Insurance Coverage for COVID-19 Claims

April 3, 2020

The COVID-19 pandemic has impacted virtually every aspect of our everyday lives. No industry or market segment is immune from the challenges this event has presented. That includes, of course, the insurance industry. Not unlike the aftermath of a natural disaster, it is anticipated that insurers will be inundated with claims by persons and businesses who sustained losses as a result of the pandemic; indeed, such claims and even lawsuits are already being made. This brief article will summarize the current status of these claims and suits, legislative efforts to mandate insurance coverage and the key coverage issues under both first party and third party policies.

SUMMARY OF COVERAGE ISSUES

We anticipate seeing claims under both first party property policies and third party liability policies. The resolution of those claims will depend on the specific facts and policy language but the following is an overall summary of the issues both insurers and insureds will need to grapple with.

A. First Party Policies

Many businesses will be hard hit by the consequences of the virus and the "stay at home" orders. The losses and costs borne by impacted businesses include costs of sanitizing and testing their property for the presence of the virus and the loss of income during that process; loss of income from closures due to the presence of the virus at the property; business interruption/loss of income due to government-mandated closures and quarantine requirements; and increased costs and expenses because of the closure of a facility of a key customer or supplier.

As these losses mount, these businesses will look to their property policies for assistance. These policies traditionally cover losses caused by physical damage to insured property by an insured peril, or "direct physical loss." Where the property has not actually been infected with the virus itself but has sustained tangential financial losses, insurers can be expected to argue that there has been no "direct physical loss" to the property itself, thereby precluding any coverage under the policy. If the property was closed or suffered losses due to a positive finding of the presence of the virus on the property, insureds can be expected to argue that satisfies the "direct physical loss" requirement due to the mechanisms whereby the virus physically attaches itself to property. There are few non-virus cases that may support that argument but it remains an unresolved issue.

Many first party policies contain separate "Business Interruption" or "Business Income" coverage. As the titles suggest, these forms provide coverage for the actual loss of business income sustained due to the necessary suspension of the business operations. However, these coverages are dependent on there being a "direct physical loss" to the insured property. Thus, businesses forced to close as a result of an actual exposure to the virus will have a much stronger argument for coverage than businesses which closed simply to avoid an exposure from happening or to prevent the spread of the disease.

Many properties include so-called "civil authority" coverage. Generally speaking, this coverage applies when a civil authority (e.g., state, local or federal governmental entity) prohibits access to an insured’s premises due to direct physical loss of or damage to property other than at the insured’s premises, from a covered cause of loss. In jurisdictions that imposed "shelter at home" orders and shuttered "non-essential" businesses, impacted insureds may look to this grant of coverage for relief. In the context of natural disasters, courts have generally held that civil authority orders issued prior to actual, physical damage of an insured property do not trigger business interruption coverage. This may apply to a civil authority order prior to a COVID-19 infection. Moreover, even when a government order prohibits or otherwise specifically restricts access to an insured premise, the policy may still require a nexus to a direct physical loss before triggering coverage. There are other nuances to this coverage that may also drastically reduce the scope and amount of benefits available. It is important to evaluate the specific language of the policy in this regard.

Even assuming the prerequisites for these coverages are met, many policies contain a so-called "virus exclusion." ISO form CP 01 40 07 06 is titled "Exclusion for Loss Due To Virus Or Bacteria," and provides that there is no coverage for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. The exclusion specifically applies to the "business income" coverage discussed above as well as the "civil authority" coverage. Insureds whose policies contain this exclusion will be hard-pressed to find coverage for their COVID-19 related losses.

Finally, the ISO is in the process of drafting new business income endorsements specifically regarding COVID-19. We will report further on those developments.

B. Third Party Policies

Businesses may be subjected to claims and suits arising out of COVID-19 issues. The possibilities are endless, and include claims by individuals claiming to have contracted the virus (and resultant bodily injuries) as a result of actions taken or not taken by the insured; property damage claims; workers compensation claims by employees who contracted the virus during their employment; employment claims by employees whose employment was terminated; and claims brought by investors under D&O policies. In fact, a group of investors has sued Norwegian Cruise Line in a class action suit in Florida after news articles exposed the company’s alleged practice of lying about the severity of the disease in order to keep bookings, which caused the cruise line’s stock to tumble. The investors claim that they took financial hits due to the exposure of Norwegian’s alleged false statements to passengers that coronavirus wouldn’t affect their trips.

It is beyond the scope of this alert to analyze these wide variety of claims under all of the different liability policies that may apply. In general, CGL policies are designed to cover damages for "bodily injury" and "property damage" during the policy period caused by an accidental "occurrence." These policies should initially respond to such claims, depending on the nature of the insured's conduct, i.e., whether the conduct which caused the “bodily injury” or “property damage” was accidental in nature. CGL policies often contain pollution exclusions and "fungi and bacteria" exclusions, neither of which are likely to apply. California courts take a very narrow view of the former (even assuming a virus constitutes a "pollutant") and by all scientific accounts, a "virus" is not a "bacteria." However, many CGL policies have "communicable disease" exclusions which traditionally exclude coverage for injury or damage arising from “the transmission of a communicable disease.” This exclusion would likely apply to any COVID-19 third party claims. It should also be noted that D&O policies typically exclude coverage for bodily injury claims and would therefore be limited to solely economic losses, a risk excluded under CGL policies.

LEGISLATIVE ACTIVITY

In the face of these coverage hurdles, especially with respect to first party policies and the massive business losses expected to occur, a few state legislatures have acted to essentially "order" insurers to pay these losses regardless of policy language and exclusions. At the present time, the legislatures of New Jersey, Ohio, Massachusetts and New York have all proposed legislation that would override “direct physical loss” restrictions (and virus exclusions in some cases) and compel coverage for COVID-19 claims for business interruption and other first-party losses. These legislative proposals also provide for reimbursement to carriers for some payments that they would not otherwise have been obliged to make. On March 18, 2020, 18 members of Congress sent a letter to insurance industry leaders urging them to pay first party claims regardless of policy language.

Interestingly, the US Constitution, and many state constitutions, contain provisions preventing states from enacting ex post facto laws or other laws impacting the "obligation of contracts." It would seem that these legislative attempts to re-write insurance contracts will be subject to constitutional challenges.

COVID-19 COVERAGE LAWSUITS

In addition to the Norwegian Cruise suit mentioned above, lawsuits have already been filed against insurers in different states and venues. These include suits by restaurants in New Orleans and Napa Valley (the famous French Laundry restaurant.) Actions have also been filed in Texas and Oklahoma. Generally speaking, these actions are seeking judicial declarations as to the availability of coverage. However, a bad faith action was recently filed in Illinois by the Big Onion Tavern Group following the denial of coverage by Society Insurance Co. We will be closely monitoring these lawsuits as they will be testing many of the issues discussed above.

In closing, these issues are evolving on an almost daily basis and we encourage our clients to stay abreast of the developments in these areas as best as they can. If you have any questions regarding these issues or seek guidance with respect to COVID-19 related matters, feel free to contact Bryan Weiss. Our office remains fully operational to meet the needs of our clients during this unique time.

Click here to sign up for our email list to receive these alerts in the future.