Insurers Face Delicate COVID-19 Coverage Decisions

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Covid-19 Insurance CoverageInsurance companies are no dummies. The world’s largest insurance companies learned important lessons following previous worldwide health crises. Since the 2003 SARS pandemic, they have tightened up their policies and carefully crafted policy language excluding communicable diseases. They have anticipated the avalanche of business interruption claims which flow from worldwide catastrophes such as the Coronavirus outbreak and have tailored their policies accordingly. But these are no ordinary times, and this is no ordinary crisis. In something that you might expect in an Orwellian dystopia, state and local governments are making totalitarian decisions by literally shutting down businesses large and small. The free market abhors uncertainty, but we are living in very uncertain times. One thing is certain, however. Small business owners in fear of their financial lives will be filing insurance claims for lost income, business interruptions, and lost profits. The economy is hemorrhaging, and the unemployment numbers are staggering. Despite having girded their loins since the last worldwide crisis, insurance companies are in a bad spot. They are the institutions of last resort and public sentiment will not be kind. Navigating the insurance coverage shoals while not becoming social pariahs will be an art in and of itself. Policies differ and every claim is different. Insurance companies should rely on coverage counsel not only for the investigation and reservation of rights phase, but also to help draft coverage opinions, and if necessary, coverage denials that do not alienate a nation.

Business owners are scared, they are worried that they will not have the resources to weather the storm. Many of these business owners are looking to their business insurance policies, hoping that they have coverage for their lost business income. Sadly, the majority of these business owners have been disappointed in their findings.

Insurance carriers are also scared, they fear potential over-exposures caused by judges who could take an ultra-liberal reading of policy language, thereby creating coverage where it should not exist. There is also a concern that the federal government could take action to mandate certain coverages and/or implement law which could greatly increase the insurer’s exposure for these losses.

The purpose of this article is to provide an introduction to this issue and an outline of the important items to consider when reviewing your policy for Coronavirus related coverage. We are still in the early stages of this pandemic and the litigation is in its infancy, however a solid foundation in these coverage concerns will allow you to put together a strategy for moving forward whether you are an insured business owner, an insurance adjuster, or a coverage attorney.

What To Look For

The industry consensus is that the standard business insurance policy will not provide coverage for virus related shut-down/slow-down and associated lost business income caused by governmental action and mandate. However, all insurance policies are not written alike, and it is possible that a policy is an outlier and would allow for such coverage. It is also possible that the jurisdiction wherein you reside or where the policy was issued has unique case law which would provide for an argument that such coverage may extend to the loss of business income.

There are many important factors to consider when analyzing an insurance policy for Coronavirus related coverage. The most essential items for your review and consideration will be the definition of physical loss per policy terms, civil authority coverage, contingent business interruption coverage, foreign entity’s operating in host country clauses, infectious disease exclusions, and contamination coverage.

We will take a brief look at each coverage/exclusion and discuss how it may impact a claim for lost income due to the Coronavirus. For the sake of simplicity, this analysis will center around the standard ISO insurance policy for business coverage. Please note that policy terms will differ, and you should retain a knowledgeable attorney to review your specific policy. Also, take note that this issue is in its infancy and the entire analysis could be turned on its head based upon judicial interpretation or legislative/executive action.

Important Policy Considerations

Is Coverage limited to direct physical loss and what is deemed a physical loss?

Standard lost business Income policy language will provide for coverage when a loss of income is sustained due to the necessary suspension of the insured’s operations during a “period of restoration”. It is necessary that the suspended business operations are caused by what the policy defines as a “Covered Cause of Loss”. This “Covered Cause of Loss” must result in a “direct physical loss of or damage to the covered property.” The most important factor, as applied to Coronavirus considerations, would be the language requiring a direct physical loss. As an example, consider the typical water supply line failure, whereby the insured property is damaged, and the business operations are suspended during the time it takes to repair the waterlogged premises. A water loss is obviously a direct physical loss, but what about a shut-down or slow down caused by a government order relating to a virus pandemic?

For the policy provisions to allow for coverage, the virus would need to be a covered cause that results in physical loss/damage to the insured property. There may be decent arguments to be made if the virus was actually physically present and infected the insured residence/business, however the vast majority of such claims will not include such a physical presence, instead being based upon the theoretical or potential presence of the virus and/or government mandated shut-down.

The current consensus among legal professionals is that the standard ISO policy will not provide such coverage under the typical business loss coverages. It is seen as unlikely that the courts, even those with ultra-liberal judges, will interpret a shut-down due to Coronavirus, not physically found in the insured premises, as a “direct physical loss”. However, some plaintiff attorneys have already filed lawsuits arguing an opposing interpretation, claiming that presence of the virus, which is known to exist on surfaces for multiple days, should be deemed a covered “direct physical loss.” While this argument may appear to be a stretch, we will have to wait to see how those cases currently in suit play out.

Please note that there is always the potential the government takes action to interpret or mandate coverage in ways which could change the above analysis and upend the current consensus.

Civil Authority Coverage

The standard business policy will include Civil Authority Coverages. This coverage will apply when there is a “Covered Cause of Loss” causing damage to the property and resulting in lost business income due to the action of the civil authority in prohibiting access to the insured property. For example, if there is a bomb threat and the City shuts down your access to the property for 48 hours while they search and clear the scene.

The typical language requires two primary conditions for this coverage to engage. The relevant conditions that must be satisfied are: “access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area” and “the action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage.”

Applicability of this provision and potential coverage would be dependent on relevant policy language, specific actions taken by the relevant civil authority, and judicial decisions and intervention in filed cases. It is possible that if the federal, state, or local government authority limits access to areas wherein the virus is being actively transmitted, then there is a stronger argument that the Civil Authority Clause may establish coverage for this type of claim.

These two necessary conditions create a significant barrier to the potential coverage on the hypothetical Coronavirus claim. The first condition can likely be fulfilled, as many states have directly limited access and/or shut down business due to the damage. However, the second condition is much more daunting, as it requires that there be a dangerous physical condition resulting from the damage. I would note that many policies do not require that this physical loss occur on the insured’s own property but can be interpreted to apply more generally. That said, it would still be necessary to show that the Coronavirus and the associated impact was a “dangerous physical condition” per the policy terms.

Similar to our analysis above, it is likely that this will be argued by many plaintiff’s attorneys, causing courts to review and rule upon this issue. The consensus is that most courts who rule on this issue will refuse to deem such losses appropriately based on physical damage, thereby denying coverage.

It is possible that there is judicial intervention which could arbitrarily expand coverage for businesses impacted by Coronavirus. If this occurs, then it is very possible that the Civil Authority Coverage will be what the judiciary relies upon should the courts individually or in combination, establish a precedent that coverage will exist for Coronavirus related loss of business income. Further, there is talk of possible federal government interference in the insurance process and possible subsidies or mandates on carriers for the expansion of this coverage. It is possible that this would be the provision whereby the coverage would be expanded through legislative initiatives/action.

Contamination Coverage

Many food/beverage related policies will include coverage for business income lost due to contamination. The typical language will read that coverage exists for, “Contamination that results in an action by a public health or other governmental authority that prohibits access to the described premises or production of your product” and the “publicity resulting from the discovery or suspicion of contamination.” Here we would be interested in reviewing whether the publicity language could be argued to cover our Coronavirus scenario. Most policies will define “publicity” as a publication or broadcast by the media, of the discovery or suspicion of “contamination” at the described premises. There is no authority on point, but it could be argued that the government shutdown and mandates could be interpreted as such “publicity” as the reason for closing the bar/restaurant or limiting in-person service was under the suspicion of contamination of the virus.

Business Insurance PolicyIf the facts surrounding contamination of your food/beverage products show a “continuous or repeated exposure to the same general harmful conditions,” this boilerplate definition of “occurrence” may provide some leeway for claiming coverage. Consider if a vendor’s/suppliers’ worker is diagnosed with Coronavirus, and the vendor/supplier handled and/or made a number of food/beverage/supplies deliveries to your business premises, within the relevant “infectious” timeframe prior to the worker’s diagnosis. There may be coverage for business losses during the required period for decontamination to “restore” your premises. There may be coverage for loss of business income from publicity, via media publication/broadcast, of actual or even suspected “contamination” at your premises. The “property damage” definition may also provide some leeway for claiming coverage, as it may include “loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the ‘occurrence’ that caused it.” Also, check your policy for “malicious contamination” in the “additional definitions” – this may be where to look, if a business falls victim to “pranksters” (as we’ve seen reported in the news media) coughing on food/beverage products, making them unsaleable. You should also consider whether you are an “additional insured” under a vendor or supplier’s policies and look to those policies for a source of coverage.

Infectious Disease Exclusion

Take note that some policies will include a specific exclusion stating that contamination arising from any infectious disease whatsoever will not be covered. Other policies may include language specifically excluding viruses, microorganisms, etc. which may cause a threat to human life from coverage. Such provisions will serve to quickly destroy the Coronavirus related claim. While these exclusions are not standard, it is essential that you search for such terms while conducting your coverage analysis.

Foreign Entity’s Operation In Host Country

Another more obscure coverage that is worth considering would be political risk insurance which could provide coverage for business interruption. This will provide coverage for losses that occur due to a foreign entity’s operation in the host country resulting from local government regulatory actions. The interesting thing is that these policies typically do not have physical damage limitations.

Contingent Business Interruption Coverage

Another coverage worth considering and reviewing is Contingent Business Interruption Coverage. This coverage is typically an additional coverage found in your business/property insurance policy. The contingent coverage will apply when damage occurs on property that is not the named insured property, instead this would be property owned by others that your business may depend upon to (a) deliver materials or services to you, (b) accept your products or services, or (C) manufacture products for delivery to your consumers. This coverage may apply if the insured company has business income losses associated from product or supply shortages which were caused by the “covered loss.” You should review the terms in detail to determine whether there are any physical damage requirements or anything else which may serve to limit your claim.

Looking To The Future/Government Action

These are unprecedented times, and these are very unique claims. It is very possible that future government action and/or judicial intervention could upend your analysis of the policy language above and create avenues for coverage.

Many attorneys and commentators discussing and reviewing these cases are comparing this situation as similar to what occurred following the 9/11 terrorist attacks. Many businesses lost money following the attacks due a number of different direct and indirect factors. However, at the time, the vast majority of insurance companies excluded acts of war from their policies. Interestingly many in the insurance industry made the decision to not assert this exclusion as a defense to the first-party claims asserted following the attacks. Also, the U.S. Congress passed a bill wherein the federal government would safeguard business by becoming the backstop for the insurance carriers if another similar attack was to occur in the future.

Insurance companies are typically well-funded and carry reinsurance/excess insurance for unexpected or catastrophic occurrences. However, the sheer extent of economic impact would likely bankrupt countless insurance carriers if the typical business policy were to cover these coronavirus losses in bulk. There is concern that state or federal government may step in to implement something similar to what was put in place following 9/11.

There are also discussions in many states regarding the potential for forcing retroactive policy changes on insurance carriers which would force them to cover coronavirus business interruption claims. The change could potentially mandate, allow, or advise (with reimbursement) insurance carriers to include coverage for virus related business lost income, that was never bargained for and would have otherwise been excluded in now existent policies.

What To do

The law is not settled, and many insurance professionals are being asked how they should be approaching coverage and advising their insureds. Insurance companies should be immediately retaining knowledgeable coverage counsel to begin reviewing relevant policies and recommending appropriate actions. Further, adjusters need to be prepared to provide recommendations to their insureds. Impacted business owners should be aware of the following:

  1. Coronavirus related damages may not be a covered loss, but you should not allow that assumption to keep you from taking action.
  2. You should promptly report all claims and potential claims to all of your insurance carriers who have a policy which may apply to your loss.
  3. You should review your policy to determine whether you have business income coverage.
  4. Consider whether you are an “additional insured” under any other businesses’ policies and review those policies to determine if they provide business income coverage.
  5. You should analyze coverage and/or retain a qualified attorney to conduct this review on your behalf.

If you should need a coverage attorney to analyze your business policy or if you have questions regarding this article or subrogation in general, please contact Ashton Kirsch at [email protected] or Sarah “Sally” Fry Bruch at [email protected].

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Ashton T. Kirsch
Partner

Ashton T. Kirsch is an insurance litigation attorney and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C., concentrating his practice on litigation of subrogation cases involving large loss casualty, commercial auto, transportation and cargo, and workers’ compensation.

Sarah "Sally" Fry Bruch
Sr. Associate Attorney

Sarah “Sally” Fry Bruch is a senior litigating attorney in Matthiesen, Wickert & Lehrer’s  Hartford, Wisconsin office. Sally’s practice focuses on complex defense litigation as well as property and casualty, workers’ compensation, and automobile subrogation cases throughout Wisconsin and across the country.