Insurance and COVID-19: Are We Covered?

03/18/2020 / Chris Yetka and Paul Smith

For a period of time now businesses have seen the effects of COVID-19 on supply lines and suppliers. But now that the virus has been officially labeled a pandemic, and businesses are being asked to shut their doors to effectuate social distancing, will insurance be the last bulwark against financial harm? The answer, as always, depends.

There are generally two types of claims that businesses will deal with. One is third-party claims brought by others seeking recovery due to some perceived shortcoming on the part of the business. The other is first-party losses suffered directly by the company. How can COVID-19 play into these two concerns and what are the implications for insurance?

Most businesses will carry Commercial General Liability (CGL) insurance to deal with third-party claims. But what are the issues relating to disease? If a business simply fails to fulfill contracts, an argument for coverage may be difficult. Most policies contain “business risk” exclusions that expressly exclude coverage for breach of contract damages. However, if a business is sued because it allegedly failed to protect against transmission of disease, or caused another company to have to shut down its offices, there is a strong argument that coverage would be provided under the Standard CGL policy. The normal language of the policy provides coverage for “sums the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’”. “Bodily injury” is usually defined to include “sickness or disease”, and “property damage” usually includes ‘loss of use of tangible property that is not physically injured.” There are exclusions that insurers could point to, like the pollution exclusion, and some policies have specific exclusions for infectious disease. A close review of your policy is important.

The bigger risk is likely the first-party loss caused by businesses being shut down entirely, or significantly curtailed. This is just the type of loss that business interruption policies were created to address. The problem is that unlike CGL policies that are pretty uniform, there is a significant amount of variance in the language of business interruption policies. Generally, these policies are meant to cover the loss of business income along with extra expenses that are occasioned by a covered cause of loss. What causes trigger coverage can vary from insurance form to insurance form. However, nearly all policy forms require some form of damage, which is often undefined. The Oxford English Dictionary defines ‘damage’ as ‘Harm or injury impairing the value and usefulness of something or the health or normal function of a person’. Additionally, the Insurance Services Office “Business Income” form (CP 00 30 04 02) provides additional coverage for losses “caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than the described premises, caused by or resulting from any Covered Cause of Loss.” The coverage requires damage to property and a covered cause of loss, which will depend on the language of your policy, but clearly there are strong arguments for coverage.

The process of policy interpretation has already started. The Oceana Grill restaurant in the French Quarter of New Orleans commenced, what is believed to be, the first case seeking a declaration of coverage for COVID-19 caused losses under a business interruption policy. Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana. The restaurant’s policy covered “direct physical loss unless the loss is specifically excluded or limited.” It also included an extension of coverage “in the event of the businesses (sic) closure by order of Civil Authority.” The Oceana Grill’s Complaint argues that the virus causes direct physical loss to the affected premises in that the virus infects and stays on the surface of objects for an extended period of time and that contamination of the premises constitutes direct physical loss requiring remediation. Taking the argument one step further, they asserted that if the restaurant is shut down because of the presence of the COVID-19 virus in other restaurants, then they are entitled to coverage for losses under the Civil Authority coverage extension. It is important to note that the Oceana Grill’s policy did not contain a “virus” exclusion. The most important point is that the policies and circumstances differ. Making an informed decision regarding the availability of coverage requires an analysis of both.

Given the breadth of the current pandemic, the best time for a review and assessment of possible insurance is now so you can make a timely claim if and when losses arise.