April 2020 – Risk and crisis planning before an event or loss occurs is a multifaceted determination. As is apparent from the impacts now following from COVID-19, understanding insurance coverage that may be provided to mitigate loss is part of that critical undertaking. Though there remains a lack of clarity as to what the impact of COVID-19 will be on a macroeconomic basis to the U.S., its impact on a microeconomic basis to a single business is already clear and can be significant, even catastrophic. The experience from COVID-19 implicates both the analysis of whether existing insurance covers the loss already sustained as well as what insurance coverage a business may need to mitigate future risks. With respect to coverage potentially triggered by COVID-19, it can include commercial property (for loss and damage to the business), commercial general liability (for injury to others), workers compensation (both in terms of sickness to employees as well as injuries incurred by employees now working somewhere else than the work premises), event cancellation, directors & officers, errors and omissions, builders risk, sue and labor coverage in ocean and inland marine policies, ingress-egress, and employment practices liability. Undoubtedly, given the breadth and depth of losses occurring due to COVID-19, there will be claims and litigation pursuant to all these coverages. For those now having to review their insurance coverage, the determination as to potential applicable coverages can be tedious and difficult. With respect to the purpose of this report, the focus will be on potential insurance coverage available for business interruption, specifically lost income.
One obvious question related to lost business income due to COVID-19 is what can be done to replace it if the business was shut down for weeks or longer? If the business was not able to operate as it had, from what sources can lost revenue be derived? If business revenues are interrupted, can one potential source be the insurance coverage that was issued to that business? Recognizing that there will be many factors considered in making an insurance coverage determination is crucial. One might conclude there is coverage if: 1) the insurance policy has language including loss for business interruption/business income; 2) the loss occurred during the policy period; and, 3) the loss occurred in the coverage territory, which is a factor that may particularly arise with multinational locations and resulting revenue losses from several states or countries. Unfortunately, the answer is not necessarily straightforward. It is dependent both on the actual insurance policy language as well as the interpretation of that policy language which, in the United States, is typically under the state law applicable to that insurance policy. This latter point is important as identical language in a policy of insurance can mean different things in different states.
To begin with, in its simplest concept, an insurance policy is nothing more than an agreement by an insurer to provide insurance coverage in return for agreement by the insured to pay policy premiums and comply with the terms and conditions of the insurance policy. Like many things so simple in concept, a determination of coverage is not always so straightforward in application. As to an assessment of potential coverage for business income interruption, it is important to recognize that there are two general types of policies that can be involved. A “named peril” policy is issued to cover property damage and business interruption losses caused by specific perils listed in the policy. Unless there are words like “virus” or “communicable disease” listed as a covered cause of loss, as a general matter there likely will not be coverage under such policy for that loss. In contrast, “all risk” policies are issued to cover property damage and resulting business interruption losses unless the cause is excluded or limited in the policy. Unfortunately, even if the policy is one that is “all risk”, and “virus” or “communicable disease” is not excluded, the determination of policy coverage is not concluded. In fact, the analysis can become more nuanced. For example, depending upon how the loss is categorized by the policy coverage(s), there may be sub-limits, i.e. lower limits, that exist rather than higher limits that otherwise might appear established by the policy. As discussed in greater detail below, business interruption coverage may exist instead (or even also) by other coverages such as loss due to action of civil authority. It may exist if there is ingress-egress coverage. It may exist if there is event cancellation coverage. Given that there are various potential bases that can exist for business interruption coverage, one must also determine whether those coverages contain different insurance limits applicable to the loss. Even then, determination must be made as to whether there may be limitation on “stacking”, i.e. whether multiple claims may be made under different policy coverages.
A question that will be repeated in state and federal courts across this country will be whether business interruption arising from COVID-19 should be covered under insurance policies, even if revenue loss can be demonstrated to have occurred, on the basis that there was no direct physical loss or damage to the covered property. In other words, was the property, itself, damaged by presence of COVID-19? If not, there is potential for dispute as to whether coverage was triggered. Unfortunately, as noted above, this determination is impacted by variant state laws. In some states, there is law to the effect that bacterial water contamination, carbon monoxide, asbestos, fumes, etc. are “damage” to the property. In other jurisdictions, something closer to “structural” damage may be required. Regardless of jurisdiction, actual evidence that COVID-19 was physically present will be more persuasive than the argument that COVID-19 could have been present. If multiple locations for the insured exist, this issue can become even more deliberative, i.e. proof that COVID-19 was present at one premises may not be proof of damage to property at other locations miles away.
Another provision in an insurance policy that may provide a basis for coverage arising from COVID-19 arises from order by a civil authority to close. In context to COVID-19, such order would likely issue from state or local authority under its emergency powers. Be cognizant that there may be a difference for “acts” or “orders” by a civil authority to close versus “recommendations” by the civil authority to close. A civil authority “suggestion” or “recommendation” not to access premises is not the same as a civil authority prohibition to access premises. There also may be more than one act (order) by a civil authority that is pertinent to the determination. One act may not suffice whereas another act might, particularly if differentiation between “essential” and “non-essential” employees in the “act” exists. Of import, coverage limits applicable to business interruption loss due to act of civil authorities are often different than limits for loss due to communicable disease under the commercial policy coverages, if such coverage even exists.
Another potential coverage that may be applicable is the contingent business interruption coverage, which might be triggered, for example, if an entity in the supply chain is unable to deliver the product necessary for the insured to conduct business. Yet another coverage that may exist is extended business interruption coverage, which extends coverage for lost business income for an additional defined period after property is repaired.
For companies in certain industries such as hospitality and entertainment, event cancellation coverage may apply. Under event cancellation coverage, the policy may likely require that cancellation be beyond the control of the insured. There may likely also be a difference as to coverage for cancellation of a public event versus cancellation of a private event. An insurance policy may also provide ingress-egress coverage, which is similar in concept to insurance coverage for act of civil authority except that civil act is not required. Yet another factor to consider is whether the business may be an “additional insured” under the insurance policy of another business, such as a vendor or a subcontractor.
As is apparent, a business interruption loss may be covered under multiple policy provisions including, potentially, insurance policies of other businesses. In the context of COVID-19, consideration of all these concepts should be undertaken.
After a determination is made that coverage might exist under a policy of insurance, a review of conditions for and exclusions to coverage is required. Such a review must include also the applicable policy endorsements changing the policy terms. Coverage that might appear to have been given in one section of the policy may be taken away, or limited, in another section or endorsement. For example, language in one section of the policy that indicates that coverage might arguably exist for something like a virus may be more clearly excluded in another section of the policy, particularly the section entitled “Exclusions” or in an endorsement. If a court finds ambiguity in an insurance policy, the ambiguity will likely be read in favor of the policyholder, not the insurance carrier. Conditions required of the policyholder by the policy can also exist that limit or even defeat coverage such as the failure to mitigate the loss or the failure to give timely “notice” particularly if “prejudice” to the insurer can be shown. Moreover, the failure to preserve records, documents or evidence of the loss may also be in violation of conditions required under the policy.
With respect to coverage for COVID-19, existing insurance policies are already in place. Coverage determinations for those existing policies will be made from that policy language. Insurance policy provisions mean something. Sometimes they mean something different than one might surmise from a casual reading or from assumptions. Takeaways with respect to coverage under existing insurance policies for COVID-19 business interruption loss claims are: 1) obtain and review the complete insurance policies that can be applicable to the loss; 2) policy language interpretations can be nuanced and there may be specific meanings to words that are different than what common understanding might indicate; 3) policies issued to one business may likely be different than policies issued to another business. Do not rely upon determination of one policyholder’s coverage to conclude what policy coverage exists under a different policy, particularly if the polices are issued in different states; 4) even if there appears to be coverage provided in one part of a policy, it may be taken away in a different section or, in contrast, if there appears to be no insurance available for the loss under one coverage, there may be insurance established by a different coverage; 5) was there timely and sufficient notice of the loss as set forth in the policy?; 6) were necessary records and documents supporting the loss preserved? Are photographs or other verification of the loss available if conditions at the location could not be maintained? If the claim is premised upon a requirement that there be physical property damage, is there proof that COVID-19 even may have been present? If act of civil authority led to the loss, what was the “act”?; 7) is there potential coverage under another business entity’s insurance policy if, for example, there were others in the supply chain or subcontractors?; and, 8) if necessary, get early advice of counsel as to coverage determinations, notice that is required and documentation of the loss.
Separate from what has already happened due to COVID-19 and whether there is coverage under existing insurance policies, there are also takeaways for businesses looking into the future with respect to appropriate insurance coverage for future business interruption claims arising from virus, supply chain stoppages, cancellations, project delays, etc. One very important take-away is that insurance policies to mitigate business risks, to include business interruption, are not all the same with only price differentiation. Business decision-makers should have dialogue with their insurance broker or agent to ensure that the broker or agent understands what the company’s business is, what its risks are and which risks need to be mitigated, if possible. If appropriate, obtain confirmation that the state’s law interpreting critical coverage provisions comports to the risk sought to be mitigated. As is apparent from the discussion above, insurance policies, their coverages, and their interpretations are not the same nor is their interpretation necessarily the same in different states. With hindsight to the current situation, existing policies that were obtained may have been different had such dialogues with brokers or agents occurred. Learning from the current situation is one benefit from what otherwise has been a major impact on business by COVID-19.