MAXIMIZING INSURANCE COVERAGE FOR CORONAVIRUS-RELATED LOSSES
Businesses Should Act Now to Maximize Potential Insurance Coverage for Losses due to the Coronavirus Disease 2019 (“COVID-19”)Updated: 04/9/20 by Andrew Lamb
COVID-19 is causing massive disruptions. To date, there have reportedly been over 1.4 million confirmed COVID-19 cases and over 83,000 confirmed COVID-19 related deaths in over 200 countries and territories. And the United States and its territories have had a combined total of over 400,000 confirmed cases and over 11,000 confirmed COVID-19 related deaths—with confirmed cases in every state, the District of Columbia, and U.S. territories including Puerto Rico, Guam, and the U.S. Virgin Islands.
Many businesses are partly or entirely shut down, voluntarily or to comply with a government order. And many more are suffering significant losses. Although the federal government’s Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides for billions in loans to small businesses and distressed companies, some businesses will be ineligible for the loans or unable, even with a loan, to survive beyond the short term. In any case, businesses should not neglect possible insurance coverage. To maximize the potential for coverage, businesses should act now by following (as applicable) the seven steps listed below.
Businesses should begin by carefully reviewing their insurance policies in view of existing and anticipated COVID-19 related losses. Attorneys and risk managers experienced in handling insurance coverage issues should assist in this review, if possible, to ensure that relevant insurance is not overlooked or misunderstood. The review should identify among other things:
1. all significant, existing or anticipated, COVID-19 disruptions and losses;
2. all existing insurance that might to any extent cover those disruptions and losses; and
3. the likely extent of that coverage.
Some potentially relevant types of insurance are identified below. Reviewers should also watch for “manuscript” provisions. Such provisions, drafted uniquely for the specific insurance policy in question, might provide coverage beyond the coverage of ordinary form policies. But under any policy, the potential for coverage will depend on—and so the insurance review will need to analyze—the policy’s terms, the facts involved in any losses needing coverage, and governing law (statutes, regulations, and court opinions).
Although policies might contain exclusions that seem to bar COVID-19 related coverage, businesses should not automatically assume that such exclusions apply. As with other policy terms, the application of any exclusion depends on its precise language, related policy terms, the facts about the relevant losses, and the governing law. Exclusions alleged by insurers as plainly barring coverage have often been held by courts to be ambiguous and not to apply to the facts at issue. Moreover, local governments might attempt by law to broaden existing insurance, under policies of certain types, to help cover losses due to the COVID-19 pandemic—even if that means overriding exclusions. Massachusetts, New Jersey, New York, and Ohio legislatures, for example, have reportedly considered bills that, if enacted, would force business interruption insurers to provide coverage for COVID-19 related losses despite the existence of any “virus” exclusion (with the proposed relief in some cases being for businesses of a certain size or for business interruptions only during a declared state emergency), and a Puerto Rican legislator reportedly asked Puerto Rico’s insurance commissioner to order the same. Although any such measure would be hotly contested, it might secure coverage even under policies with seemingly applicable exclusions or other limitations.
Commercial property insurance policies often provide several types of potentially relevant insurance, including: (1) business interruption insurance (or business income and extra expense insurance); (2) contingent business interruption insurance (addressing supply-chain and customer disruptions); and (3) civil authority act insurance.
(1) Business Interruption Insurance
(Business Income & Extra Expense Insurance)
Business interruption insurance typically covers net profits and operating expenses, including payroll, lost during a specified period of suspended operations (a “restoration” period)—where the suspension is due to physical damage or loss resulting from a covered cause. Some courts have held that the physical damage or loss need not involve any visible or tangible property damage, as long as a covered cause makes the insured property temporarily or permanently unusable. “See, e.g., Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 805 (N.H. 2015)” (New Hampshire supreme court holding that “physical loss” to condominium unit, insured by homeowners policy, required no visible or tangible change but could occur if odors made “insured property temporarily or permanently unusable or uninhabitable”) (reviewing other court opinions with similar conclusions). COVID-19 is a physical virus that can contaminate physical property, making the property at least temporarily unusable. So, evidence that the virus contaminated insured property, requiring a suspension of business operations, might suffice to trigger business interruption coverage. In fact, at least one local government expressly referenced COVID-19 as having caused physical property damage as a reason for ordering the closure of businesses. See Broward County Administrator’s Emergency Order 20-01 (Mar. 22, 2020) (“[T]he virus is physically causing property damage due to its proclivity to attach to surfaces for prolonged periods of time.”). And any “extra expense” coverage might also apply to cover any added expenses of avoiding or minimizing the impact of any such suspension.
(2) Contingent Business Interruption Insurance
This insurance is like business interruption insurance, except that contingent business interruption insurance covers losses from a business suspension resulting from physical damage or loss suffered by others—typically, the insured business’s suppliers and, for some policies, its customers. This coverage might apply, for example, if business operations are suspended because a supplier ceased its deliveries while cleaning machinery to address evidence of machinery contamination by COVID-19.
(3) Civil Authority Act Insurance
Commercial property insurance often includes civil authority act insurance as an addition to, or extension of, business interruption insurance. Civil authority act insurance effectively allows business interruption insurance to apply where a civil authority bars access to the insured premises because of physical damage or loss due to a covered cause, but where that damage or loss is to property not insured by the policy (typically third-party property). So, if a COVID-19 contamination in one store of a mall has led a civil authority to order the entire mall closed, other stores might have civil authority act insurance for their resulting losses. This insurance might also cover a business’s losses as a result of a local or state government limiting, but not prohibiting, access to the business.
Specialized Business Interruption InsuranceSome businesses might have specialized insurance that provides business-interruption type coverage. Such specialized insurance includes:
1.trade disruption or political risk insurance;
2.event cancellation insurance;
3.commercial hospitality insurance;
4.healthcare insurance (sometimes added in commercial property policies by an extension); and
5.parametric insurance addressing pandemics or contagious disease events more generally.Trade disruption or political risk insurance is like contingent business interruption insurance and civil authority act insurance, but it insures for cases where the insured business is interrupted because supplies are delayed by foreign-government action or inaction. Insurance for event cancellations, commercial hospitality operations (such as hotels), and commercial healthcare operations might also include business-interruption type insurance. And parametric insurance might offer coverage triggered by a pandemic or similar health event.
Liability InsuranceBusinesses should also review liability insurance—not only to address any existing claims and liabilities related to COVID-19 but also to prepare for possible future claims and liabilities. Relevant liability insurance includes:
1.commercial general liability (“CGL”) insurance;
2.management and professional liability insurance, including directors-and-officers (“D&O”) and professional errors-and-omissions (“E&O”) insurance;
3.workers compensation insurance;
4.“umbrella” liability insurance; and
5.employment practices liability insurance.Liability insurance might help to cover a business’s responses to COVID-19 related claims. Examples of such claims include: claims alleging that the business should have done more to protect its customers, clients, or employees from COVID-19; claims that the business or its management should have better planned for a pandemic to protect shareholder investments; and COVID-19 related workers compensation claims.
STEP 2: SET AND FOLLOW COVERAGE-PRESERVING TIMELINES
As soon as possible, businesses should set adequate timelines—with deadlines for submitting to insurers timely coverage-claim notices and follow-on information, as well as earlier deadlines for collecting the information needed for those submissions. These timelines should be carefully followed. By way of example, property insurance policies typically require the submission of a signed and sworn “proof of loss” within a short time frame, such as within 60 days after the insurer requests it. Although insurers are often amenable to extending the deadline, the modification of any deadline required by a policy should be agreed-to in writing by the insurer.
STEP 3: COMMUNICATE TO PRESERVE COVERAGE
In handling the COVID-19 pandemic, businesses should act in ways that align with their strategies for maximizing potential coverage. Special care is needed in communicating with insurers and brokers. But all external messaging should be crafted to provide accurate information, while not unnecessarily jeopardizing coverage. Businesses should generally avoid stating publicly or to insurers or brokers that insurance for losses due to COVID-19 seems lacking—including while negotiating for future insurance. They should also avoid characterizing relevant facts in ways that might suggest a lack of coverage. Because of the complexities involved, COVID-19 management and communication strategies should be developed in coordination with attorneys and risk managers experienced with insurance cases.
STEP 4: MINIMIZE LOSSES AS MUCH AS REASONABLY POSSIBLE
To recover under most property insurance policies, businesses are typically required to minimize covered losses. For example, business interruption insurance generally requires insured businesses to act promptly:
- to make temporary repairs to damaged property;
- to incur expenses that will expedite the end of the business interruption;
- to secure alternate facilities or equipment, if that helps to mitigate the interruption; and
- to make use of available inventory. An unexcused, unreasonable failure to mitigate a loss could result in a loss of coverage.
STEP 5: PRESERVE INFORMATION FOR COVERAGE CLAIMS
Care should also be taken to preserve the information needed to assert strong insurance-coverage claims. Policy terms should be carefully analyzed to know what information a policy requires. As far as possible, all evidence of any related COVID-19 contamination—of the insured business, any supplier or customer, or anything else—should be secured and preserved, along with information on the contamination’s connection to any claimed loss. And key personnel should be identified and kept apprised of what information to preserve.
For any business interruption claim, it is prudent if not essential to preserve the following documentation (possibly among other documentation):
- the schedule for repairs or other restoration activities;
- the experience of the business prior to the interruption;
- the production and sales forecasts for the interruption period;
- the experience of the business during the interruption period;
- the net sales value of the products or services lost as a result of the interruption;
- the variable costs associated with affected products or services;
- the expenses incurred in mitigating the loss; and
- the value of production or sales made up through the mitigation efforts.
A professional analyst, such as a forensic accountant or public adjuster, can provide critical assistance in properly documenting losses and preparing insurance claims. Often the fees charged by such professionals for their claim documentation and preparation services are expressly covered under property insurance policies.
STEP 6: SUBMIT THE CLAIM
For a business interruption claim, the insured’s submitted claim or proof of loss (the submission documenting the loss) should typically summarize:
1.the period of the interruption;
2.the production lost because of the interruption;
3.the value of that lost production; and
4.the expenses incurred in mitigating the loss. The submission should also include all documentation supporting the claim’s components and stated amounts.
STEP 7: SEEK ADVANCES OF UNDISPUTED PORTIONS OF THE CLAIM
Insurers may provide advance payments of amounts claimed over which there is no dispute. So, if there is a dispute over part of a claim, the insured business should press for payment of the undisputed portion while that dispute is being resolved. Pressing for and receiving such advance payments can keep the insurer from using the insured business’s need for undisputed amounts as leverage to help resolve the disputed part of the claim in the insurer’s favor.
By taking these steps now in coordination with attorneys and risk managers, businesses can maximize the potential for insurance coverage that helps to offset COVID-19 related losses.
Please do not hesitate to contact us if you wish to discuss any coronavirus-related insurance issues.
Disclaimer: The article above is general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please contact WMC if you would like to request a case evaluation and are seeking specific legal advice on your case.