March 26, 2020 Maria Verdin

AIR CRE Leases Require Business Interruption Insurance. Will it Cover Losses for Coronavirus Closures?

By: Usman Mohammed, Consensus Legal P.C.


California businesses have been suffering and many have closed, either by direct mandate of the government as related to the Coronavirus pandemic, or “voluntarily” for health/business reasons. Most AIR CRE Leases require Lessees to obtain “business interruption” insurance. For Lessees whose businesses are interrupted or closed as a result of the Coronavirus, does their “business interruption” insurance cover them for their loss of income?

Short Answer: Business interruption coverage typically requires “physical damage” to property, such as from a fire. However, if a business is able to confirm (or make a plausible showing) that the virus was present at their business, it may constitute “physical damage” and trigger coverage. Note: we are not insurance experts, and there are many nuances and technical insurance coverage issues involved, therefore please discuss with your insurance advisor.

Business Interruption Provision: Paragraph 8.4(b) of most AIR CRE Leases provides: “Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.”

Business Interruption Insurance in General: Business interruption insurance protects against economic losses that a business suffers relating to the closing of a business facility.

“Physical Damage” Typically Required: Common situations where business interruption applies are fires or other natural disasters, which cause visible damage to property. However, California businesses are closing for safety/health reasons (or by government mandate), even though there is no visible damage to property.

Existence of Coronavirus In Facility May Constitute “Physical Damage”: Although the Coronavirus is not typically causing “physical damage” to a premises or building, some courts have broadly interpreted “physical damage.” Courts have held that “physical damage” to property has occurred where hazardous chemicals are released into a facility, such as ammonia or asbestos, or where gasoline is in the soil under a building. According to a National Law Review article by Jason Rosenthal, if “a business is able to confirm (or make a plausible showing) that the Coronavirus has been found at their premises [it] may be able to argue that this constitutes ‘direct physical loss’ to the property by a covered peril, . . . thereby triggering the resulting business income insurance, until the contaminant is remediated or eliminated.”

Usman Mohammed is the Managing Partner of Consensus Legal P.C., a real estate law firm focusing on sales and leasing transactions.

This article is intended for educational purposes and to provide a general understanding of the law; no legal advice is provided through this e-mail newsletter.