Insurance Coverage for Covid-19 Related Losses
Jocelyn Whiteley | March 23, 2020
As the COVID-19 pandemic continues to ravage businesses in Seattle and around the globe, many are wondering whether commercial lines insurance may protect them against COVID-19 related losses. Fortunately for many, the answer may be yes. The viability of a given claim will turn on such factors as the policy’s insuring language, exclusions and endorsements, the governing jurisdiction, how the specific loss manifested, and perhaps some creative thinking.
For first-party losses, many businesses’ property insurance includes business interruption coverage, protecting them against income losses sustained as a result of disrupted operations. Other policies potentially contain more industry-specific coverages, such as coverage for losses incurred as a result of orders issued by the relevant civil authorities, contingent business interruption, and communicable disease/pandemic coverage. Certain businesses may also have purchased products specific to their operations, such as event cancellation insurance or trade disruption insurance. For third-party losses, liability insurance may protect business owners—particularly in the hospitality and restaurant industries—who face claims by infected guests or employees, who may alleged that the business failed to adequately protect them against or warn of the coronavirus. This article provides a high-level overview of the main coverages potentially available to protect your business.
Business Interruption Coverage
The largest category of losses businesses will experience as a result of the coronavirus are business interruption losses—restaurants and bars are ordered closed, airline flights are cancelled, retail shops are shuttered, and many projects requiring the physical meeting of people are sidelined. With much of the world at a standstill, businesses’ losses due to an inability to operate continue to mount.
Fortunately for policyholders, many businesses carry business interruption (“BI”) insurance as a component of their first-party property insurance or as a freestanding policy. That coverage generally protects businesses against income losses sustained when their business is suspended. While insuring language frequently varies, BI coverage is generally triggered by physical loss or damage to insured property. For example, a typical BI insuring agreement reads:
This policy insures against loss resulting directly from necessary interruption of business caused by physical loss or damage by a peril not otherwise excluded herein to insured property of the Insured, all subject to the terms and conditions of this policy.
Insurers will almost certainly argue in COVID-19 related claims that no “physical loss or damage” exists. In other words, we expect insurers to argue that the “physical loss or damage” trigger excludes intangible economic impact unaccompanied by physical damage to property.
Fortunately for policyholders, many coronavirus claims may clear this hurdle. Coronavirus within the confines of a workplace or business likely constitutes damage to the property. Further, numerous courts have found that “physical loss” occurs when property is rendered “uninhabitable,” or “unusable” for its intended purpose. Though the outcome of the following case examples are policy-language dependent, they are a useful tool in the policyholder’s tool belt when seeking coverage for BI losses.
Case Example One: Cat urine odor that entered the insured’s condominium unit from a neighboring unit may constitute physical loss or damage because the odor rendered the insured property temporarily or permanently unusable or uninhabitable. The court was clear that intangible changes to property, those that cannot be seen or touched, may also constitute physical loss or damage.
Case Example Two: Whether E. coli bacteria in a well on the insured’s property constituted physical loss or damage was a fact issue for the jury.
Case Example Three: The presence of a noxious odor from the “off-gassing” of sulfide gases and other toxic chemicals from “Chinese Drywall” constituted physical loss or damage. The court rejected the insurer’s argument that physical damage required some physical alteration or injury to the property’s structure. Instead, the court found “physical loss” because the building in question was rendered unusable by physical forces.
Case Example Four: Smoke from a nearby wildfire that infiltrated a partially enclosed, open-air theater constituted physical loss or damage. In rejecting the insurer’s argument that air was not “physical,” the court concluded that “while air may often be invisible to the naked eye, surely the fact air has physical properties cannot reasonably be disputed.” The court concluded that it was “undisputed that the interior of the building had to be cleaned, the air filters had to be changed multiple times, and smoke in the air within the theater had to dissipate before business could be resumed.”
Case Example Five: The release of ammonia refrigerant from a refrigeration system at the insured’s juice packaging facility constituted physical loss or damage because the ammonia rendered the insured’s facility physically unfit for normal human occupancy.
Similar to these examples, COVID-19 has resulted in the closure of thousands of businesses, as their premises are deemed unsafe or unfit. Although analogous to some law around the country, Washington has yet to issue a decision directly on point and policyholders are likely to face strong opposition from insurers, especially as the number of COVID-19 claims quickly mounts. Insurers may, for example, focus on the specific factual background of the claim (i.e., was an employee actually infected; how long does COVID-19 remain on surfaces; could daily cleanings have been sufficient) and cite specific exclusions, such as those for delay, loss of use, loss of market, etc.
Ultimately, BI insurance is a way to potentially recoup some of the losses businesses have sustained from COVID-19. A professional review of your specific policy language is the best place to begin.
Other Potentially Applicable Property Coverages
Some businesses’ property insurance may also include additional and significant coverages, among them civil authority; ingress/egress; contingent business interruption; communicable disease; extra expense; and preservation of property.
Civil Authority. This coverage is commonly included with BI coverage, and applies when a civil authority (i.e., a state or federal governmental entity) prohibits access to an insured’s premises due to direct “physical” (or sometimes “imminent”) loss of or damage to property other than the insured’s premises, from a covered cause of loss. In other words, if a governmental entity issues orders or directives that restrict your ability to operate, you may have a claim under your policy’s civil authority coverage.
Ingress/egress. Ingress/egress coverage involves the inability to enter or leave the insured premises. Some examples include customers not being able to access a store, a product is unable to be shipped out, or raw materials are unable to be shipped in. Ingress/egress coverage is similar to civil authority insurance in that both apply when access to the insured’s property is limited. The difference between these coverages is that ingress/egress coverage is not limited to circumstances where the government prevents access to the premises by way of law, ordinance, or emergency order. Said differently, a civil authority’s interference is not required for ingress/egress coverage to be triggered.
Contingent Business Interruption. Some businesses have purchased supply chain insurance or Contingent Business Interruption (“CBI”) insurance to protect against losses arising from disruptions in the supply chain. CBI coverage may apply to interruptions or delays in the delivers of goods or materials, parts or supplies, etc. CBI insurance covers economic losses, typically including increased costs, from lost or reduced operations resulting from physical damage on the premises of a named or unnamed supplier. For example, this coverage may be applicable if your supply chain is disrupted by a downstream supplier who is unable to fill your orders due to COVID-19 related issues. Limited coverage may also exist for loss of markets for your own products.
Communicable Disease/Pandemic Coverage. Especially in the restaurant and retail industries, certain policies may include additional coverage for “communicable disease.” For example, a typical “communicable disease” endorsement to BI coverage may read:
We will pay for the actual loss of Business Income you sustain as a result of having your entire ‘operations’ temporarily shut down or suspended by order from any local, state, or federal Department having jurisdiction over your ‘operations.’ Such shutdowns must be the direct result of an outbreak at the insured premises of a ‘communicable disease,’ such as, but not limited to, Meningitis, Measles….
In the same vein as “communicable disease” coverage, some polices in fact contain “pandemic event” endorsements. Coverage under such endorsements can be triggered by “infected person” entering the insured premises or an announcement by a public health authority that a specific location has been closed due to a pandemic event.
Extra Expense Coverage. Business interruption coverage often includes coverage for extra expenses the policyholder incurs in excess of normal operating expenses during the period of restoration. These expenses typically include generators, temporary office space and computer equipment, overtime wages, employee meals outside of normal workdays, and expediting expenses necessary to speed the replacement of machinery, equipment or other personal property.
Event Cancellation Insurance
Some insureds, particularly in the hospitality industry, may carry specialized Event Cancellation insurance. Generally, these coverages apply to losses arising out of the cancellation, interruption, or postponement of specified events caused by incidents outside the policyholder’s control. Such coverage may be written expressly to include specific insurance against cancellation because of infectious diseases.
Trade Disruption Insurance
Trade Disruption Insurance (“TDI”) protects against loss of earnings and extra expense incurred because of disruptions in the supply chain. TDI was originally designed to protect businesses from financial setbacks resulting from disruptions such as embargoes, confiscation of goods, terrorism, labor strikes, political violence, or war. TDI was also intended to protect companies from financial problems stemming from covered causes of loss, such as vessel breakdowns, port closings, waterway blockages, and natural disasters.
Commercial general liability insurance protects businesses against liability arising out of bodily injury or property damage and should respond to claims that a customer became ill on the business premises. If you are facing a claim that your business took inadequate precautions to protect or warn against coronavirus-related risks, your liability insurer may need to fund your defense and indemnify you for any resulting losses. Like other coverages, however, each claim is fact and policy language dependent. In addition to general liability insurance, many health care providers also purchase errors and omissions insurance, commonly referred to as hospital professional liability coverage. These policies may respond if a patient sues a medical facility, claiming that he or she sustained a coronavirus-related bodily injury.
Know Your Policy’s Time-Limitations
Notice requirements for interruption coverage may include brief windows for tendering a claim to the insurance carrier—oftentimes well before it is possible to assess losses related to an interruption. Even if you are not yet prepared to make a claim, it is critical to be aware of those deadlines.
We understand that businesses in Seattle and around the world are reeling from COVID-19’s economic fallout. Although we cannot guarantee a recovery, we are familiar with the issues and coverages relevant to COVID-19 losses, and have ample experience securing the benefits our clients deserve. If you have any questions, please feel free to reach out to Jocelyn Whiteley at 206-625-8600 or firstname.lastname@example.org.