Uncertainty abounds when it comes to the novel Coronavirus Covid-19, and the insurance industry is no exception. And while we find it personally humorous to see the number of people suddenly declaring themselves experts in an area with little to no case law directly on point, it is true that as businesses and workers face real economic effects from the pandemic, insureds are beginning to ask how their existing policies might cover them. All while insurers bone up on their coverage defenses. Like other folks, we have been doing our homework to prepare for the coming questions surrounding this new landscape and in the next weeks, we will examine how various types of coverage might apply to claims related to the virus and actions taken, or not taken, in response. While new territory, it is not completely uncharted, and we will do our level best to spot potential areas of conflict. We begin with the first coverage likely to come into dispute, Business Interruption Insurance.
The Basics
The insurance industry abbreviates Business Interruption as BI, but since so many of you are personal injury attorneys we will use “Interruption” to avoid confusion. Interruption coverage comes standard with most Commercial Property policies and provides for compensation for lost revenue due to a covered loss. Typically Interruption coverage breaks down into three types:
- Loss of revenue due to a covered loss at your property.
- Contingent Interruption, loss of revenue due to disruption in your supply chain. Often this coverage does not require a direct contract between your business and the break in the supply chain, and it can include issues relating to transportation of both goods and customers.
- Leader Property Coverage, for the resulting loss of revenue due to loss of a place that provides you customers. This is often described in terms of associated businesses like hotels, restaurants, and retailers that depend on the draw of bigger attractions such as theme parks, arenas, cultural centers, and transit hubs.
That sounds broad and reassuring, but there are potential hitches and hoops to jump through, even in the best scenarios.
For any Interruption claim, insureds must show loss of revenue, which means having your books in order. So if you don’t already have a system in place for comparing past revenue with current, now is a good time to get started (bookkeepers breathe a sigh of relief, your jobs should be pretty secure).
Insureds also must show that the loss of revenue stems from a specific covered loss since Interruption obviously isn’t intended to cover a business just not doing well. This is where things are going to get tricky, and we can expect a lot of creative mental gymnastics coming from both insureds and insurers as they apply their specific policy language. Please note that like with all claims, the exact relationship between the policy language and the details of the loss will be what determines coverage. So just because something might appear excluded or covered at first glance, a deeper look is worth it.
The Hurdles
The first thing to look for in your policy is whether it contains ISO form CP 01 40 07 06 which rolled out in 2006, with outbreaks very much in mind (the circular that accompanied its filing specifically name-checked SARS). This endorsement, titled “Exclusion for Loss Due To Virus Or Bacteria,” states in part: “We will not pay 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.” It goes on to specifically list Interruption among the types of coverage the exclusion applies to. Since this form first started appearing in policies almost 15 years ago, it is unfortunately likely that many insureds will find it in their own. But we have yet to have a widescale test of the endorsement’s language in courts, so all hope is not necessarily lost.
Absent the Virus or Bacteria exclusion, any other contamination exclusion will likely be raised, especially in cases where there is confirmed presence of Coronavirus. Courts in different jurisdictions have addressed the broadness of the term contamination in vastly varying ways, and we can expect this present argument to result in similarly different outcomes based on the applicable underlying case law in the respective jurisdiction.
The second issue almost certain to rear its head is what is a covered loss. Most policies directly tie a covered loss to a physical loss. So we can look forward to arguments over what constitutes a physical loss reaching obsessively intricate and obtusely philosophical levels. There is some case law on this already from various jurisdictions and finding the best fit of fact patterns will take dedicated journeys down the rabbit hole.
Mitigation will also likely come into play for businesses that are forced to close due to a confirmed case of Coronavirus in their building or amongst their workforce. Some policies have restoration provisions that hold coverage for 72 hours after a loss and limit the amount of time an insured has to fix the problem that has caused the interruption. These are typically worded in ways that invoke how long it reasonably should take, not how long it does take, to get back up and running. And while everyone currently writing on the subject is doing so in the hypothetical, some insurer-side articles have already begun dismissing the possibility of coverage outright because of this language, pondering how long it could reasonably take to wipe things down with bleach. This argument alone illuminates the concern insurers have about the coming wave of claims.
For those businesses that are shuttered as part of the effort to flatten the curve, a ray of light might be found in the Civil Authority provisions of policies. And some local officials seem surprisingly aware of the issues surrounding insurance, using potentially helpful language in public statements and orders. However, we can expect insurers to mount defenses to this as well. First, they will likely reiterate the argument that coverage must stem from a covered loss (read physical loss). Second, they will hitch their wagon to the assertion that Civil Authority provisions are meant to be reactive and do not cover costs linked to prophylactic measures. We can expect this line of reasoning to attempt to exclude coverage because the widespread measures being taken by authorities are to stem the spread of infections rather than in response to a proven presence of the virus at the insured’s business. That said this is a very different situation if a particular insured is ordered to shutter because of confirmed Coronavirus either at their facility or amongst their work pool, although we can expect insurers to revert back to other exclusions in that scenario.
There has also been talk of legislatures potentially passing bills that would mandate insurers cover Coronavirus related losses. That would open up a contract and constitutional can of worms that we won’t dive into here but might prove fascinating to watch play out.
Regardless of the new challenges presented by the pandemic, insureds must not forget about the aspects of coverage that are well-cemented. Unfortunately, like with any Interruption claim, many insureds that do succeed in getting losses at least partly covered will become intimately acquainted with the succubus known as a co-insurance penalty. Again, keep those bookkeepers at the ready.
For those fortunate to survive this pandemic with their business unscathed, it will be more important than ever to scrutinize policies come renewal time. Even if you do not currently have a virus exclusion attached to your policy, you can certainly expect it to appear. Also anticipated are a slew of new exclusions, and their accompanying coverage products, related to health emergencies. Much like newer coverages such as Cyber, these are likely to initially be unclear, ad hoc, and quite frankly clunky; with insurers attempting to plug holes as fast as insureds discover them.
Clearly there will be a lot for insurers, insureds, and coverage attorneys to research and argue about for the foreseeable future. And there is some existing case law that is relevant, if not directly, at least tangentially. But it is a mixed bag for insureds. As this area continues to develop, we will continue to monitor concrete outcomes as they become available. In the meantime, prepare for the predictable denials and defenses outlined above, and of course, wash your hands.