Insurance Coverage in the Time of COVID-19

First-Party Property Insurance

First-party property insurance policies commonly provide insurance that covers businesses for the loss of income resulting from the suspension of their operations. The business interruption or business income insurance may extend not only to losses from the suspension of a business’s own operations but also to losses from the suspension of a supplier’s or customer’s operations (known as contingent business interruption insurance, dependent property insurance, or supply chain insurance).

There are a number of steps to assess whether this coverage will be available for losses.

The first step in any review is to determine whether a given policy is broad enough to cover a coronavirus-related loss. Some property insurance policies cover “all risks” except those that are expressly excluded. Other policies are written on a “covered peril” basis, which means they respond only to losses caused by specifically enumerated events.

The next step is to ascertain whether coverage can be triggered by the losses in question. Physical damage often is a prerequisite in first-party property policies. As a result, the exposure at issue must be tied to actual physical damage. Although we expect that many insurers will assert that the presence of the virus does not satisfy the requirement for physical damage, there are a number of cases, depending on the applicable law, that support the argument that the presence of the virus satisfies the physical damage requirement. See, e.g., Essex Ins. Co. v. BloomSouth Flooring Corp., 562 F.3d 399, 405 (1st Cir. 2009) (odor allegedly caused by defective carpeting in building could constitute “physical injury” to property); Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 406 N.J. Super. 524, 541, 968 A.2d 724, 735 (N.J. Super. Ct. App. Div. 2009) (recognizing that “physical damage” could include “loss of function or value”); Sentinel Mgmt. Co. v. N.H. Ins. Co., 563 N.W.2d 296, 300 (Minn. Ct. App. 1997) (ruling that contamination by asbestos “may constitute a direct, physical loss to property under an all-risk insurance policy”). This interpretation is supported by the fact that the insurers have specific exclusions for pandemics, viruses, and diseases. For policies that do not have such exclusions, the existence of these exclusions is evidence that the insurance industry recognizes that the presence of microorganisms may constitute physical damage.

Nonetheless, while the actual presence of the virus likely would satisfy the physical damage requirement, the suspension of operations as a precautionary measure may not be covered. Thus, the timing of a business’s closure may be key. Even absent physical damage at the property itself, however, there may be coverage available if a suspension of operations is caused because a civil authority or landlord prohibits access to the premises.

Finally, policy exclusions should be reviewed. In recent years, particularly after the Ebola and SARS outbreaks, some insurers added broad exclusions for communicable diseases and viruses. However, not all policies contain such exclusions; and although some insurance companies may attempt to rely on “bacteria” or pollution exclusions as a bar for losses, policyholders will have strong arguments that these exclusions do not apply to loss caused by COVID-19.

Cancellation and Travel Insurance

Cancellation insurance offers another potential source of insurance coverage for losses resulting from the cancellation of events. Such policies may cover both losses from incurred expenses and lost revenue from the cancellation of events.

The best practice is for policyholders to review these policies to assess whether coverage for communicable diseases is a part of this insurance. Some insurers sell coverage for “all risks” other than what is excluded, and some insurers sell specific policy endorsements to provide coverage for cancellations resulting from communicable diseases. But cancellation caused by viruses sometimes is not part of, or is excluded from, cancellation coverage.

D&O and CGL Insurance

Given the injuries and losses to date, and the creativity of the plaintiffs’ bar, there undoubtedly will be third-party claims that result from COVID-19. For example, companies and their directors and officers may face claims by shareholders and others based on allegations that they failed to disclose the risk of communicable diseases or failed adequately to prepare for them. Furthermore, retailers and hospitality companies may face bodily injury claims by customers and guests for failing to take proper precautionary measures to prevent the spread of coronavirus. Indeed, Princess Cruises already faces multiple multimillion-dollar lawsuits by passengers who were on cruises where COVID-19 was found.

Directors’ and officers’ (D&O) insurance policies provide coverage for claims made against the company’s employees for alleged wrongful acts committed in connection with business operations. The coverage also typically extends to claims against the entity, at least for certain types of claims. Although D&O policies often contain exclusions for bodily injuries, in the absence of a clearly worded and specific exclusion for communicable diseases, D&O policies may be a key source of protection for claims alleging economic losses.

Commercial general liability (CGL) insurance policies respond to claims by third parties for, among other things, bodily injury and property damage. Insurers may seek to assert pollution exclusions or “expected and intended” exclusions as a bar to coverage for these claims; but, again, absent an express and clear exclusion for communicable diseases, businesses should not assume that these exclusions apply. One important note is that although workplace injuries by employees generally are covered by workers’ compensation policies rather than CGL policies, bodily injury and property damage claims by employees’ family members likely would fall under CGL insurance. Businesses also should recall that coverage or other protection may be available through additional insured and indemnification provisions in their commercial agreements if a claim results from the activity of their contracting counterparty.

General Pointers

In assessing the scope of coverage for claims or potential claims, three points are worth remembering. First, insurance law is state-specific, so the result of the same dispute can vary depending on which law applies. Second, in most states, policy language is interpreted to protect the reasonable expectations of the policyholder. Thus, if the language is ambiguous and subject to two reasonable interpretations, courts will construe the language against the insurance company and in favor of coverage. Finally, courts typically broadly apply the obligation of insurers to provide a defense under their policies. Thus, if even a single claim or allegation potentially falls within coverage, under the law of most states, the insurer will be obligated to provide coverage. As a result, businesses should never assume that claims are not covered.

In the event of a loss or third-party claim, three considerations are important:

1. Provide prompt notice to insurance companies, keeping in mind that more than one insurance policy may respond to the same loss or claim.
2. Account for all losses and damages, utilizing consultants, accountants, and counsel when necessary.
3. In communicating with insurance companies, take care not to characterize a loss in an unfavorable manner.

Conclusion

The safety of businesses’ employees and customers is rightly the paramount concern now. However, in preparing to weather this unexpected crisis, management should not lose sight of insurance as a potentially important recovery source to offset losses.

Joseph M. Saka is senior counsel in Lowenstein Sandler LLP’s Washington, D.C., office. 

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