Potential Insurance Coverage for Loss Caused by COVID-19
I. Potential Business Interruption Coverage
In addition to the human wreckage caused by the novel coronavirus and COVID-19, the pandemic has inflicted great financial loss. Many entities have in place business interruption insurance which was purchased with the expectation that it would provide indemnification for loss arising from such unforeseen developments. This note addresses whether there is potential business interruption coverage for loss occasioned by COVID-19 and provides some practical tips to help policyholders maximize any such insurance coverage.
- Has the Virus Caused “Physical” Damage?
Business interruption coverage is typically a component of property insurance policies. In order for business interruption coverage to be triggered, there must first be “property” damage. However, courts have interpreted property damage broadly. If a building is rendered uninhabitable or does not otherwise serve its purpose, it can potentially be regarded as experiencing “property” damage. However, it could be that the actual presence of the novel coronavirus in the property (as opposed to merely the threat of contamination) needs to be demonstrated.
Assuming this initial obstacle is overcome, it is necessary to also demonstrate that the novel coronavirus is a “peril” recognized by the property insurance policy. Property policies can be either “all peril” policies (which provide coverage for all perils that are not excluded) or “named peril” policies (which sets out a closed list of named perils for which coverage is provided). The broader, “all perils” type of policy will, be definition, include the novel coronavirus. However, the policy may contain an exclusion for viruses (sometimes, the exclusion may be a part of the “pollution” exclusion). The narrower “named peril” type of insurance policy is unlikely to refer specifically to the novel coronavirus given its novelty (despite its kinship with SARS). However, the novel coronavirus may be encompassed in a “basket clause” (although this is unlikely).
- Special Types of Business Interruption Coverage
Property policies also have various “extensions”. For instance, a governmental order which closes down a building may trigger coverage, as may the lack of access to the building (sometimes called egress/ingress coverage). Moreover, there may be some coverage for “contingent” or “dependent” business interruption if there is a disruption to a supply chain or a third party on which the policyholder’s business relies.
Policyholders in various types of industries, such as hotels and restaurants, may have special coverage which supplements traditional business interruption coverage. For instance, there could be express coverage for loss arising from contamination (a classic example is a restaurant which suffers from an E. coli outbreak) or what is called “loss of attraction” coverage (an analogous situation is loss of customers due to a publicized crime committed at a hotel). Such coverage may be sub-limited (that is, it may be partially covered up to a lower “cap”).
Ultimately, the analysis will turn on the specific wording of the policy, particularly if the coverage was negotiated and departs from standard terms.
- Practical Considerations
Insurance policies contain time-sensitive notice requirements. It will be necessary to timely inform your insurers (usually through your broker) in order to preserve your coverage rights under the policy. Failure to do so can compromise coverage (although courts may provide relief from forfeiture in some cases for extenuating circumstances).
Proving business interruption loss will require diligent record-keeping. It is often advisable to engage accounting experts early on in order to better preserve and ultimately present any available insurance claim.
Efforts to mitigate the loss should also be undertaken and documented.
II. Event Interruption Insurance
The novel coronavirus has caused cascading cancellations of events ranging from conferences to concerts. Some entities may have purchased even-specific insurance, called event interruption insurance, to protect against this eventuality.
Like business interruption insurance, event cancellation insurance is typically structured as either extending to cancellations (or postponements) for all risks (subject to exclusions) beyond the insured’s control – hence, the similarity to force majeure clauses – or to cancellations arising from a closed list of specified perils. An exclusion for cancellations stemming from communicable diseases is common in event cancellation insurance. However, there is sometimes a “carve out” to the exclusion for cancellations necessitated by governmental orders.
Event cancellation insurance also usually has exclusions for cancellations due to poor anticipated attendance, so it will be necessarily to demonstrate the causal connection to COVID-19 as opposed to collateral reasons for the cancellation. It is important to carefully craft the announcement of the cancellation so that it avoids citing reasons that prejudice coverage under the policy.
Again, the event cancellation policy may have stringent requirements regarding the provision of notice to the insurance company (this notice should also be carefully worded), and demonstrating and documenting the loss will benefit from accounting expertise.
The novel coronavirus has inflicted great financial loss across various industries. Insurance coverage may potentially be available to mitigate some of that loss. Policyholders should collaborate with their risk department, broker, legal counsel and accountant to help maximize potential insurance coverage to alleviate the financial strain caused by the virus.