From: HarrisMartin’s Covid-19 Litigation Report Publication
Date: April 20, 2020
[Editor’s note: Verne Pedro is Special Litigation Counsel with Fullerton Beck LLP and Managing Attorney of the New Jersey office. For more than 18 years, he has litigated and advised clients regarding insurance coverage on a wide range of first-party and third-party insurance matters. For more information on coronavirus-related insurance coverage topics, Verne can be reached at firstname.lastname@example.org or 732-515-6293.]
Novel coronavirus disease 2019 (COVID-19) is disrupting the entire world. Social distancing is now part of today’s lexicon, embodying a host of precautionary measures aimed at protecting human life and abating human suffering.
Efforts to reduce the spread of COVID-19 include quarantines, travel bans, restrictions on public gatherings, university and school closings, cancellations of professional sports’ seasons, restaurant and hotel closures, and cessation of auto production, to name a few.
Widespread shutdowns are causing dislocation and uncertainty for businesses and their customers. As financial implications mount for many companies, a critical issue facing insurers and policyholders alike is whether potential losses and risks stemming from COVID-19 are covered by insurance.
The outbreak gives rise to the complex question of whether there is insurance coverage for financial losses related to COVID-19. Ultimately, coverage for claims arising from coronavirus will depend on specific policy language and discrete circumstances involved. We have identified some initial topics and insurance coverage issues that may arise from COVID-19. The following summary is for general information purposes and is not intended to be and should not be considered as legal advice.
Business Interruption Insurance
Commercial business insurance generally affords financial protection against loss caused by direct physical loss or damage to property. Most commercial property insurance policies provide coverage for business income losses the insured suffers as a result of covered loss, damage, or destruction to property. Typical policy language states:
We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
The insured must show the property loss was caused by any fortuitous peril not specifically excluded under an all-risk policy or caused by certain perils specifically delineated in a named perils policy. The fortuity requirement means the loss must be accidental in some sense to trigger coverage. Damage from a covered cause of loss to property must also cause a “necessary suspension” of the insured’s business operations.
Physical damage to property means a distinct, demonstrable, and physical alteration of the structure of property. One likely coverage dispute involving COVID-19 will focus on whether the presence of the virus constitutes “physical damage or loss” in the first instance. Insurers will rely upon the direct physical loss or damage requirement in the coverage grant. Insureds might argue, for example, that the subject property was contaminated, which could constitute physical damage. Some courts have found coverage absent physical damage when sources unnoticeable to the naked eye render a building structure unsafe or unusable.
Viruses, pandemics and contagious/infectious diseases are typically excluded from standard form commercial property policies, although hospitality or retail businesses may have purchased specific coverages or coverage extensions under which COVID-19 would be a covered peril. Even if a claim is covered, identifying all potential areas of loss, documenting the claim, substantiating and valuing the claimed BI losses attributable to the pandemic as opposed to other market forces may pose unique challenges.
That said, lawsuits have already been filed in multiple jurisdictions by businesses seeking coverage for coronavirus-related losses since the outbreak. These business interruption lawsuits, span market sectors, including restaurants, retail stores, a French heavy metal music festival, a Florida dive shop, casinos run by the Chickasaw Nation in Oklahoma, wig shop and barbershop in Texas, an Indiana repertory theater, Illinois dentalb clinic, and a California law firm.
Contingent Business Interruption
Contingent business interruption (CBI) insurance is an extension to standard property insurance that reimburses the insured for business income loss stemming from loss, damage or destruction at the premises of a supplier of goods or services to the insured and/or customers of goods or services provided by the insured. The contingent property may be specifically named, or the coverage may blanket all customers and suppliers. The physical damage to property of others must be of a type that would be covered under the insured’s policy had the damage happened to the insured’s property.
Limited coverage may be available where business interruption is due to orders from a civil or government authority that prohibit or impair an insured from accessing covered property. Many policies require the order to be the direct result of physical loss or damage to covered property on the described premises or property adjacent to the premises described in the insured’s policy. By example, depending on the policy language, this coverage might be triggered if a quarantine order prevents access to an insured location, even in the absence of virus contamination or other physical damage to the insured property.
Proposed COVID-19 Business Interruption Legislation
Recognizing that commercial business policies generally contain a physical damage requirement or exclude coverage for losses resulting from virus and bacteria, several states have proposed legislation to modify or nullify these provisions. On March 16, 2020, the New Jersey Assembly proposed a bill that would mandate insurers of certain businesses to provide retroactive business interruption coverage and pay for COVID-19 losses, even if policies may expressly exclude coverage for virus or bacteria related losses.
The National Association of Mutual Insurance Companies pushed back against the proposed NJ bill, arguing that business interruption coverage is triggered by physical loss or physical damage, not fear of pandemics. New Jersey’s proposed bill was pulled off the table on March 17 without a full Assembly vote but will likely reemerge in due course.
On March 24, 2020, Ohio introduced a bill that would force insurers to retroactively cover business interruption losses arising from the COVID-19 pandemic. Other states, including New York, Massachusetts Pennsylvania and Louisiana have followed this lead.
On April 8, 2020, a bill was introduced in South Carolina that, if enacted, would require policies in effect to provide coverage for loss of use and occupancy and business interruption claims. The bill would mandate coverage for COVID-19 related losses, even under policies with virus exclusions. Insurers would be prevented from denying claims based upon the absence of physical damage to property, or orders, acts or decisions by a government authority.
Industry commentators have noted that passage of these laws would place primary insurers in the difficult position of having to pay out claims that may not be reimbursed by their reinsurers. If the reinsurance policies do not cover these claims that would not normally be paid, insurers could face significant exposure with no guarantee of reimbursement.
These proposed laws, which other critics argue unconstitutionally restrict freedom of contract by re-writing insurance contracts, underscore how the unprecedented threat of COVID-19 will pose unique challenges for commercial insurers, reinsurers, and policyholders alike as the pandemic situation develops.
Event Cancellation Insurance
COVID-19 has led to the unprecedented cancellation of major events around the world, raising the question of whether cancellations for disease outbreak are covered by insurance. Event Cancellation Insurance is purchased for one-off events as a protection against loss of revenue or extra expenses that result from circumstances beyond the control of the organizer. Fear is not a covered reason for cancellation. Rather, an insured would need to show an inability to commence the event, such as a civil authority shutdown of the event; restriction on mass gatherings; some type of travel ban, etc. Insurance for communicable diseases is an optional coverage that can be purchased for an additional premium. However, these policies typically exclude “loss arising directly or indirectly as a result of any communicable disease or the threat or fear of communicable disease (whether actual or perceived).” Polices with an existing communicable disease rider in force may provide coverage for losses resulting from coronavirus cancellations, but it would depend on the specific policy, the exact type of loss, and the terms and conditions of the policy.
Because COVID-19 is now a known disease and global threat, insureds cannot retroactively add coverage to existing policies or try to insure against it in future policies. Communicable disease cover would now specifically exclude coronavirus or any derivative. As of March 13, 2020, many insurance companies have stopped offering communicable disease coverage with their event cancellation policies.
Force Majeure Clauses, contract provisions found in most commercial contracts that excuse a party’s performance of its obligations under the contract when certain circumstances arise beyond the party’s control making performance inadvisable, commercially impracticable, illegal, or impossible, may also come into play, as COVID-19 continues to disrupt most industries and businesses.
Directors & Officers
Directors and Officers (D&O) policies generally provide coverage (defense and indemnity) to the directors and officers of a company, or to the insured organization itself, for damages and defense costs stemming fromlosses resulting from any actual or alleged error or wrongful acts committed by the policyholder in their capacity as directors or officers.
On March 12, 2020, a shareholder of Norwegian Cruise Lines filed a securities class action lawsuit in the Southern District of Florida against the company, its CEO, and its CFO. The complaint purports to be filed on behalf of a class of shareholders who purchased the company’s shares between February 20, 2020 and March 12, 2020. The class period begins on February 20, 2020, when the company filed an 8-K with the SEC, in which the company published its fourth quarter 2019 and year-end 2019 financial results. It is alleged Defendants made false and/or misleading statements and/or failed to disclose that: (1) the Company was employing sales tactics of providing customers with unproven and/or blatantly false statements about COVID-19 to entice customers to purchase cruises, thus endangering the lives of both their customers and crew members; and (2) as a result, Defendants’ statements regarding the Company’s business and operations were materially false and misleading and/or lacked a reasonable basis at all relevant times. The Norwegian Cruise Lines suit is a COVID-19-related securities class action lawsuit and we can anticipate others in the future.
General Liability Insurance
Standard commercial general liability policies are occurrence-based and are primarily designed to protect the insured business owner from liability to third parties (a non-party to the insurance contract) for claims involving bodily injury, property damage and personal and advertising injury. These policies cover a wide range of business liability and risks that constitute an accident or continuous or repeated exposure to a harmful condition. CGL policies would likely respond to third-party claims alleging negligent release of or exposure to COVID-19, absent communicable disease exclusions. We can anticipate negligence claims by individuals against the hospitality industry, long term care and health care facilities, and essential retail stores, for example, alleging they contracted coronavirus at a hotel, on a cruise ships or at a health facility. In that regard, the family of an Illinois Walmart employee who died from COVID-19 complications recently filed a wrongful death lawsuit against the retail giant, alleging the store failed to protect employees from the novel coronavirus.
We also foresee related disputes arising from contractual risk-shifting provisions that require (1) one party to defend and indemnify the other for claims arising from the actions or inactions of the indemnitor, and (2) to add a the indemnitee as an additional insured under the indemnitor’s general liability policy. Although distinct, the obligations are related—in both cases, liability is shifted from the indemnitee to the indemnitor’s insurer. These are prevalent risk shifting provisions in the insurance context, as well as under vendor’s agreements, leases and services contracts.
Insurance policies are complicated and must be reviewed in detail to determine how coverage would impact any discrete circumstances involved. The global coronavirus pandemic is affecting our families, institutions, communities, and our way of life. As circumstances and legal issues continue to evolve, we are closely monitoring the post-crisis landscape and are available to help insurers, businesses and individuals interpret policy language and navigate related contractual issues.