The spread of the novel coronavirus disease (“COVID-19”) and accompanying business closures have prompted many companies to inquire whether their existing insurance policies may cover some or all of their losses. Although many insurance policies, such as business interruption coverage, require physical damage, insureds should carefully review their policies to see what coverage, if any, applies. In any event, we anticipate that the issue of whether some or any of the insurance policies discussed in this article respond to claims will be the subject of much future litigation.
Below is an overview of some common insurance coverages that may respond to losses from the COVID-19 pandemic, as well as best practices to preserve possible claims. It should be noted that insurance coverage is highly fact-specific and depends on the specific policy language, surrounding circumstances and governing law.
Business Interruption Coverage
Business interruption insurance is written to cover lost income and extra expenses which occur from covered “perils” which typically include fire, windstorm, rain damage and other such perils as listed within the particular policy. While these policies are designed to provide coverage where businesses are unable to operate normally, in most policies unless there is “direct physical loss to property,” there will be no business interruption coverage.
Business interruption insurance may also cover losses resulting from loss of use of the property where the commercial property policy extends coverage to loss of ingress/egress from the insured property and the loss of ingress/egress is related to COVID-19. Thus, depending on the language of the policy, a quarantine order that prevents access to the insured property may trigger business interruption coverage.
New York, New Jersey, Massachusetts and Ohio have proposed legislation that would force insurers to retroactively cover business interruption claims resulting from COVID-19. The New York bill would apply to “every policy of insurance insuring against loss or damage to property” in place as of March 7, 2020 for businesses with less than 100 full-time employees. Also, under New York’s proposed legislation, insurers that pay out business interruption claims can seek reimbursement from the New York State Superintendent of Insurance.
Express Communicable Disease Coverage
Some specialty insurance policies contain express coverage for losses arising out of communicable diseases. Such policies typically cover losses for business interruption, costs of cleaning up a contaminated facility and the costs of disposing of contaminated materials. A communicable disease policy may also cover public relation costs incurred in connection with the COVID-19 pandemic. If a policy contains specific communicable disease coverage, it may negate the impact of any contamination exclusion, particularly if the exclusion is phrased to except “loss or damage otherwise covered” by the policy.
While some policies may have sub-limits for communicable disease coverage, these sub-limits may not apply where a communicable disease, such as COVID-19, leads to other losses covered by other parts of the policy, such as business interruption or contingent business interruption coverage.
All Risks Commercial Property Policy
Under an all risks commercial property policy, a common form of policy that covers all causes of property damage that are not expressly excluded, coverage may exist for the costs of cleaning up a property contaminated by COVID-19. It should be noted, however, that many of these policies contain exclusions for contamination by, among other things, viruses and bacteria.
Contingent Business Interruption
Contingent business interruption coverage, which is often offered as a component to a commercial property policy, expressly covers the policyholder’s lost profits and other economic losses that result from loss or damage to the property of a supplier (i.e., a third-party entity upstream in the supply chain) or a customer or client (i.e., a third-party downstream in the supply chain). Thus, if an insured’s supplier is shut down because of the pandemic resulting in losses to the insured, contingent business interruption coverage may be applicable for COVID-19 related losses.
Event Cancellation Insurance
Event cancellation insurance policies cover losses arising from disruption or cancellation of events due to circumstances beyond the insured’s control. The scope of such policies, however, depends on the specific policy language and many such policies contain exclusions for communicable diseases.
Civil Authority Claim
Civil authority coverage reimburses lost profits and other economic losses when a government entity has issued a legal order resulting in denial of access to the policyholder’s insured premises. Such coverage, however, typically requires physical property damage to a third-party’s premises which results in the denial of access to the insured’s premises. For example, a fire in a neighboring building that results in a court order requiring that the insured’s premises be closed.
Directors and Officers Liability
On March 4, the U.S. Securities and Exchange Commission issued a press release reminding companies to inform investors of coronavirus-related risks of which they are aware. Corporate officers and directors may therefore find themselves subject to claims related to a failure to adequately disclose risks associated with the COVID-19 pandemic. In such an event, Directors and Officers Liability policies may cover against such claims. Such policies typically cover the corporate entity for securities claims as well as claims against individual directors and officers, where “wrongful acts” are alleged. The term “wrongful acts” is typically defined broadly, as “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted.”
Commercial General Liability (“CGL”)
CGL policies typically cover losses that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which the insurance policy applies. Thus, third-party claims alleging injuries resulting from COVID-19 may be covered by a CGL policy. As with many of the other coverages discussed in this memo, many CGL policies contain express exclusions for communicable diseases.
Preserving Your Claim
It is important to timely report any claims to the carrier in order to preserve any potential coverage under the policy. Any claim will require clear and accurate documentation of the claim, including documentation of any decline in revenue or increased costs resulting from the COVID-19 pandemic such as (1) historical financial records and financial statements, (2) tax returns and (3) general ledgers.
The insured seeking recovery should also create a separate account of expenses incurred in connection with the claim as well as a financial forecast and budget based on historical financial performance to demonstrate the loss.
We hope that you stay safe and healthy throughout this crisis. If you need assistance or have questions during this evolving crisis relating to any insurance coverage issue, please do not hesitate to contact any of the attorneys in our litigation department.
In light of governmental mandates, the offices of Kane Kessler, P.C. are working remotely at full capacity. Our attorneys are available at all times through email, phone, and videoconferencing to address any of your legal needs and answer any of your questions.
For additional information about recent developments or any litigation issue, please feel free to contact Dana Susman (at 212-519-5136, firstname.lastname@example.org); Reid Kahn (at 212-519-5129, email@example.com); Arthur Rosenberg (at 212-519-5147, firstname.lastname@example.org); Jeff Daichman (at 212-519-5142, email@example.com); or any other attorney in our Litigation Department.