As many of you are aware, COVID-19 has all but brought U.S. and world economies to a standstill. Many states and counties have ordered all non-essential businesses closed. Some have even issued “shelter-in-place” orders, compelling people to stay home with limited exceptions for obtaining food and medicine. Events, including the 2020 Summer Olympics in Japan, have been postponed or cancelled. The disruption to daily life and business as a result of COVID-19 is unprecedented.
Insurance coverage has been among the many issues arising out of the COVID-19 pandemic. Business interruption, contingent business interruption, event cancellation, and worker’s compensation are but a few of the coverages business owners and workers may invoke to attempt to minimize losses caused by COVID-19. Whether any such losses will be covered by these insurance policies is a fact intensive question that will depend on the language of the particular policy. Changing state and federal law may also affect coverage. If you have a loss, or anticipate a loss, consult your agent/broker and ask a lawyer to review your applicable insurance policies.
Business interruption coverage can reimburse a business for lost income and extra expenses incurred as a result of direct physical damage or loss to the insured business. The typical example is a fire, which results in the actual impairment of the business’ operations. Contingent business interruption coverage can apply for losses arising out of disruption to the insured’s direct suppliers.
Civil authority coverage, a corollary of business interruption coverage, can reimburse a business for lost income or extra expense incurred as a result of actual impairment to the business’ operations caused by prohibition of access to the premises by a civil authority. However, the prohibition of access must generally be the result of a covered cause of loss as well as direct physical loss or damage to a property away from the premises or to a dependent business premises – suggesting that mere forced closure is insufficient to trigger coverage. Civil authority coverage often also includes a mandated waiting period; meaning that an insured cannot seek coverage until the period has concluded.
Event cancellation insurance can reimburse an insured for certain losses arising out of the cancellation of a scheduled event. However, the insured must show legal or physical impossibility to holding the event; voluntary cancellation typically will not trigger coverage. Consistent with an insured’s general duty to mitigate in good faith, the insured will likely need to try to reschedule the event before coverage will be afforded.
Worker’s compensation insurance typically reimburses worker’s for certain losses arising out of work-related injuries. However, the mere fact that the injury occurred at work is generally insufficient to obtain coverage; the injury must occur as a result of the kind of work performed by the worker. In the context of COVID-19, a healthcare worker’s exposure to the virus at work likely will trigger coverage; the same cannot be said for a lawyer or accountant.
In the context of COVID-19 and business interruption policies, we anticipate significant debate regarding whether the presence of the virus at the insured property constitutes a “physical loss or damage.” The general trend in existing case law suggests the answer is “no,” though some cases have challenged this notion. Further, many policies specifically exclude coverage for losses arising out of a virus or pandemic. In 2006, the Insurance Services Office (“ISO”) issued a virus exclusion attached to many commercial property policies as an endorsement. If you have this endorsement, obtaining coverage for business interruption loss caused by COVID-19 will be quite difficult. Many other exclusions within the policy could also result in a finding of no coverage, such as the pollution exclusion. A “pollutant” is often defined in the policy as a contaminant. Insurance companies may argue that a virus is a contaminant, while policyholder counsel will argue the opposite.
As this alert has discussed, these coverage issues are highly dependent on the specific language of the insured’s policy. This alert is also non-exclusive as many other insurance issues have and will continue to arise, including bodily injury coverage under commercial general liability policies. Here are a few general guidelines that you may use in reviewing your policies with respect to business interruption and event cancellation losses:
- Did you purchase pandemic coverage insurance for business interruption losses? This coverage was available, but insurers, apparently, have stopped writing it until resolution of this pandemic.
- If you have business interruption coverage, does your policy specifically exclude coverage for virus or pandemic related losses? Coverage could be excluded under the 2006 ISO virus endorsement or a pollution exclusion within the policy.
- If you have civil authority coverage, does your policy require that a covered cause of loss precede the closure of your business.
- Do you have an “all-risk” policy? These policies tend to offer broader coverage since they generally cover a risk unless it is specifically excluded by the policy. Lawsuits in Louisiana and California have already been filed seeking a declaration of rights under “all-risk” policies.
- If you have a loss, have you tried to mitigate? Recall there is a general duty to mitigate in good faith.
If you have not already, we suggest you gather your policies and discuss with your agent/broker and lawyer any losses or potential losses from which you may be able to claim insurance coverage. This is important due to varying policy language.
Finally, use this crisis as an opportunity to review your entire risk management portfolio with your agent/broker. This will ensure that you understand what coverages you have, the limitations of those coverages, and, of similar importance, what coverages you do not have. This action will help you prepare for the next crisis.
If you have any questions, please contact Gunster attorneys Timothy S. Danninger, Stephen C. Richman or Brad Johnson.
