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Am I Covered? Business Interruption and Extra Expense Coverage for Clients Facing Losses Associated with Coronavirus (COVID-19)

Mon Mar 23, 2020

As this is a fast moving topic, please note that this article is current as at 3/23/20. 

With critical and time sensitive discussions happening in real time, and, evolving rapidly across the globe, Oles Morrison attorneys are addressing important client questions regarding insurance coverage relating to the coronavirus (COVID-19). While the federal and state governments are taking drastic action to help stop the spread of the virus, this client alert provides some practical steps business and construction clients can take now to help maximize potential insurance recovery with respect to claims relating to coronavirus.

1. Creating an Insurance Recovery Plan for Impacted Businesses.

To help position our clients to potentially seek any available insurance recovery at a later date, we recommend business and construction clients take the following actions now to help support a potential claim relating to COVID-19:

  • Review your commercial property insurance package for Business Income and Extra Expense Coverage. This is a separately elected coverage in addition to standard commercial property coverage.
  • Be prepared to put your insurer on notice of a claim or potential claim as soon as practicable after identifying business interruption as a direct result of COVID-19 – both preventative measures and actual infections.
  • Civil Authority/Emergency Orders are directly impacting business. If this occurs in your area:
    • Develop a detailed list of financial impacts your business is experiencing as a result of any civil authority or Emergency Orders issued that restrict access to an insured location;
    • Prepare a list of any civil authority or Emergency Orders or restrictions imposed by governmental authorities to help stop the spread of coronavirus;
    • Provide a detailed narrative description of how these various governmental actions are disrupting transit supply chains for materials, equipment, inventory, etc.
  • Direct business interruption may arise if you have a reported case of COVID-19 involving any of the following:
    • Your employee or a close relative of an employee;
    • Any of your office locations, job or project sites;
    • Any suppliers, customers or clients with whom your employee has had close contact.
  • Document any circumstances caused by third parties like vendors, suppliers, transportation providers that are tied directly to your business and its ability to meet contract deadlines and project requirements.
  • In addition to identifying the interruption and putting your insurer on notice, immediately begin tracking receipts and financial documents that support a claim of direct or indirect damage or losses at insured locations, job sites and project locations

It is imperative for insurance recovery purposes that you record any impact the occurrence of COVID-19 as outlined above may have upon your operations, revenue, and expenses. A good way to think about how to do this effectively is to treat it the same way you would if your business or property experienced a different type of catastrophic loss such as a windstorm or a fire loss. Taking the time to carefully track and categorize cost/losses as they are incurred will assist in timely submitting a claim.

2. What Types of Damages May Be Recovered Under Business Interruption Coverage?

COVID-19 losses may create many different categories of extra expense for businesses including:

  • Lost revenue and missed business opportunities due to delays, job site or project shutdowns, or other impacts caused by governmental and business reactions to COVID-19;
  • Expenses associated with having to work remotely due to civil authority and shelter in place orders to protect public health;
  • Salaries of employees who are ill with COVID-19 and absent due to civil authority requirements; and
  • Additional cleaning costs.

The list goes on. While most of these extra expense type of damages and business interruption losses are exactly the type of losses often considered recoverable under a first party property policy, coverage exists only if the underlying cause of these losses is a covered, and not an excluded, peril. A loss caused by a virus or pandemic may be specifically excluded under the policy or it may not be. Specific policy forms, endorsements and language contained in the policy will be key.

3. Will Your Business Interruption Insurance Be Triggered by COVID-19?

Many insurance industry analysts are predicting that property and casualty insurers are largely insulated from COVID-19 losses due to specific exclusionary language in property policies and the potentially onerous burden of linking the civil authority orders precluding occupancy of an insured job site or location to actual “property damage”.

a. Physical Loss/Property Damage

Insurance coverage extensions for such things as extra expense, business interruption or lost income, and denial of access to property by a governmental authority or due to mandated cleanup of a contaminant are typically tied to “direct physical loss or damage” by a covered peril.  However, courts across the country are split on what constitutes “direct physical loss.”  Whether there has been “direct physical loss” will require examining the facts of each particular case.  Some of the key insurance coverage challenges policyholders might face in this regard include:

      • Does the presence of a human virus or contagion constitute “direct physical damage to the type insured against” or simply “property damage”?
      • Does the inability to occupy an insured building, job site or location because of the presence of a virus constitute “property damage”?
      • What about mandated cleaning requirements imposed by civil authority to require specific types of cleaning of surfaces of shared equipment, walls, HVAC units, etc. where COVID-19 was found—are such costs a result of “property damage”?

b. Covered Cause of Loss – Exclusions and Potential Government Intervention to Protect Insureds

Many commercial property policies contain limitations and specific exclusions for “virus”, “contagion” or “pandemic”; however, many insurance analysts are predicting such coverage limitations will be immediately tested given the emerging nature of the risk and the fact some state legislatures have already taken the extraordinary step to pass legislation to alter these coverage restrictions. See New Jersey Assembly Bill No. 3488, bill introduced to force insurers to pay COVID-19 business interruption claims expressly excluded by ISO form virus exclusion.  On March 16, 2020, the New Jersey General Assembly passed Bill No. 3488 to force property insurers to cover business interruption losses arising from COVID-19. The bill applies to small businesses (defined in the bill as less than 100 employees working more than 25 hours per week). In a sweeping move, the bill forces coverage even where an insurer believes its’ policy should not apply in situations where the policy contains a specific exclusion for “virus” or “pandemic”. The bill applies to all property policies in effect as of March 9, 2020 and requires insurers to provide coverage for “business interruption due to global virus or pandemic. “

The new law renders invalid any exclusion purporting to provide coverage for business income resulting from “virus” or “pandemic”. This includes the common ISO CP 01 04 07 06 Virus or Bacteria Exclusion. The law also allows insurers impacted to apply to the New Jersey Banking and Insurance Commissioner for relief and reimbursement through a “special purpose apportionment” collected from all insurers issuing policies in New Jersey.  The New Jersey Senate must still act to enact the legislation, so this is an evolving situation we will be watching closely.

Although it is hard to predict what judges or a jury might do when faced with an unpaid claim for catastrophic business losses caused by COVID-19, the extreme nature of the damages suffered may lead to unpredictable results based upon the unique facts supporting these claims

Virus is a common property insurance exclusion, whether specifically identified or interpreted under a broader definition of pathogen, pollution or biological contaminant. Because not all property policies contain such specific exclusions, this presents another reminder to carefully read your policy.

Given the unique situation and the significant impact of such losses, it is not only likely, but certain, future litigation will challenge many of the policy defenses presented by insurers. Any successful claim requires the insured to carefully document and support all details supporting the claim.

As this client alert is being written, laws are being proposed in several states, in addition to New Jersey, to mandate coverage for COVID-19 related losses by insurers (who may later end up being reimbursed by those state governments) for certain sized businesses.

The coverage litigation over these issues is already underway, with lawsuits filed this week seeking Business Interruption coverage in the context of a forced closure of a business due to COVID-19, due to the “physical damage” to the property contaminated by the COVID-19 virus. Cajun Conti LLC v. Certain Underwriters at Lloyds, et. al. filed on March 16, 2020, (Civil District Court, Parish of Orleans, Louisiana).

The wave of insurance coverage litigation over business losses associated with COVID-19 is definitely coming. In fact, it is already here. Oles Morrison attorneys are prepared to advise clients on these rapidly evolving and complex insurance coverage issues associated with COVID-19 to maximize their ability to recover for business interruption claims.

Angelia D. Wesch, Partner, 206.467.5628

Michael J. Schmidt, Partner, 206.467.5628

This document is intended to provide you with general information regarding the impact of the COVID-19 pandemic. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact your regular Oles Morrison Rinker & Baker LLP attorney.