The effects of the unprecedented COVID-19 pandemic cannot be understated. No event in recent history has had such an impact on both the health and financial well-being of so many around the world. With stay-at-home orders in place in nearly every state, businesses are experiencing astronomical losses that are due to no fault of their own. Even with the historic relief package passed by the United States Congress, these businesses continue to struggle to make payroll, pay rent, and envision a path for the future.
For the businesses looking to their insurers for coverage for their losses, they likely will find an uphill battle. At the outset, following the SARS pandemic in the early 2000s, insurers began including Insurance Services Office (“ISO”) promulgated “virus” exclusions on their commercial property insurance policies. These exclusions are broadly worded and seemingly operate to negate coverage for any claims of damage to property or closure of businesses as a result of any virus, including the COVID-19 pandemic. The exclusion was part of a 2006 ISO circular and, simply put, the whole point was to bar coverage for contamination caused by disease-causing viruses. While there are some state legislatures (e.g.
, New Jersey, New York, Massachusetts, Ohio, Louisiana, Pennsylvania and South Carolina) considering and/or moving forward with legislation that would mandate coverage for business interruption losses, Texas, where freedom of contract typically reigns supreme, seems unlikely to follow suit. Whether such legislative efforts will pass or uphold judicial scrutiny remains uncertain.
Even if a virus exclusion is not included in your policy, most property policies and associated business income coverage forms require that the insured provide proof of direct physical loss or damage to the insured property. That is true in the context of business interruption, extra expense, and civil authority coverage (although civil authority coverage typically requires direct physical loss or damage to nearby property rather than the insured’s property). Whether the presence of the virus constitutes “damage” in and of itself is unknown. Fear of the possibility of the presence of the virus is likely insufficient. Further, while some stay-at-home orders specifically reference property damage or the likelihood of property damage because of the presence of the virus, the reality is that each insured likely will still have to establish physical loss or damage to its own property or nearby property (in the case of civil authority), so such orders do not appear to be the end of the discussion. Moreover, even if a property can be shown to be contaminated, and such contamination survives judicial scrutiny as “direct physical loss or damage,” issues will be raised as to whether any contamination can be removed with a deep clean that will, in turn, create issues as to time-element deductibles and the period of any covered delay.
The foregoing being said, there are a number of articles and webinars to be found around the four corners of the globe taking a bullish position on insurance coverage for COVID-19-related claims. We believe that some of the information contained in these articles and webinars paint too rosy a picture of the likelihood of recovery. At the end of the day, however, an insurance policy is a contract and the language of the policy likely will control the outcome. Thus, while we certainly do not agree with all the positions taken by insurers (e.g.
, claiming pollution exclusions are worded broadly enough to bar these claims), certainly other policy obstacles exist for securing coverage. Nevertheless, there is hope for some insureds, as not all forms are the same. As such, reviewing your actual policy language is critical
. For example, some policies include limited communicable disease coverage that might apply to losses associated with business closures attributable to a pandemic. Moreover, depending on what state’s law applies to your policies, prospective legislation may alter how the policies and certain exclusions are interpreted.
In short, we believe that there will be (and already is) strong pushback from the insurance industry with respect to COVID-19 claims. Some of the pushback is grounded on real obstacles depending on the policy language. We are continuing to monitor legislation, governmental orders, and (already filed) litigation as it relates to these issues. Further, we are available for reviewing and analyzing insurance policies in an effort to find coverage for our clients during these challenging times.
As this remains a fluid situation, anyone that has or anticipates losses due to COVID-19 should take steps now
in an effort to support an insurance claim. The most important steps are to promptly provide notice of the claims to the insurance company and to keep detailed records of all losses.
We have prepared a checklist
as a guideline for best-practices in putting yourself in the best position for making a claim.
One more thing: We have heard chatter of proposed federal legislation that would establish a reinsurance fund for COVID-19 (actually any pandemic or outbreak of communicable diseases) business interruption losses. The current draft of the legislation suggests the program would work similar to the Terrorism Risk Insurance Act passed after the September 11, 2001 terrorist attacks. The reinsurance program would mandate that coverage would apply to claims relating to a pandemic or outbreak of communicable diseases. Carriers would be required to sign up for the program to be eligible for the reinsurance proceed. Insureds would be required to pay additional premium for the coverage. Most importantly for purposes of the current situation, if passed in its current form, the program would apply retroactively to COVID-19 claims, voiding any exclusions that may limit or bar coverage. We will continue to monitor how this legislation progresses.
As noted in our previous blogs, we remain OPEN
during the COVID-19 pandemic and look forward to assisting you in any insurance coverage needs—from a safe 6-foot distance, of course.
Douglas P. Skelley