The coronavirus (COVID-19) pandemic is evolving on a daily basis and its effects are being felt by businesses around the world. While the cancelling of sporting events and conferences, as well as the closing of restaurants and retailers and broader measures to encourage or mandate social distancing are vital to public health during this time, they also are a major economic blow to many businesses. This update focuses on whether a business may be covered by insurance for losses sustained due to COVID-19.
Insurance Coverages Potentially Triggered by COVID-19 Losses
If your company has been impacted by COVID-19 or you believe it may be in the future, now is the time to review your insurance policies to consider any coverage that may be triggered by COVID-19 losses and consider changes to your coverage to eliminate exclusions or limitations that may preclude recovery under similar circumstances in the future. Whether your business is covered will depend greatly on the language of the policy, the facts and circumstances of your particular loss as well as the law governing your insurance policy.
Some types of coverages that may be implicated include:
- Business Interruption Coverage Typically this kind of coverage is triggered only where business losses stem from physical loss or damage to covered property. Although COVID-19 is not known to cause permanent damage to property, some courts have found that contamination which leaves a building unusable for a period of time constitutes “physical damage” for purposes of determining whether there is business interruption coverage. For example, in Gregory Packing, Inc. v. Travelers Prop. Cas. Co. of America, a federal court in New Jersey found in 2014 that “property can sustain physical damage without experiencing structural alteration.” Thus, the court ruled that contamination of an insured’s property with ammonia could be the basis for recovery under a business interruption policy despite the fact that the presence of the chemical agent did not structurally alter the property. Critically, policy exclusions also must be examined when determining the availability of coverage. It is not uncommon for policies to exclude coverage for contamination of property by bacteria, viruses or other pathogens. Exclusions also may apply to pandemics or infectious diseases that are declared by the CDC to be a health emergency. In addition, coverage related to health conditions may be significantly more limited than traditional business interruptions, such as fire or earthquakes, which directly affect physical property. Careful examination of policy exclusions and limitations should be undertaken because some may extend to contaminants such as bacteria and fungi, but not viruses.
- Supply Chain or Contingent Business Interruption Coverage Many property insurance policies include coverage for economic losses resulting from supply chain disruptions. This type of coverage commonly is referred to as Contingent Business Interruption (CBI) coverage. CBI coverage normally requires physical damage on the premises of the supplier of the same type as would be covered if the damage occurred on the premises of the insured. This type of coverage also may be limited to suppliers identified on a schedule attached to the policy and exclude coverage for infectious diseases.
- Civil Authority Coverage Some property insurance policies include coverage for economic losses resulting from an order of a civil authority that prohibits access to an insured property. This coverage typically applies only if the order is a direct result of physical damage at the insured property or within a certain distance of it. Here, too, policy exclusions may apply.
- Coverage for Communicable or Infectious Diseases Some insurers offer business interruption coverage for economic losses resulting from communicable or infectious diseases without requiring the presence of physical loss or damage. This specialized coverage most typically is purchased by businesses in the hospitality and health care industries.
- Cyber Insurance Coverage With many employees working remotely due to the COVID-19 outbreak, cyber risk is likely higher than normal for most companies. Generally, cyber insurance is designed to protect your company from cyber risk through five types of insuring agreements, including network security, privacy, interruption to your business, media liability, and errors and omissions. While ransomware cyber criminals reportedly have “agreed” to a hiatus on hacking healthcare organizations, that promise should not cause any company to become complacent.
- Directors and Officers Coverage On March 4, 2020, the SEC Chairman issued a press release reminding companies “to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable.” If investors feel that they were not fully informed or were misinformed regarding the potential impacts of COVID-19 on the business, they may file suit. For example, Norwegian Cruise Line shareholders recently filed suit in Miami federal court alleging that the cruise line misrepresented the effects that COVID-19 would have on its business. D&O policies may provide coverage for costs and liabilities arising from these types of suits. While D&O policies generally have an exclusion for bodily injury, such exclusions should not preclude coverage for shareholder claims based on economic loss that relate to the COVID-19 pandemic.
- Workers’ Compensation Coverage This coverage generally is required by state law. It pays for an injured employee’s medical expenses and partial lost wages. An increase in workers’ compensation claims may result as employees premise such claims on contraction of COVID-19 in the course of their employment. Some state statutes have carve-outs from coverage for “ordinary diseases” or diseases that are unrelated to employment. Worker’s compensation coverage is limited to work-related injuries. Whether an injury is work-related depends on factors such as the nature of the injury, the employee’s activity at the time of the injury and the location where the injury occurred. Therefore, it is important for businesses whose employees may be exposed to the coronavirus to keep detailed records regarding potential exposures.
- General Liability Coverage This coverage may be triggered by a third-party claim relating to alleged negligence by the company for failing to adequately protect against the spread of COVID-19, resulting in bodily injury. General liability coverage may also be implicated where an individual claims that he or she was falsely imprisoned or wrongfully evicted as a result of unwarranted or improper quarantines or other actions. In addition, general liability coverage may apply to claims alleging invasion of privacy or defamation resulting from actions taken to prevent the spread of COVID-19. Again, checking the exclusions to coverage will be important, as some policies exclude claims relating to contaminants or pollutants.
- Event Cancellation Coverage This policy may be implicated if an event is cancelled due to COVID-19. Such a policy may provide for payment of lost income and/or expenses incurred based on the cancellation of the event. If your company was forced to cancel an event for reasons related to COVID-19, you should also review any event related contracts to determine the ability to terminate the contracts under a force majeure or other similar clause.
Stay Informed on Coverage Developments
Like everything else, the legislative landscape regarding COVID-19 is changing on a daily basis. The mayor of New York City, along with other city mayors, have cited property damage from COVID-19 as the basis for mandating business shutdowns. New Jersey lawmakers currently are considering a bill that would force insurance companies to cover business interruption losses caused by COVID-19 despite virus exclusions in many policies. If enacted, the New Jersey law would be retroactive for any insured with a business interruption policy in place on March 9, 2020. While critics of this bill cite constitutionality concerns and surely will result in litigation, these are examples of the rapidly changing landscape for insurance coverage. Businesses will want to stay informed of these developments, as they may apply to coverage of losses related to the COVID-19 pandemic.
If you have any questions about this legal update or any other COVID-19 related issue, please reach out to the authors of this update or your MMM attorney.