With no clear end of the COVID-19 pandemic in sight, businesses face a variety of challenges as they struggle to cope with the nation’s “new normal.” Insurance coverage for a wide range of claims may well provide an assist.
Plaintiffs are already pursuing claims against businesses alleging, among other things, exposure of employees, customers, suppliers, vendors and others to infected premises and products; failure to heed reminders from securities regulators that companies have obligations to their investors to properly warn them of virus-related risks; and errors in providing advice or services responsive to the spread of COVID-19 and to governmental directives.
And businesses are looking to their insurance policies for help. Creative claimants are arguing that the virus is causing dangerous conditions that result in the closing of businesses, the cancellation of large crowd events and the disruption of supply chains, and that government-ordered shutdowns are causing significant losses that ought to be covered. As might be expected, many insurers are taking the position that no coverage exists in the absence of a direct loss of, or damage to, property caused by COVID-19.
Carriers, applying concepts of strict construction, claim coverage does not exist even in the face of business interruption provisions in their policies (or separate such coverage), arguing that there has been no loss of or damage to property, a requirement of virtually all such policies, and raising concerns over a flood of claims and possible insurance industry bankruptcies.
Insureds counter that the existence of COVID-19 on and in their premises is itself damage to their property and their businesses. Interpreting the policies gets complicated where there are specific exclusions for communicable diseases (included in policies by risk-averse carriers after the SARS epidemic of the early 2000s) and also provisions for coverage where civil authority orders adversely affect insureds’ businesses and supply lines.
It hasn’t taken long for battle lines to be drawn—with insurance company executives lining up on one side and insureds on the other—and litigation to commence. Numerous class actions have been filed on behalf of injured claimants, some alleging that insurers breached their obligations to fully investigate claims by denying them out of hand. At least two major carriers have gone on the offensive by filing lawsuits seeking court determinations that no coverage exists under their policies.
Insurance industry members are also warning of “dire consequences” for insurers if business interruption insurance is found to cover COVID-19 losses. Some carriers are asserting that, if successful, attempts by courts and legislatures to “rewrite” insurance policies to add business interruption coverage where none exists violate the U.S. Constitution contracts, takings and due process clauses.
Where does this leave businesses?
With the task of auditing their insurance policies to determine whether they have any coverage that might be implicated.
Several different kinds of policies might be implicated and could provide some form of coverage for policyholders, even if they do not contain specific business interruption provisions and exclude coverage for the spread of communicable diseases. A careful reading of all potentially applicable insurance policies is essential.
Business and Trade Disruption Insurance. Despite the existence of specific exclusions for communicable diseases, business interruption coverage should be the first focus of any insurance review to determine whether losses caused by COVID-19 are covered. Specialized trade interruption insurance may eliminate the need to establish physical loss and may well provide coverage for loss of earnings, unexpected expenses and penalties under contracts.
Property Insurance. Some property policies include “civil authority” coverage for losses where, as with COVID-19, a governmental authority has ordered the shutdown or limited access to businesses. Depending on specific policy language, coverage may be available for lost customers, lost revenue, fixed property costs such as rent and other occupancy expenses, and employee salaries and benefits. “Leader” coverage—also known as contingent business interruption insurance—may also be available where an insured’s business is adversely affected by the closing of other businesses that would otherwise result in customer traffic for the policyholder.
General Liability Insurance. Policyholders that are drug manufacturers; are in the life sciences industry generally; or interact with hospitals, schools, restaurants, airlines, cruise lines, supermarkets, etc., may face product liability lawsuits and litigation seeking to connect plaintiffs’ illnesses to illnesses of staff members or other patrons at these entities. These claims could be covered if a causal connection can be proved. Although policies often include specific exclusions for transmitted diseases, general liability policies should be carefully reviewed as there may be language interpretation arguments or specific pandemic provisions.
Directors & Officers, Errors & Omissions and Professional Liability Insurance. Professional liability and E&O policies may provide coverage for mistakes in advice given or services provided, as well as steps the insured took in responding to the pandemic. D&O insurers should be put on notice and called on to respond to claims of shareholders and investors who complain that management failed to take appropriate action to avoid losses—or total business failures—caused by the outbreak.
Representation & Warranty Insurance. While the pandemic has delayed or shelved mergers and acquisitions altogether, deals that include R&W insurance still exist. However, they are undergoing increased scrutiny by insurers. Insureds should know that carriers are expressing concern over issues including the interruption or downturn in a target’s business, disruptions in the target’s supply chain or other adverse effects on the target’s customers, and failures of the target’s suppliers to timely manufacture or ship raw materials.
Workers’ Compensation Insurance. As employees work remotely, employers should review their workers’ compensation policies to determine whether coverage is available for quarantined or “safe at home” employees, and should consider their particular state’s workers’ comp laws. Under most policies, covered losses must have arisen out of the employees’ course of employment. Nevertheless, every attempt should be made to obtain coverage through the claims process. Indeed, the insurer should be notified immediately, in writing, of any potential exposure, positive test result or infection of an employee.
Every effort should be made to establish coverage under existing policies, since renewing or replacing coverage in the future will have its own set of challenges. Careful analysis of pertinent language of all relevant policies, developing arguments that will lead to coverage and pursuing claims pursuant to proper policy procedures are threshold necessities.
For information on the business impacts of COVID-19, please visit our COVID-19 Resource Center, which we continue to update as the situation evolves. If you have questions about COVID-19’s impact on your business, please reach out to your Loeb relationship partner or email us directly at COVID19@loeb.com.