19 continues to blight is business operations – specifically small businesses. One academic study on the effects of COVID-19 on small businesses concluded that “43% of businesses were temporarily closed and that employment had fallen by 40%.”[2] While the government, through the Small Business Administration (SBA), has provided aid to small businesses via the Paycheck Protection Program (PPP), many small businesses are turning to their insurance providers to garner further financial aid to stay afloat during these tough times.

Businesses can collect lost income under a variety of insurance policies. The most applicable coverage for protection against losses sustained from COVID-19 is the Business Income Loss coverage (also known as Business Interruption insurance). However, this policy may still present hurdles for businesses wishing to collect and may preclude a business, which otherwise has timely paid its premiums, from doing so.

The typical Business Income Loss policy grants coverage under these terms:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The suspension must be caused by direct physical loss of or damage to property and premises which are described in the Declarations . . . the loss of damage must be caused by or result from a Covered Cause of Loss.[3]

Typical Business Income Loss policies will exclude many covered causes of loss. However, they typically do not exclude business income loss caused by COVID-19.[4] The primary issue under the typical Business Income Loss policy, assuming there is no outright exclusion for damages caused by Viruses, is whether the business suffered losses as a result of a “direct physical loss of or damage to property.” Courts across the nation are split on what constitutes a direct physical loss of or damage to property. In Western Fire Ins. Co. v. First Presbyterian Church, the Colorado Supreme Court ruled that a church saturated by gasoline fumes suffered a “physical loss or damage” because “further use of the building was highly dangerous.” [5] However, in Universal Image Prod., Inc. v. Fed. Ins. Co., the Sixth Circuit held that mold and bacterial contamination was not a covered physical loss to property because the plaintiff had not suffered any tangible damage to physical property, nor were its premises rendered uninhabitable or substantially unusable.[6] It is hard to tell whether COVID-19 is more like saturation by gasoline fumes or an infestation of mold, but one could see how further use of a business’ premises is highly dangerous due to COVID-19.

A recent Michigan case, however, may make businesses shy to claim loss of business income under their insurance policy. In Turek Enterprises, Inc. v. State Farm Mutual Automobile Insurance Co., the court granted the insurer’s motion to dismiss for failure to state a claim against a class of businesses headed by a chiropractic office.[7] The businesses in that case were all issued Businessowners Insurance Policies almost identical to the typical Business Income Loss policy cited above.[8] The businesses sought recovery under breach of contract for loss of income incurred from Michigan’s COVID-19 shutdown order.[9] The court struck down the plaintiff’s argument that “direct physical loss” includes “loss of use,” and held that, in order to recover under the policy, the plaintiff must, “demonstrate some tangible damage to Covered Property.”[10]

All things considered, the future of insurance claims resulting from COVID-19 is hardly settled. Courts, however, should keep in mind some important insurance rules while judging businesses claims. First, the reasonable expectations doctrine states that, “an insurance policy should be interpreted in accordance with the terms the policyholder thought it was purchasing, even if that interpretation is contrary to the plain terms of the policy.”[11] Although this doctrine is subject to many limitations, it is worth noting briefly. Second, the general rule is that ambiguities in insurance contracts be construed favorably to the insured. If an insurance policy does not clearly define “direct physical loss or damage,” the business should be afforded the protection it has paid for. And finally, as noted by James O’Connor and David E. Suchar, the insurers are in the business of taking risks, not the insureds.[12]

The implications for solving the insurance problems for businesses presented by COVID-19 are massive. Many small businesses will fail if they cannot receive money under their policies to stay afloat. This could potentially result in the unemployment of half of the workforce, who are employed by small businesses, if those businesses go under.[13] And there is no doubt that new claims are being filed by small businesses every day. The question is, will those claims be granted? This question unfortunately, yet unsurprisingly, hinges on the meaning of “direct physical loss of or damage to property,” a meaning which changes drastically depending on the court left to interpret it.

*Note: this blog post focused solely on one policy, the Business Income Loss policy, while many others may be of help to small businesses, such as “Civil Authority” coverage and Ingress and Egress coverage.

[1] David J. Cennimo, How Did The Coronavirus Outbreak Start?, Medscape,,a%20global%20health%20emergency (last visited Feb. 18, 2021).

[2] Alexander W. Bartik et al., The Impact of COVID-19 on Small Business Outcomes and Expectations, PNAS (July 10, 2020),,closed%20because%20of%20the%20pandemic.

[3] James Duffy O’Connor & David E. Suchar, COVID-19 Business Interruption Insurance Coverage: The Threshold Trigger of “Direct Physical Loss or Damage” & Other Considerations, 15 NO 1 ACCLJ 1 (2021).

[4] Id.

[5] Compare Western Fire Ins. Co. v. First Presbyterian Church, 437 P.2d 52, 55 (Colo. 1968), with Universal Image Prods., Inc. v. Federal Ins. Co., 475 F. App’x 569, 575 (6th Cir. 2012) (finding that an infestation of mold in the insured’s business did not constitute “direct physical loss or damage” because “the presence of mold did not alter or otherwise affect the structural integrity of the [property]”).

[6] Univ. Image Prod., Inc. v. Fed. Ins. Co., 475 F. App’x 569, 575 (6th Cir. 2012).

[7] Turek Enters., Inc. v. State Farm Mutual Auto. Ins. Co., 484 F. Supp. 3d 492, 505 (E.D. Mich. Sept. 3, 2020).

[8] Id. at 494.

[9] Id.

[10] Id. at 502.

[11] Kate L. Hyde & Eduardo DeMarco, Limitations on the Use of the Reasonable Expectations Doctrine and the Contra Proferentem Rule by Sophisticated Policyholders, Kennedy’s Law (Jan. 14, 2019),

[12] O’Connor & Suchar, supra note 3.

[13] Bartik, supra note 2.

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