Nuclear Physics & "Direct Physical Loss": Perspective on Pandemic Business Interruption Claims

Samuel Cohen invented the neutron bomb in 1958. Unlike conventional nuclear warheads, the neutron bomb was supposed to be a tactical weapon channeling the energy of a nuclear reaction into enhanced, even armor-piercing radiation, but with a smaller blast radius inflicting less physical damage on infrastructure. Throughout its development into the 1970s, the neutron bomb was both praised and vilified for its ability to exact devastating loss of life while leaving structures intact. 

Chicago Sun Times, 1977

While technically inaccurate, the visual of a building left standing in the wake of a deadly neutron bomb provides some useful perspective for insurers and ultimately the courts, which are now responding to an increasing torrent of business interruption claims in the wake of the current public health crisis.

Imagine a business owner submitting a lost-income claim for a property that is otherwise unscathed but surrounded by the human devastation of a neutron bomb. Then imagine that the claim is denied on the basis that the property has not sustained “physical loss or damage”. If you can imagine this, then you can begin to understand what is happening to businesses all across America.  

The business interruption coverage in most commercial property policies requires “direct physical loss or damage.” While “loss” and “damage” are separate terms, insurers responding to pandemic-related business interruption claims have repeatedly insisted that some tangible injury or alteration of the building itself—some damage—must occur before coverage is triggered. Not only does this argument ignore the plain language of their insurance policies, America’s insurers have ignored the factual and legal reality of the COVID-19 pandemic.

An insured building does not exist in a vacuum. It is inseparably connected with its environment, including the employees that work there, the materials, supplies and vendors that support its upkeep and operation and most importantly—its patrons. These are all tangible components of an insured property that non-essential businesses have lost in the current pandemic. Countless state and local governmental quarantine orders have kept employees at home and consumers away from public places for months. Public reaction to the health crisis has resulted in shortages of basic food items, cleaning agents and sanitary materials. If residents cannot buy toilet paper, how is a business supposed to operate without it?  The palpable loss of employees, supplies, and patrons from insured premises is not just an ethereal economic loss. It is a “direct physical loss”, which in turn has caused dramatic business interruption to corporate America. The American Property Casualty Insurance Association has estimated that small business losses amount to between $255 billion and $431 million—each month.

The notion that businesses subject to lockdown orders have not suffered “physical loss” is tantamount to denying the existence of “physical loss” to a structure left unscarred but physically isolated by the desolation of a neutron bomb. Insurers’ collective refusal to acknowledge the “physical loss” sustained by American businesses means not just the denial of claims for thousands of corporate policyholders, it is nothing short of a denial of the severity of the public health crisis that has now claimed the lives of more than 158,000 people in the United States and more than 692,000 worldwide. 

Well-established legal precedent governing the interpretation of insurance contracts requires that policy terms and exclusions be expressed clearly with any doubts resolved against the drafting insurer. This precedent has prompted other courts in multiple venues around the country to recognize that “physical loss” can occur without physical damage. Under the most common form of business property insurance policy—the “all-risk” policy—loss of income resulting from “direct physical loss” is insured unless it is excluded, and there is no “global pandemic” exclusion upon which insurers can rely. Without an express exclusion for “pandemics” or “public health crises,” it does not take a nuclear scientist to see that America’s insurers should be paying America’s business interruption claims.