March 23, 2020

Insurance Coverage COVID-19 Considerations

As the world attempts to navigate the mounting complications related to the coronavirus disease, we are here to address important legal considerations the insurance industry will face in the wake of this pandemic.  Touching every aspect of life, we can expect this virus, in turn, to touch every aspect of the insurance industry and business.  As a courtesy, we set forth the following more salient coverage issues to bear in mind as we move forward in potentially uncharted territory.

1.  COMMERCIAL PROPERTY COVERAGE

Typically, commercial property policies provide coverage for losses to the insured’s property in one of two ways: “all risks” or “named perils.”  “All risks” policies cover all physical loss to property unless the peril is specifically excluded.  “Named perils” policies, however, only cover losses for perils that are specifically identified in the policy.  Both policies require “direct physical loss of or damage to Covered Property.”  Thus, whether a property’s exposure to COVID-19 constitutes “direct physical loss” will be a threshold issue with respect to coverage.  

In the event a “direct physical loss” is found to exist, commercial property policies often contain exclusions for viruses and bacteria, which would likely apply to bar coverage. Pollution exclusions, which could arguably bar coverage for coronavirus property contamination claims, may also apply.

Business interruption coverage

Companies across the nation are experiencing breaks in their supply chain and temporary closures.  So, the question of whether business interruption coverage applies to the losses resulting therefrom is at the forefront of the minds of policyholders and insurers alike.

To begin, there are two types of coverage that could be implicated in these losses: business interruption coverage and contingent business interruption coverage.  Business interruption coverage provides coverage for loss sustained by the insured as the result of having to shut down abruptly, and contingent business interruption coverage applies when a policyholder experiences loss from the closure of its third-party supplier or distributor.  For either coverage to apply, policies generally require proof of a “direct physical loss” to property and a causal connection to loss of income.

Jurisdictions vary in how they define “physical loss or damage.”  In some jurisdictions, “physical loss or damage” requires tangible changes resulting in material damage to property.  Others jurisdictions have considered changes that cannot be seen or touched if there is a demonstrable alteration of the property.  Regardless, the insured bears the burden of showing that the damage constitutes “physical loss or damage.”

Closures of businesses due to the fear of COVID-19 may not constitute a “direct physical loss” to property, in which case business interruption coverage would not apply.  For instance, where a business property has been shut down for fear of spreading the virus, but the building remains habitable, there is arguably no direct physical loss to property.  However, if there has been someone infected with COVID-19, who has been inside the property and physically contaminated the building, this may constitute a “direct physical loss” to property. 

While legal precedent alone dictates that insureds face a heavy burden of proof in establishing that a sneeze or cough altered a property so as to constitute “physical loss or damage,” there is talk of state legislatures overriding insurance policy exclusions and limitations on business interruption coverage. 

Specifically, on March 16, 2020, the New Jersey state legislature considered a bill that would require property insurers to provide coverage to policyholders for COVID-19-related business losses in New Jersey.  The bill proposes application for the duration of the New Jersey State of Emergency.  If passed, this legislation would preempt explicit property policy exclusions for loss caused by viruses or bacteria.  If passed, it is very possible that other states will consider similar legislation.

Event cancellation coverage

From festivals to sporting events and everything in between, states and cities are issuing mandatory orders to cancel public gatherings.  The loss associated with these cancellations is tremendous, so considering the extent of exposure is critical.

Event cancellation policies often provide a list of covered causes for event cancellation. If the list includes communicable disease of pandemics, coverage for COVID-19-related cancellations may be available.  However, if the event is cancelled solely because of the fear of COVID-19, coverage is not afforded.

Generally, event cancellation policies do not respond when an event organizer makes a voluntary decision to cancel an event.  These policies respond when there is a legal or physical impossibility of the event going forward as planned.  Thus, if there is a governmental ban on large public gatherings, as is the case presently, which forces an organizer to cancel, it is more likely that coverage will apply to those losses.  That said, event cancellation policies typically require that the policyholder attempt to mitigate losses, e.g. make a good-faith effort to reschedule the event prior to its cancellation.

We note that there is a growing complaint among event organizers who, in light of COVID-19, recently purchased event cancellation policies, which included express communicable disease coverage for an additional premium charge.  These insureds are now discovering upon receipt of the actual policies that there is a specific coronavirus exclusion that was not disclosed, directly or by way of a reduced premium.  Insurers issuing such coverage may be in violation of state insurance regulations.  We expect to see this issue highly litigated in the future.

Civil authority coverage

Across the country, governments are mandating business closures to help slow the spread of COVID-19. With these closures, businesses will also seek coverage for their losses through civil authority coverage.  

Oceana Grill, a popular New Orleans restaurant, has already filed such a lawsuit.[1]  Oceana Grill-Plaintiffs filed a Petition for Declaratory Judgment, seeking a declaration that the Louisiana Governor’s and New Orleans Mayor’s orders limiting restaurant operations (which have since been further limited) trigger the civil authority provision contained in Oceana Grill’s Commercial Property policy.  Plaintiffs assert that the policy is an “all-risk” policy, which provides coverage for direct physical loss unless specifically excluded or limited under the policy.  Because the policy does not contain any exclusions for viral pandemics, Plaintiffs seek a declaration that coverage is provided for any future civil authority shutdowns in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the Coronavirus has contaminated the insured premises.

What is unique to civil authority coverage claims, and other property damage claims, resulting from Coronavirus losses is the difficulty insureds will face in showing direct physical loss to property.  Currently, it is unknown how long the Coronavirus can survive on surfaces or materials.  Some studies have shown up to 72 hours, while others indicate up to 28 days.  Significant litigation using expert scientific opinions to make this determination can be expected.  Even if a scientific consensus is reached that the virus has a short lifespan on surfaces, insured property still faces risk from re-contamination, which potentially could then fulfill the direct physical loss requirement.

A perhaps less scientific argument for policyholders is that the loss of functionality to property, caused by COVID-19 and governmental orders, is akin to direct physical loss.  However, there is legal precedent pertaining to the 9/11 terrorist attacks that indicates an insured is not entitled to coverage for lost earnings due to national disruption of flight service where the airline’s facilities were not damaged by the terrorist attack.[2]  Because of the unprecedented nature of COVID-19, the extent to which civil authority orders trigger coverage for property damage will be a highly litigated issue.

2.  EMPLOYER’S LIABILITY COVERAGE

Where there is an influx of workers’ compensation claims, employer liability claims are not far behind.  The Occupational Safety and Health Act (OSHA) requires employers to comply with specified safety and health standards, including a general duty to provide a workplace free from recognized hazards likely to cause death or serious physical harm.  OSHA has published COVID-19 planning guidance, urging employers to adopt its recommendations for identifying risk levels in the workplace and implementing appropriate control measures.   

Employer liability coverage is generally implicated when there is a claim that the employer’s negligence has caused an employee to suffer bodily injury by accident or disease.  Failure to take into account the recommendations and mandates set forth by federal and state agencies regarding COVID-19 and subsequent contraction of the virus by employees, co-workers or family members could trigger defense obligations under employer liability policies.  Although CDC and OSHA recommendations are not mandatory, there is a likelihood that these guidelines will be seen as the standard of care.

Nevertheless, employer’s liability coverage requires that the bodily injury be sustained during the course and scope of the injured employee’s employment, as well as to have been caused or aggravated by the conditions of that employment.  As with workers’ compensation claims related to COVID-19, we expect a showing that a claimant was exposed to the virus while working will prove difficult with many claims.     

3.  WORKERS’ COMPENSATION COVERAGE

Employees in some states are already filing workers’ compensation claims, asserting that they contracted COVID-19 as the result of their employment.  While state compensation schemes vary, generally an illness is compensable under a state workers’ compensation act so long as it is work-related.  The burden is on the claimant to show that exposure to a virus occurred during the course of employment, and that the conditions were specific to their work. 

Showing that exposure to the virus was sufficiently intertwined with their work will present a significant hurdle for employees who contract COVID-19 but work in a lower exposure risk environment.[1]  Employees in very high to high exposure risk environments who contract COVID-19, such as healthcare workers and medical transport workers, however, are far more likely to show work-relatedness.  We note that two state insurers, a Kentucky insurer and the Washington State Department of Labor and Industries, have already guaranteed that workers’ compensation benefits will be paid to healthcare workers and first responders.  Of course, workers’ compensation is state specific and compensability issues will be assessed on a case-by-case basis. 

Federal workers’ compensation coverage

The U.S. Department of Labor recently issued a statement regarding Federal Employee Compensation Act coverage for COVID-19, providing:

A federal employee who contracts the Coronavirus Disease – 2019, known as COVID-19, while in performance of their job duties would have the full coverage of the FECA for related medical treatment and for wage loss or disability related to that condition or associated complications.

The DOL further indicated the same requirements that apply to other occupational disease claims would apply here.  Employees still must submit a medical report from a qualified physician that reflects a positive test result for COVID-19, as well as establish that their exposure was employment-related.

Under the Longshore & Harbor Workers’ Compensation Act, claimants are often entitled to the presumption that an illness arose out of their employment.  Thus, in contrast to some state compensation schemes, which require the claimant to show that the disease arose out of their employment, longshore employees claiming work-related exposure to COVID-19 will likely face fewer challenges. 

4.  GENERAL LIABILITY COVERAGE

The possibilities for negligence claims and the contraction of COVID-19 are endless.  A recent newspaper headline underscored this fact, reading: “Grand Princess Cruise couple sues over ‘lackadaisical’ coronavirus response.”  The plaintiffs, who to date have not reported contraction of COVID-19, are asserting entitlement to damages for the cruise ship’s gross negligence in failing to take adequate precautions when it was notified that a passenger on the first leg of the voyage had fallen ill with the virus.

General liability insurance provides coverage for bodily injury claims resulting from the insured’s negligence so long as such arises out of an “occurrence,” which includes only accidents.  The intentional act of not relaying important information, as the cruise passengers allege, or of not adhering to the mounting federal and state mandates and recommendations that could have minimized the spread of coronavirus, is arguably not accidental.  Therefore, claims of this ilk may not be a covered “occurrence.”

Intentional becomes much less likely, however, as we consider instances where adequately-protective masks have not been provided and hospital personnel are passing the virus to people outside of the hospital or where short-staffed hospitals are prematurely releasing exposed staff from quarantine.

With older adults seeming to be at the greatest risk for adverse effects stemming from the Coronavirus, we can also expect nursing homes and senior-living facilities to face sharp scrutiny for their handling of this outbreak.  General liability insurance will be implicated in these claims.

Errors and omissions insurance

Medical care providers have in place Errors & Omissions insurance policies, which provide coverage for bodily injury that arises out of their providing or failure to provide certain medical care.  These policies generally exclude coverage for employees who sustain bodily injury during the course of their employment, including exposure to an infectious disease.  However, E&O policies may be on the hook for patients who claim a Coronavirus-related bodily injury as the result of medical providers’ actions.

Directors and officers insurance

As the stock market feels the effect of this pandemic, shareholders may claim that the acts or omissions of a company’s directors and officers are responsible for a Coronavirus-based loss in value.  D&O insurance policies expressly exclude coverage for any loss, including economic loss, which arises out of or is related to bodily injury.  Nevertheless, these exclusions are continually challenged and we will expect to see challenges persist. 

5.  MARINE INSURANCE

Marine insurance policies, including marine hull insurance, cargo insurance, protection and indemnity insurance, charterer’s legal liability insurance and loss of hire insurance can also expect to be affected by coronavirus-related claims.  With staff shortages and infected ports on the rise, voyage cancellation and delays in shipping operations will likely increase.  This, in turn, will bring about a variety of claims, including loss of hire claims, charter liability claims, cargo claims and demurrage claims, as well as possible personal injury claims.  Moreover, because of supply chain disruption and staff shortages, repair cost insurance claims will likely increase.  

Many marine policies have exclusions for virus and bacteria, pandemics, force majeure, and civil authority actions, which will serve as defenses to coverage.  We expect to see these claims litigated in the future. 

IN CONCLUSION: THE URGINGS OF CONGRESS

On March 18, 2020, members of Congress sent a letter to the Presidents and Chief Executive Officers of American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, Independent Insurance Agents & Brokers of America, and Council of Insurance Agents and Brokers urging their member companies and brokers, in the wake of COVID-19, to make financial losses related to COVID-19 and other infectious disease-related losses part of their commercial business interruption coverage for policyholders. 

These members of Congress pointed to the more than 118,000 declared cases in 114 countries, and the more than 4,000 individuals who have lost their lives to this virus.  The Members assert that business interruption coverage is triggered when the policyholder sustains “direct physical loss or damage” to insured property, and stress that many commercial property insurance policies also provide coverage for loss of business income due to a civil authority order that prohibits or impairs access to the insured property.  The Members urge insurers to consider the economic impact on American businesses, particularly small businesses, given the current shelter-in-place orders and mandatory curfews and all of those individuals who have voluntarily opted to shelter-in-place.  In closing, the undersigned members of Congress pledged their readiness and willingness to work with insurers on any future measures that might be necessary to see our country through this trying time.

We are closely monitoring the impact of this devastating virus and are here to guide you through legal issues as they may arise. 

Sincerely,  

Sid

Sidney W. Degan, III
Managing Partner 
E-Mail: sdegan@degan.com

DEGAN, BLANCHARD & NASH 
A PROFESSIONAL LAW CORPORATION
NEW ORLEANS | BATON ROUGE | LAFAYETTE
WEBSITE: WWW.DEGAN.COM 

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1 Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s, London and Governor John B. Edwards, in his official capacity as Governor of the State of Louisiana, and The State of Louisiana, pending in the Civil District Court for the Parish of Orleans, bearing case number 2020-02558.

2 See United Airlines Inc. v. Ins. Co. of the State of Pennsylvania, 439 F.3d 128 (2nd Cir. 2006).

3 See cdc.gov and osha.gov for more information on exposure risk.

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