Many businesses struggling due to the COVID-19 pandemic may have insurance coverage to help mitigate financial losses. Insurance policies vary widely in scope and coverage and each claim must be determined based on the specific language of the policy in question and the unique facts of the claim. Insureds should carefully review their insurance policies to determine the extent of any COVID-19 coverage.
Insureds should be aware that insurance companies will likely receive a massive number of COVID-19 claims. Insureds should expect insurers to apply heightened scrutiny to COVID-19 claims, require strict compliance with policy conditions, narrowly interpret coverage and exclusions under the policy to exclude COVID-19 claims, and specifically exclude COVID-19 claims from policies during renewal.
Insureds can improve the chances of the insurer accepting a COVID-19 claim by closely reviewing policy language and making sure they comply with all requirements of the insured under the policy. Insureds should pay particular attention to the following common provisions which may be part of their insurance policy:
- requirements regarding prompt notice of claims.
- requirements regarding cooperation with the insurer including timely notification of material facts concerning a claim and by promptly responding to all reasonable requests for documents and information.
- requirements regarding mitigation of damages.
What follows is a broad overview of coverages that may apply to COVID-19 losses under first-party property policies, third-party liability policies, and specialty coverages.
FIRST-PARTY COMMERCIAL PROPERTY INSURANCE
First-party Commercial Property Insurance pays the insured when a covered event damages the insured’s business property. Generally, first-party commercial property insurance policies should be reviewed to mitigate damages from the stoppage or slowdown of business due to COVID-19 and damage to the insured’s commercial property due to COVID-19 such as contamination. Coverage types under a first-party commercial property insurance policy may include business interruption insurance, business interruption coverage extension for civil authority, business interruption coverage extension for ingress and egress, contingent business interruption insurance, and commercial property insurance extensions including specific communicable disease coverage.
Business Interruption Insurance generally provides coverage for lost profits and related costs when a company can’t continue normal business operations. The business interruption must result from “direct physical loss or damage” to the insured’s property. Coverage may also depend on the extent and impact of the interruption such as whether the business interruption a slowdown or complete stoppage and was the interruption necessary or a discretionary business decision. Coverage issues may include specific exclusions for property damage arising from a virus, communicable disease, or bacteria. The direct physical loss requirement may be met where the property is contaminated due to the presence of infected persons on the property. However, where the company’s property is closed due to fear of COVID-19 and the property itself remains uncontaminated, the insured may not be able to meet the direct physical loss requirement.
A business interruption extension for civil authority generally provides coverage for loss of business income when an order of civil or military authority impairs access to the insured’s business operations. An extension for civil authority usually requires physical loss or damage to the property for coverage to be triggered. A mandatory quarantine order or an order that a business close to prevent the spread of COVID-19 is likely to qualify as an order of civil authority. Coverage issues may include exclusion for losses due to fear of contagion but not actual physical contamination. There usually is not coverage for preventive measures taken before actual property damage occurs even where the order of civil authority is to prevent physical damage from contamination. Additionally, time limitations and distance restrictions may exclude coverage.
A business interruption extension for ingress and egress generally covers business interruption losses caused when a company cannot access its own property (other than because of an order of civil authority). Coverage is triggered under an ingress and egress extension where physical loss or damage to property occurs due to the inability to access the covered property. The insured’s losses must be casually connected to the actual physical loss or damage which likely includes COVID-19 contamination. However, losses where a business cannot access its property due to the fear of contagion without physical contamination likely are not covered.
Contingent Business Interruption Insurance covers lost profits and related costs caused by business interruptions at the locations of an insured’s suppliers or downstream customers. The business interruption must result from direct physical loss or damage to the supply chain partner’s property. Some contingent business interruption policies require the insured to identify/list specific supplier and customer locations to be covered. Hurdles to coverage may include the requirement of actual contamination at the supply chain partner’s property. If the supply chain partner’s property is closed due to fears of COVID-19 without being contaminated the insured most likely will not meet the direct physical loss requirement. Additionally, contingent business interruption policies may exclude property damage arising from a virus or communicable disease and/or bacteria.
Commercial Property Insurance Extensions may include endorsements and/or coverages that do not require physical damage to the covered property but do provide coverage for some COVID-19 losses. Such specific endorsements/coverage may include the following:
- business interruption losses caused by illness or communicable disease;
- cancellation of bookings coverage.
Insureds should be mindful that commercial property insurance extensions typically have strict coverage requirements which may include one or more of the following:
- actual contamination and not the fear of contamination by a communicable disease;
- requirements that access to the property be limited for a certain amount to time (for example, more than 48 hours); and/or
Entertainment, retail, and hospitality businesses are most likely to have commercial property insurance extension coverage for COVID-19.
THIRD-PARTY LIABILITY INSURANCE
Third-party Liability Insurance generally covers legal liability of an insured to a third party. Generally, insureds should review third-party liability policies if a third-party is claiming damages related to the insured’s actions or inactions during the COVID-19 pandemic. For example, a customer may claim he/she was exposed to COVID-19 at the insured’s place of business or a shareholder may claim that the insured’s stock fell because officers and directors failed to take timely and appropriate action to mitigate the impact of COVID-19. Third-party liability insurance generally includes commercial general liability insurance, directors and officers liability insurance, employment practices liability insurance, errors and omissions liability insurance, workers’ compensation insurance, and pollution and environmental liability insurance.
Commercial General Liability Insurance generally provides broad coverage for third-party claims alleging bodily injury, property damage, or personal injury. For example, claims that your company’s negligence led to exposure or infection of client’s or customers may be covered. Product liability claims may also be covered (for example, a claim that your company’s air filtration system failed causing exposure or illness). Insureds should be mindful that commercial general liability policies may limit or exclude coverage for COVID-19 damages including the following:
- bacteria and virus exclusions;
- pandemic exclusions; and/or
- broad pollution exclusions.
Directors and Officers Liability Insurance (D&O) provides defense and liability costs to directors and officers for claims made against them while acting in their official capacity. D&O policies may provide coverage for lawsuits that target companies and their officers and directors for drops in stock price or other adverse financial consequences related to COVID-19. Lawsuits may be based on theories such as the company’s COVID-19 communications, marketing, and sales practices; allegations the company misled its investors about its exposure to the COVID-19 pandemic; and/or failure to follow government protocols. Insureds should pay particular attention to how a claim is defined as some policies exclude coverage for costs related to the investigation of civil or regulatory claims until a formal charge or order is issued. Insureds should be aware that D&O policies typically exclude coverage for fraud, intentional violations of law, and illegal personal profit. Additionally, claims for bodily injury and/or property damage are typically excluded.
Employment Practices Liability Insurance (EPLI) generally provides coverage for discrimination, harassment, wrongful termination, defamation, and invasion of privacy claims made by employees against their employer. For example, an employee that voluntarily self-quarantines during the COVID-19 pandemic and is terminated for violating an existing HR attendance policy may allege wrongful termination. EPLI may provide coverage for claims by employees who are laid off or lose their jobs due to government mandated shutdowns or company shutdowns related to COVID-19. EPLI policies typically exclude coverage for claims made pursuant to the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act)(which requires large employers to provide advance notification closings and mass layoffs) and similar state laws; the Occupational Safety and Health Act of 1970 (OSH Act); and/or The Family and Medical Leave Act of 1993 (FMLA).
Errors and Omissions Liability Insurance (E&O) generally protects the insured and its employees against claims that they failed to take appropriate measures to protect third parties from the effects of a pandemic. For example, an E&O policy may provide coverage for a claim that a patient in a healthcare facility contracted COVID-19 because a healthcare provider acted or failed to act. E&O policies generally exclude the following:
- claims for bodily injury and/or property damage;
- claims for damages made by an employee, director, or officer of the insured;
- coverage for fraud, malicious or dishonest acts, and intentional violations of the law
Workers’ Compensation Insurance generally provides coverage for claims that an employee was injured by COVID-19 during the course and scope of employment. Coverage is more likely if the employee was required to work during quarantine or travel to a high-risk location. Exclusions typically apply for employer’s willful misconduct and failure to comply with health and safety laws and regulations.
Pollution and Environmental Liability Insurance generally provides coverage for losses arising from pollutants. Covered losses may include claims for bodily injury, property damage (including loss of use without physical damage), and clean-up costs. Infectious diseases like COVID-19 may be included under the definition of pollutants. However, communicable disease exclusions may exclude coverage where a disease is transmitted by personal contact. Insureds should pay particular attention to whether coverage is excluded when the transmission of the disease is caused by the environment of the property (for example, poor ventilation causing). Where transmission is caused by the environment of the property claims arising from COVID-19 may be covered even where there is a communicable disease exclusion.
Specialty coverages may include event cancellation insurance, supply chain risk insurance and trade disruption insurance, travel insurance, and political risk insurance.
Event Cancellation Insurance provides coverage when an event is adversely impacted due to disease or quarantine. “Adversely impacted” may include cancellation, postponement, and relocation. Event cancellation insurance may cover all risks or cover only specific events. Broad, all risk policies likely have communicable disease endorsements which may cover COVID-19. Insureds should be aware that event cancellation insurance does not cover voluntary cancellations and/or low attendance. Insured are typically required to mitigate damages. COVID-19 related coverage determinations will most likely be highly fact specific and depend on subject judgments. For example, what counts as a voluntary cancellation.
Supply Chain Risk Insurance and Trade Disruption Insurance provides broad coverage for lost profits and related costs caused by supply chain disruptions. Disruptions due to pandemics and quarantines, transportation breakdowns, regulatory action, supplier solvency, and contractual penalties resulting form a covered event are all typically covered by supply chain risk insurance and/or trade disruption insurance. Insureds should be mindful that some policies require insureds to list covered properties and unlisted properties will not be covered.
Travel Insurance may cover damages arising from employee travel necessitated by COVID-19 including the cost of delays and cancellations, hotel fees, lost or stolen luggage, alternative travel arrangements, and travel medical expenses. Travel insurance typically does not cover voluntary cancellations or changes unless the insured has cancel for any reason coverage. Exclusions that may apply to a travel insurance policy include pandemics (as opposed to localized disease outbreaks), foreseeability (insurers are likely to argue that travel issues related to COVID-19 were foreseeable), and traveling after travel warnings or advisories have been issued.
Political Risk Insurance provides coverage for losses due to political instability, including import/export embargoes; government shutdowns, and/or contract frustration due to political events. Coverage is only triggered if the political action is arbitrary and the primary cause of the loss. There is typically a waiting period before coverage is activated. Coverage disputes are common due to the subjective nature of decision regarding coverage. For example, is political action the prior cause of the loss or it the primary cause the insured’s own action and/or the action of a third-party.
Businesses adversely affected by the COVID-19 pandemic should closely review all insurance policies as coverage may help mitigate losses. Coverage for COVID-19 will depend on the specific facts of the claim, the specific policy language and applicable state laws. Additionally, federal and state authorities’ actions in response to this pandemic are continuously changing and may impact insurance coverage. Insureds should pay particular attention to requirements regarding prompt notice of claims, requirements regarding cooperation with the insurer including timely notification of material facts concerning a claim and by promptly responding to all reasonable requests for documents and information, and requirements regarding mitigation of damages. Insureds are encouraged to report any claims directly to their insurer(s) as soon as possible and as directed under the insurance policy in question.
For more information about navigating issues your business may be facing due to COVID-19 and whether you may have insurance coverage to help mitigate losses, please do not hesitate to contact Trey Cooper or Todd Wooten at Dover Dixon Horne PLLC.