Insurance Amid COVID-19: Is Your Business Eligible for Coverage?
On April 16, 2020, Governor Andrew Cuomo issued Executive Order 202.18, extending most “New York State on PAUSE” restrictions through May 15, 2020, including restrictions on the operations of non-essential businesses. As stay-at-home orders and restrictions on business operations extend into the spring, businesses across all industries are experiencing disruptions and incurring losses. While some relief may come from government stimulus programs, various commercial insurance policies may also provide reimbursement for losses incurred from the current shutdown.
Potential Coverage for COVID-19 Losses
Almost every business will have a first-party property insurance policy. In addition to covering physical damage to property, these policies typically include coverage for business interruption losses (sometimes referred to as “time element” coverage). Though language may differ slightly among policies, business interruption coverage generally covers losses of income stemming from “direct physical loss or damage to property.”
While many in the insurance industry have taken the position that losses from COVID-19 cannot trigger coverage under these provisions, the issue is far from settled. Indeed, in analogous circumstances, numerous courts have held that the presence of harmful substances at a property may constitute physical loss or damage so as to trigger business interruption coverage.1 Given the pre-symptomatic and asymptomatic spread of COVID-19, and the ability of the virus to remain viable on surfaces for extended periods of time, the presence of COVID-19 may constitute physical loss or damage to property insofar as it prevents the safe use or occupancy of a building.
Some policies may contain exclusions for losses arising from bacteria, viruses or other pathogens – or other terms like “pollutant” or “contaminant” may be defined in such a way so as to exclude claims arising from viruses. While at first glance these exclusions might appear to preclude coverage, keep in mind that any ambiguity in the policy language will be construed in favor of the insured.
Additionally, legislative developments may alter the current landscape. A proposed bill in the New York State Assembly would, among other things, require insurance policies providing business interruption coverage to be construed to include losses during the current state of emergency and preclude the enforcement of virus exclusions.2 Other states are considering similar legislation.
Courts will address these issues in the coming months. For now, businesses should at least place their insurers on notice of claims so as to preserve their rights.
In addition to the primary business interruption coverage for loss or damage at the insured’s premises, most policies also contain additional coverage extensions that may apply. These coverage extensions may be subject to different or additional exclusions, and may have different sublimits of coverage.
- Orders of Civil Authority: Civil authority coverage reimburses the insured for losses stemming from an action of governmental authority that prohibits or impairs access to the insured’s business. These coverage extensions typically require that there be some physical loss or damage to property within a specified geographic proximity to the insured premises. The extensions typically provide reimbursement for 30 or 60 days of losses.
- Contingent Business Interruption: Contingent business interruption coverage (or “supply chain” coverage) covers losses stemming from damage at an upstream supplier or a downstream customer that affects a business. Some policies may also provide coverage where there is damage to a “leader” or “attraction” property (e.g., losses to hotels when damage closes a nearby tourist venue).
- Communicable Diseases: Though less common, some policies contain coverage extensions for losses stemming from the presence of microorganisms, viruses or other communicable diseases at the insured’s premises. These coverage extensions may require the actual, not merely suspected, presence of a pathogen, so testing and detection of COVID-19 may be crucial.
Environmental Liability / Pollution Policies
Environmental liability or pollution insurance policies provide first-party insurance coverage where there is a “pollution condition” at the insured’s premises. A pollution condition is often defined to include the dispersal, release or migration of any irritant or contaminant into or upon structures or the atmosphere. This insuring language often applies to business interruption and loss of income.
Event Cancellation Insurance
Depending on your industry, your business may have purchased event cancellation insurance. Unlike most property or commercial general liability policies, event cancellation insurance policies are non-standard, and many of the terms can be negotiated. They generally cover cancellation, abandonment, curtailment or postponement of an event. In such cases, the policyholder is entitled to its loss of revenue.
Event cancellations due to a public health crisis like the COVID-19 pandemic are a classic example of the type of peril usually covered under event cancellation policies. Events have been cancelled or postponed either due to government orders or safety precautions. As a result, losses should be covered under these policies.
Insurance for Third-Party Claims
While the policies described above may provide coverage for direct losses to a business, companies may also be faced with third-party claims related to COVID-19.
For example, a business’s commercial general liability policy should provide coverage for any third-party suits alleging bodily injury. Coverage should be provided for almost all COVID-19-related bodily injury lawsuits. Recent examples include lawsuits alleging negligence by cruise line operators, nursing homes and retirement communities, allegedly exposing plaintiffs to an unreasonable risk of harm.
Businesses may also face workers’ compensation claims from employees who contract COVID-19. If the worker can establish that he or she became ill due to exposure in the workplace, they may be able to claim workers’ compensation, and employers’ policies should cover such claims.
Finally, directors and officers liability insurance may be implicated where suits allege wrongful acts by company executives and managers related to the COVID-19 pandemic. Several suits have been filed already alleging that company officials made misleading statements related to COVID-19. One suit alleges that Norwegian Cruise Line officials made false and misleading financial statements, while another alleges that a pharmaceutical CEO falsely claimed to have developed a COVID-19 vaccine in order to manipulate the company share price.
Other Available Insurance
In addition to the insurance policies discussed above, a business may be named as an additional insured on insurance policies held by its vendors, contractors and business partners. Businesses should review their contracts and any insurance certificates, and request copies of policies under which they are an additional insured.
Guidance and Best Practices
Given the scale of business interruption losses across the economy, businesses should expect that insurance carriers will look to deny most claims arising out of the COVID-19 pandemic. Although carriers and brokers may be quick to make blanket statements that there is no coverage for COVID-19, keep in mind that insuring language and exclusions will vary from policy to policy, and many of these novel issues will be tested in the courts, or addressed by legislatures, in the coming months.
For now, businesses should take the following steps to preserve their right to any potential insurance recovery:
- Take inventory of all active insurance policies to identify potential coverages.
- Give prompt notice to insurers to preserve rights and avoid any argument as to untimely notice in the future.
- Track ongoing losses and preserve business records and documents that will support the claim.
- Mitigate losses wherever possible – and track expenses incurred to do so, as they may also be recoverable.
- Cooperate with the insurance carrier’s investigation of the claim.
- See, e.g., Matzner v. Seaco Ins. Co., No. CIV. A. 96-0498-B, 1998 WL 566658, at *3 (Mass. Super. Aug. 12, 1998) (construing “direct physical loss or damage” broadly, to include more than tangible damage to the structure or insured property); Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., No. 2:12-CV-04418, 2014 WL 6675934 (D.N.J. Nov. 25, 2014) (discharge of ammonia could constitute physical loss or damage); Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823 (3d Cir. 2005) (bacteria contamination of home water supply was direct physical loss because functionality of property was nearly eliminated or destroyed); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997), aff’d in part, 615 N.W.2d 819, 825-26 (Minn. 2000) (asbestos contamination can constitute a direct physical loss to property); Farmers Ins. Co. v. Trutanich, 858 P.2d 1332, 1335 (Or. Ct. App. 1993) (odors from a methamphetamine lab triggered coverage).
- Assembly Bill A10226A. Bill text and status available at https://www.nysenate.gov/legislation/bills/2019/A10226.