While pandemic exclusions in typical business interruption insurance policies make them contractually immune to COVID-19 losses, some coverage in the marketplace could be exposed.

Peter Fallon of Risk Strategies began responding to coverage inquiries from insureds before the coronavirus reached U.S. shores, often examining policy language line by line. Since 2006, standard policy forms have exempted losses from disease outbreaks, but many policies leave daylight for interpretation, said Fallon, who is senior vice president and head of property at the broker.

"Words like 'virus,' 'communicable disease,' 'bacteria' and 'microbes,' which are all included within some of these exclusions have definitions, and you have to look at them to make sure you understand how broadly the term is being used," he said.

While standard commercial property insurance covers the cost of physical damage to structures, business interruption insurance covers loss of income, damage to supplies and other related costs.

Jared Zola, an insurance recovery lawyer for Blank Rome LLP, said his firm has answered a rush of inquiries from commercial insurance customers facing losses due to restrictions governments have imposed to slow the spread of the virus.

About half the policies Blank Rome reviews include exclusions specifying that underwriters will not cover losses from the spread of illnesses, Zola said in an interview. However, the rest do not specify that pandemic losses are not covered under business interruption. Those products are often bundled with others, he explained.

Even without the exclusions, insureds looking to get payments from their underwriters would still need to demonstrate that the presence of the coronavirus could be considered property damage — or they would have to show in disputes that restrictions to slow the advance of infections are the mandates of civil authorities preventing physical access to a business location, Zola said.

Other exceptions to the standard form are large commercial industrial policyholders who sometimes have manuscript, or individually tailored, policies that do not have pandemic exclusions, Fallon said.

"Or, if they have a virus and bacteria exclusion, they may offer a specific coverage grant for property damage ... cleanup and any resulting downtime during the cleanup," he said.

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Zola advises clients whose policy language includes the exclusion for microbial infections that they are very likely not covered for COVID-19 related losses. Even without the exclusion, a legal challenge would be an expensive battle with narrow chances of prevailing. The legal expense in many cases, then, might not be worth the risk.

With the amount of money in the balance from commercial losses so massive that they are leading to recession, the nation's courts will probably see a host of legal challenges and many years of litigation to pick over which policy language holds up and which does not, Zola said.

A New Orleans restaurant has already initiated one of the first legal volleys against writers of its Lloyd's of London business policy. Oceana Grill said its policy is an "all-risk" cover for business losses incurred due to the actions of civil authorities and does not include an exclusion for virus or global pandemic.

Aside from a tide of angry lawsuits, insurers may yet have to face the often irresistible force of government pressure. A bill drafted in the New Jersey state legislature would have compelled insurers to cover COVID-19 associated losses, though it has since stalled. New York's regulator issued a letter ordering all property and casualty companies with business interruption policies to explain to their business customers and to the state how losses from coronavirus interruptions might apply to coverage.

"Given the potential impact of COVID-19 on business losses, particularly concentrated effects in local communities, [the Department of Financial Services] considers insurers' obligations to policyholders a heightened priority," the regulator said in a letter dated March 10. The deadline for submission was March 18.

Fallon cautioned that government authorities have, in the past, used their power to bend coverage in insureds' favor.

"There has been some precedent for state, local or the federal government to step in and, despite what policies say, because of the extraordinary circumstances, mandate something from insurance companies," he said.

The federal government might eventually need to offer a backstop for such a move similar to its backing of flood or terrorism insurance, Fallon said.