The Virus and Bacteria Exclusion: How ISO CP 01 40 Killed Most COVID Business Interruption Claims

When COVID-19 forced businesses across the country to shut their doors in March 2020, business owners turned to their commercial property insurance for relief. They had been paying premiums for business interruption coverage — insurance designed to replace lost income when a covered event forces a business to suspend operations. A global pandemic that shuttered entire industries seemed like exactly the kind of catastrophe that insurance was supposed to cover.

For the vast majority of policyholders, the answer was no. A single endorsement — ISO form CP 01 40, the “Exclusion of Loss Due to Virus or Bacteria” — stood between millions of business owners and their insurance coverage. This endorsement, quietly added to most commercial property policies beginning in 2006, was specifically designed to eliminate coverage for losses caused by viruses and bacteria. When the pandemic arrived fourteen years later, it worked exactly as the insurance industry intended.

The Origins of ISO CP 01 40: A Post-SARS Maneuver

The virus and bacteria exclusion did not exist before 2006. Its development was a direct response to the 2002–2003 SARS epidemic, which raised the specter of pandemic-related insurance claims. The Insurance Services Office (ISO) — the industry organization that drafts standard policy forms used by most commercial insurers — filed the new exclusion with state regulators in 2006.

In its filing, ISO explicitly stated the purpose: to address “the threat of loss” from disease-causing agents and to clarify that commercial property policies were not intended to cover virus or bacteria-related losses. The filing acknowledged that the standard commercial property form did not contain a specific exclusion for such losses, creating potential coverage under open-peril policies. ISO’s solution was not to test the question in court but to eliminate it prospectively by adding an exclusion so broad that virtually no virus or bacteria-related claim could survive it.

State regulators across the country approved the filing with little opposition. By the time COVID-19 emerged in late 2019, the exclusion had been a standard feature of commercial property policies for over a decade. Most business owners had no idea it was there.

What ISO CP 01 40 Actually Says

The exclusion language is broad and deliberately comprehensive. The key operative provision states:

“We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

The exclusion is not limited to specific viruses or bacteria. It covers anyvirus, bacterium, or microorganism capable of causing illness. It does not require that the virus actually caused illness — merely that the virus is “capable of inducing” illness. And it applies to both “loss or damage” — which insurers argue encompasses both direct physical damage to property and loss of use.

The endorsement further provides that this exclusion applies regardless of any other cause or event that contributes concurrently or in any sequence to the loss. This anti-concurrent causation language is designed to prevent policyholders from arguing that a government shutdown order — rather than the virus itself — caused the business interruption loss. Under the exclusion’s terms, if a virus is anywhere in the causal chain, the loss is excluded.

The “Direct Physical Loss or Damage” Debate

Even for policies that did not contain ISO CP 01 40, COVID-19 claims faced a second, equally formidable barrier: the requirement that business interruption coverage be triggered by “direct physical loss of or damage to” property at the insured premises. The standard commercial property policy conditions business income coverage on this trigger — lost income is covered only when the business suspension results from direct physical loss or damage caused by a covered peril.

This language became the central battleground in COVID-19 coverage litigation. The core question: does the presence of a virus on surfaces, or a government order closing a business due to a virus, constitute “direct physical loss of or damage to” property?

• The insurer position:“Direct physical loss or damage” requires a tangible, physical alteration to the property itself. A virus that can be cleaned from surfaces does not physically alter or damage the building. Government orders restricting business operations are not physical events. Without physical damage to the premises, the business income coverage trigger is never satisfied.
• The policyholder position:“Loss of” is distinct from “damage to.” The policy says “direct physical loss of or damage to” property — two separate concepts connected by “or.” A business that cannot use its property due to viral contamination or government orders has suffered a “loss of” the property, even if no tangible structural damage occurred. Rendering property unusable for its intended purpose is a physical loss.

The COVID Business Interruption Litigation Wave

The scale of COVID-19 business interruption litigation was unprecedented. Thousands of lawsuits were filed across the country, generating an enormous body of case law in a remarkably short period. The results were overwhelmingly — but not universally — unfavorable to policyholders.

Decisions Favoring Insurers

The majority of courts held that COVID-19 did not cause “direct physical loss of or damage to” property, and that the virus exclusion, where present, barred coverage. Key decisions include:

• Inns-by-the-Sea v. California Mutual Ins. Co.(2021) 71 Cal.App.5th 688 — The California Court of Appeal held that government closure orders did not constitute “direct physical loss of or damage to” property. The court found that the policyholders did not allege any physical alteration to their property and that loss of use alone did not satisfy the coverage trigger.
• United Talent Agency v. Vigilant Ins. Co.(2022) 77 Cal.App.5th 821 — Another California appellate decision reinforcing that COVID-19 and related government orders did not cause direct physical loss or damage.
• Santo’s Italian Café LLC v. Acuity Ins. Co.(2021, 6th Cir.) — The Sixth Circuit held that the virus did not cause direct physical loss and that the virus exclusion independently barred coverage.
• Oral Surgeons, P.C. v. Cincinnati Ins. Co.(2021, 8th Cir.) — The Eighth Circuit held that government orders restricting dental practices did not cause direct physical loss or damage to the insured premises.

Decisions Favoring Policyholders

A smaller number of courts found for policyholders, often on specific facts or policy language:

• Erik’s DeliCafé v. Zurich American Ins. Co.(N.D. Cal. 2020) — An early decision where the court found that the policyholder had adequately alleged that COVID-19 caused direct physical loss, allowing the case to survive a motion to dismiss. However, this was a procedural holding that did not resolve the coverage question on the merits.
• North State Deli, LLC v. Cincinnati Ins. Co.(N.C. Business Ct. 2020) — The North Carolina court found that the presence of COVID-19 caused “direct physical loss” because the virus rendered the premises unsafe and unusable for normal business operations.
• Cherokee Nation v. Lexington Insurance Co.(E.D. Okla. 2021) — The court found that the Cherokee Nation sufficiently alleged direct physical loss where COVID-19 particles physically attached to and altered surfaces.

Despite these favorable decisions, the overall trend was decidedly against policyholders. By 2023, the University of Pennsylvania Carey Law School’s COVID Coverage Litigation Tracker showed that insurers had prevailed in the substantial majority of decided cases nationwide.

Civil Authority Coverage Arguments

Many policyholders pursued claims under the civil authority coverage provision found in most commercial property policies. This provision covers lost business income when a civil authority (government) prohibits access to the insured premises due to direct physical loss of or damage to property in the vicinity of the insured location.

The argument was that government shutdown orders — stay-at-home orders, capacity restrictions, mandatory closures — constituted action by a civil authority that prohibited access to the insured premises. But this argument faced the same fundamental barrier: the civil authority provision requires that the government action result from “direct physical loss of or damage to” property in the area. If the virus did not cause physical loss or damage, the civil authority trigger was never satisfied.

Most courts rejected civil authority arguments on this basis. The government orders were issued due to a public health emergency, not due to physical damage to property near the insured premises. While the orders prohibited or restricted access, they did not arise from the type of physical loss or damage contemplated by the civil authority provision.

California-Specific Legal Landscape

California’s courts were largely aligned with the national trend, though California law does provide some unique frameworks that policyholders attempted to invoke:

• Efficient proximate cause doctrine— Under California Insurance Code Section 530 and the efficient proximate cause doctrine, when a covered peril and an excluded peril combine to cause a loss, coverage depends on which peril was the “efficient proximate cause” — the predominating cause that set the others in motion. Policyholders argued that government orders (not the virus itself) were the efficient proximate cause of their business losses. Courts generally rejected this argument, finding that the virus was the predominating cause of the entire chain of events.
• Reasonable expectations doctrine— Some policyholders argued that they reasonably expected their business interruption coverage to cover pandemic-related losses. While California does consider the reasonable expectations of the insured in interpreting ambiguous policy language, courts found the virus exclusion to be unambiguous.
• Regulatory estoppel— A creative argument that the California Department of Insurance approved the virus exclusion based on ISO’s representation that it was merely a clarification, not a reduction in coverage. If the exclusion actually removed coverage that previously existed, the regulatory approval may have been based on a misrepresentation. This argument was raised in some cases but did not gain significant traction in the courts.

Policies Without the Virus Exclusion

Not every commercial property policy contains ISO CP 01 40. Some carriers use proprietary policy forms that may not include a virus exclusion. Some older policies issued before 2006 predate the endorsement entirely. And some specialty or manuscript policies negotiated by sophisticated commercial insureds may have specifically excluded the endorsement or negotiated alternative language.

For policyholders whose policies lacked the virus exclusion, the “direct physical loss or damage” requirement was the primary barrier. A few such policyholders obtained favorable rulings — particularly where the policy language used “loss” without “physical” as a modifier, or where the court accepted the argument that viral contamination constituted a physical alteration of property.

Going forward, business owners should specifically check whether their policy contains a virus or bacteria exclusion. The absence of the exclusion does not guarantee coverage for future pandemic events, but it removes the most significant barrier and shifts the analysis to the “direct physical loss” question — which at least some courts have resolved in favor of policyholders.

Regulatory and Legislative Responses

The mass denial of COVID-19 business interruption claims prompted legislative action at both the state and federal levels, though no broadly effective solution was enacted:

• State legislative proposals— Several states, including California, New Jersey, and New York, introduced bills that would have retroactively required insurers to cover COVID-19 business interruption losses regardless of policy exclusions. These bills faced intense industry opposition on constitutional grounds (impairment of contracts) and concerns about insurer solvency. None was enacted into law.
• Federal pandemic risk proposals— Members of Congress introduced the Pandemic Risk Insurance Act (PRIA), modeled after the Terrorism Risk Insurance Act (TRIA), which would have created a federal backstop for pandemic-related insurance losses. The legislation did not advance beyond committee.
• California Department of Insurance actions— The CDI issued a notice reminding insurers that claim denials must be based on thorough, good-faith investigation and that blanket denials based solely on the virus exclusion — without analyzing the specific policy language and facts of each claim — could violate the Fair Claims Settlement Practices Regulations.

Lessons for Future Pandemic Planning

COVID-19 exposed a fundamental gap in the commercial insurance market: businesses believed they had coverage for catastrophic events that forced them to close, and they did not. Whether or not one believes insurers were justified in excluding pandemic risk, the practical lesson is clear — business owners must understand exactly what their policies cover and what they do not.

1. Read your policy for the virus exclusion.Search for ISO CP 01 40 or equivalent language in your policy’s endorsement schedule. If it is there, understand what it excludes. If it is not, understand that you may have broader coverage than competitors whose policies contain it — but coverage is still not guaranteed due to the “direct physical loss” requirement.
2. Ask about parametric or pandemic-specific insurance.In the aftermath of COVID-19, some specialty insurers have developed parametric products that pay a predetermined amount when a triggering event occurs (such as a government shutdown order in the insured’s geographic area). These products bypass the “direct physical loss” and virus exclusion issues because they are not indemnity policies — they pay on the occurrence of a defined event, not on proof of physical damage.
3. Review cause of loss forms carefully.The standard ISO cause of loss forms (Basic, Broad, and Special) differ in their scope of coverage. Understanding which perils are covered and which are excluded — and how cause of loss forms interact with endorsements like CP 01 40 — is essential for evaluating your total exposure.
4. Maintain robust business continuity plans.Insurance is one component of business resilience. Businesses that had contingency plans — remote work capabilities, alternative revenue streams, cash reserves — survived the pandemic better than those that relied solely on insurance recovery.
5. Document everything. If a future pandemic or epidemic occurs, document the specific impact on your business from day one: government orders, dates of closure, revenue loss, extra expenses, remediation costs, and any physical evidence of viral contamination. The policyholders who fared best in COVID-19 litigation were those who could point to specific, well-documented physical impacts on their premises.

Key Takeaway

ISO CP 01 40 accomplished exactly what the insurance industry designed it to do: it eliminated coverage for virus and bacteria-related losses across the vast majority of commercial property policies in the country. When COVID-19 arrived, the exclusion — combined with the “direct physical loss or damage” requirement — blocked recovery for millions of businesses. The courts largely upheld these barriers, and legislative efforts to override them were unsuccessful.

The lesson is not that insurance is worthless — it is that policyholders must understand the specific language in their policies and the specific exclusions that limit their coverage. A business owner who knows the virus exclusion is in their policy can make informed decisions about supplemental coverage, risk mitigation, and business continuity planning. A business owner who discovers the exclusion only after filing a claim has no options left.

For related reading, see our articles on business interruption coverage, civil authority and utility services coverage, commercial endorsements, period of restoration disputes, and commercial cause of loss forms.