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 provides financial protection against loss caused by direct physical loss or damage to an insured’s 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 insured 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 covered 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 covered 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.
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 avoid 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 re-emerge 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 and Pennsylvania have followed this lead.
These proposed laws, which critics argue unconstitutionally restrict freedom of contract by re-writing insurance policies, underscore how the unprecedented threat of COVID-19 will pose unique challenges for commercial insurers and policyholders alike as the pandemic situation develops. To date, two lawsuits have been filed seeking to force insurers to pay business interruption claims — one by a restaurant in New Orleans and one brought by the Chickasaw Nation in Oklahoma.
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.
Director’s & 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 from losses 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.
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 and property damage. 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 and health care industries, for example, alleging they contracted coronavirus at a hotel, on a cruise ships or at a health facility.
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 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. We are in this together. As circumstances and legal issues continue to evolve, we are available to help our clients and contacts in interpreting policy language and navigating related contractual issues.