Declared a global pandemic by the World Health Organization on March 11, 2020, the recent outbreak of the coronavirus, COVID-19, raises significant questions for the insurance industry as it contends with claims by policyholders for business interruption and other losses related to the outbreak as well as related third-party claims. As the measures aimed at controlling the spread of the virus in the United States and globally continue to cripple the economy, businesses small and large will undoubtedly look to other sources, including their insurers, to shoulder some of their business interruption and other losses. In addition, policyholders may be subject to a variety of third-party liability claims related to COVID-19 for which they will seek insurance coverage.
Below we examine some of the insurance issues related to COVID-19 that insurance companies are likely to be addressed in the coming weeks, months, and perhaps even years.
Business Interruption Insurance
As a consequence of the recent governmental travel advisories and restrictions, the business closures aimed at controlling the spread of COVID-19, and the general downturn in business for many companies related to public fear over contraction of COVID-19, many businesses are likely to experience significant disruptions in their operations and revenue stream. Some of the coverage issues with respect to business interruption losses related to COVID-19 that are likely to arise include:
Physical Loss or Damage to Property. Business interruption insurance and contingent business interruption insurance are generally triggered only when the suspension in the insured’s operations is caused by “direct physical loss or damage” to property either, in the case of business interruption insurance, at the insured’s premises, or, in the case of contingent business interruption insurance, at the premises of the insured’s customer or supplier or to property on which the insured relies to attract business. In most cases, contagious diseases, such as the transmission of COVID-19 from person to person or even the presence of COVID-19 in the community at large, do not constitute “physical loss” or “physical damage” to insured property sufficient to trigger business interruption coverage. Actual contamination of property with the virus (as opposed to threatened contamination or fear of contamination), if proven, may arguably constitute “physical loss” or “physical damage,” such that if the actual contamination of insured property or the property of a supplier or customer causes the insured business operations to shut down and results in concomitant financial losses, business interruption insurance may respond. However, even then, there are important limitations on coverage discussed below.
Bacteria and Virus/Bacteria Exclusions. Some business interruption policies may contain bacteria or combined virus/bacteria exclusions. These exclusions, which generally bar coverage for business interruption losses resulting from bacterial or viral disease or illness-causing agents, were added to some policies following the SARS outbreak in 2003. It is important to note, however, that these exclusions are not universal. In addition, it is also important to understand that viruses such as COVID-19 are not bacteria, and therefore stand-alone bacteria exclusions may not apply. Exclusions that include both viral and bacterial pathogens likely will apply, depending on the specific policy language and the particular facts.
Pollution Exclusions. Business interruption coverage, particularly when included as part of a commercial all-risk property policy, may be subject to a pollution exclusion. These exclusions typically apply to losses caused by “pollutants”, “contaminants”, or “irritants.” Insurance companies likely will contend that the pollution exclusion bars coverage for COVID-19 related business interruption losses because a virus such as COVID-19 is a “pollutant” or “contaminant” within the scope of the pollution exclusion. If the term “pollutant” or the term “contaminant” is defined in the policy to specifically reference a virus, then the argument that the pollution exclusion applies to bar cover-age is substantially stronger. However, the terms “pollutant” or “contaminant” may not be defined in the policy and may not be defined to expressly include viruses. In these circumstances, there is no settled rule as to whether viruses are “pollutants” or “contaminants” for insurance purposes.
Civil Authority Coverage Extension. “Civil authority” coverage, a coverage extension provided under some business interruption coverage, generally covers business interruption losses caused by the action of civil authority that prevents access to the insured premises. This coverage generally requires that the restriction in access to the insured property be caused by direct “physical loss” or “physical damage” to property other than the insured property. As a result, where the federal, state, or local government restricts access to or from areas where active transmission of COVID-19 has been identified, an insured may argue that the “civil authority” coverage extension responds to its business interruption losses resulting from its inability to access the insured premises. The evaluation of coverage in such a circumstance depends on the specific policy language and the particular facts of the claim. However, a key consideration will be whether the business interruption coverage contains the exclusions discussed above, and if so, whether they apply to the “civil authority” coverage extension.
Communicable or Infectious Disease Coverage. Specialized coverage known as “communicable or infectious disease” coverage may be included in certain business inter-ruption policies sold to specific industries, such as the hospitality or healthcare industries. Such coverage may provide coverage for certain losses caused by “communicable or infectious disease,” including a virus, without requiring that there be “physical loss” or “physical damage” to insured property. Such coverage, however, may be subject to its own sublimit and may apply only to the extra expense associated with evacuation, disinfection, and testing after a building has been closed due to the introduction of a virus, and may not extend to any loss of income.
Workers’ Compensation and Employers’ Liability Insurance
A separate question arises with respect to claims against an insured business by employees who contract COVID-19 during the course of their employment. Two different types of coverage may be implicated by such claims, workers’ compensation insurance and employers’ liability insurance:
- Workers’ compensation insurance coverage is generally limited to the liability imposed on the insured business by the applicable state’s workers’ compensation law. Because the workers’ compensation laws in most states apply to infectious or contagious diseases only if the hazard of contracting such diseases by the employee is inherent in the employment, workers’ compensation insurance is not likely to apply to the majority of cases of work-related contraction of COVID-19. Such non-covered cases are likely to include an office worker who contracts the virus from a fellow employee or other cases where contraction of the virus is incidental to the workplace or common to all workplaces. In contrast, an employee who can show that he or she contracted COVID-19 because of an increased risk due to his or her occupation and can identify a specific event during the performance of his or her job that resulted in the exposure, such as a healthcare worker or first responder actually treating a patient with the virus, may have a stronger argument for workers’ compensation benefits.
- Employers’ liability insurance generally provides coverage to the insured business for liability to employees for work-related bodily injury or disease, other than liability imposed on the insured business by a workers’ compensation law. The claim against the insured business by the office worker discussed above or other employee who incidentally contracts COVID-19 at the workplace is more likely to be covered under the insured business’s employers’ liability coverage.
Other Liability Insurance
Commercial General Liability Insurance. Businesses also may face third-party liability claims from customers and other entrants to their premises that they failed to protect them from the exposure to COVID-19 on their premises. The businesses particularly vulnerable to such third-party claims include providers of healthcare, transportation, and hospitality services, as well as retail establishments. General liability policies, which generally provide coverage for bodily injury and property damage claims, may respond to these claims by requiring the insurance company to provide a defense and possibly indemnity.
Errors and Omissions Insurance and Directors and Officers Insurance. Professionals, particularly healthcare professionals, may face third-party claims related to COVID-19, such as the failure to provide adequate medical services or the failure to meet some other duty of care, which may be covered under their errors and omission liability coverage. In addition, a company’s directors or officers may be subject to claims by shareholders for financial losses resulting from their mismanagement of the company’s response to the COVID-19 pandemic, which may be within the scope of the company’s directors and officers policy.
As we as a society continue to address the short- and long-term impacts of the COVID-19 pandemic, the insurance industry will face a variety of insurance coverage issues related to COVID-19. Proactively understanding the nature of the losses and claims, and the attendant insurance coverage issues, likely to result from the COVID-19 pandemic will be key to effectively managing the insurance company’s response. Rubin and Rudman is prepared to assist. If you have questions about this Alert or any other topic, please contact your Rubin and Rudman legal professional:
Please note: This communication is for informational purposes only and should not be construed as legal advice, nor does it constitute a client/attorney relationship. Under the rules of the Supreme Judicial Court of Massachusetts, and in some other states, this material may be considered as advertising.