by Brian Katz and John Creevy

Businesses around the world purchase insurance in an attempt to recover from a catastrophe or event that causes their business damage. Usually, those catastrophes and events are weather or fire-related. However, every so often, a nonweather or fire-related event occurs that prevents businesses from operating as they normally due. There was the attack on the United States on 9/11, the SARS outbreak in 2003, and the Swine-Flu/H1N1 in 2009. Then there are smaller, more localized damages like an E.Coli or Legionnaires disease outbreak, chemical release or even the discovery of asbestos in a building.

Today, large and small businesses alike are dealing with the unprecedented losses associated with the current SARS-CoV-2 virus and the resulting disease, COVID-19. Those losses are in most cases the result of governmental orders which have shut down or limited the ability to conduct business, damage sustained due to exposure to the virus or precautions taken to avoid further spreading of the disease. Most businesses are looking to weather this economic storm by any means possible, whether through federal government loans, private loans, equity infusions, adapting their business models or seeking recovery of insurance proceeds through a businesses’ coverage. There are many factors to consider in determining if a business has the right to recover from its insurer for losses sustained as a result of COVID-19. Insurance coverage starts and ends with the language of the insurance policy and the individual state’s legal interpretation of previous cases involving similar language and facts.

Read the Policy
An insurance policy is made up of two primary documents: the policy itself and the declaration page. The insurance policy will contain detailed information regarding what is covered and what is excluded. The declaration page will provide the amount of coverage and an itemized list of the types of coverage. These documents should be read together to fully understand the policy, what is and is not covered and the dollar amounts of any coverage.

Each insurer has its forms, language, coverages, exclusions, examples and definitions that make up the policy, but most policy language tends to be similar. The similarity is the result of policy language created by the Insurance Services Office, Inc. (“ISO”), which assists insurers in drafting policies. The ISO gathers data from the industry, including information on millions of claims. This data allows the ISO to provide sample policy terms that anticipate likely risks.

Recognizing Risks
The insurance industry studies risk through claims history to help plan the coverage offered and the premiums charged. Similar to COVID-19, in recent
memory, the SARS outbreak in 2003 affected 20 countries before being contained, causing over 8,000 infections and nearly 800 deaths. The
H1N1 (Swine Flu) outbreak in 2009 resulted in approximately 60 million infections, according to the Center for Disease Control, causing over 274,000 worldwide hospitalizations (12,400 in the U.S.), and 150,000 deaths worldwide. ISO creates form language for insurers to address these risks as they become more prevalent.

Claim Notification
Once a business decides to make a claim, it is important to timely file that claim with the insurer. Most policies require that an insured notify the insurer “promptly” or “as soon as practicable.” The claim can be initiated by a call to the insurance agent informing them of the desire to make a claim under the policy. The agent will send the claim to the insurer and the insurer (or the insurer’s claims adjuster) will follow up with the insured to obtain more specific information about the business, the losses sustained and the causes of those losses. It is important for a business to be truthful and as general as possible with the insurer about the causes of the loss, which may be due to multiple factors. At this point, most insurers have fielded enough COVID-19 claims that they have created specific questionnaires seeking information from the business concerning dates of closure, causes of the closure, whether partial operation was allowed and whether COVID-19
infection was present in employees or customers.

The importance of making a timely claim for losses sustained as a result of COVID-19 is that if a business fails to do so, the insurer may later deny the claim or use the failure to notify as a defense if a lawsuit is necessary.

Insurance Coverage
All-Risk insurance policies will cover all risks and perils unless specifically omitted. Within an all-risk policy, a business has the option to purchase business interruption coverage for an additional premium. Typically, a businesses’ commercial property policy will be the policy to review to determine what coverages are available. Most policies will have coverage for “Business Interruption and Extra Expense” and “Civil Authority.”

Within the “Business Interruption and Extra Expense” portion of the policy, the hope is to obtain coverage for economic losses sustained when the business cannot operate fully. The lost income that can be recovered is typically defined as net income, and continuing normal operating expenses, payroll included, is labeled as “Business Income.” The period of loss for business interruption coverage ranges from a few months to twelve months or more.

In order to recover this lost income, the business must prove that the policy actually covers the losses due to COVID-19. The standard language that must be proven is “…the actual losses of Business Income you sustain due to the necessary suspension of operations during the ‘period of restoration.’ The ‘suspension’ must be caused by the direct physical loss of or damage to property at premises. The loss or damage must be caused by, or result from, a “Covered Cause of Loss.”

The biggest issue a business will need to prove in order to obtain coverage is evidence that the premises sustained a direct physical loss of or damage to the property from COVID-19. The law of a business’ state will ultimately decide that question. While the novelty and extent of the current COVID-19 pandemic means that there is little in the way of case law that specifically addresses coverage for this type of loss, there is reason for some optimism. Courts have ruled that E.Coli, ammonia release, asbestos, noxious odors, poisonous fumes, chemical infiltration, lead dust accumulation, electrical blackouts and other items on the surface may not seem to meet the definition of physical damage have been accepted by courts as causing direct physical damage. Also, concern about the health and safety of employees and customers due to possible COVID-19 infection in the area may constitute a loss or damage at the property.

If a business can prove that the COVID-19 caused the direct physical loss or damage to the premises, the business will also typically be entitled to receive the “extra expenses” incurred during the time it was restoring the property that it would not have incurred if there were no direct physical loss of or damage to the premises. This is called Extra Expense coverage and is specifically provided in many policies that cover business interruption.

If a business sustained business income and extra expenses due to governmental order closing the business, that business may have coverage under the Civil Authority portion of the policy. When there is an order by the government that shuts down or limits business operation and there is loss or damage to nearby property within a certain geographical area of the business, the business is generally entitled to receive the damages incurred under the Civil Authority provisions. The governmental orders issued by many states and municipalities classified the danger associated with COVID-19 due to the person-to-person spread of the virus and that the virus specifically caused property damage. This language is important since the government spelling out the physical damage to property as a reason for its order assists in forcing insurers to cover the losses.

The Civil Authority losses are more limited than Business Interruption losses because of the period of time for recovery. Generally, Civil Authority losses will not begin until 72 hours after the order is issued and will be limited in time, typically 30 to 60 days, with some policies offering different timetables. Each policy will also be specific about the geographical area in which the damage must have occurred. Policies have specifically stated anywhere from a mile from the business to the city limits.

Despite the specific language in most policies requiring direct damage to property in the specific geographic area in order to be able to recover under the Civil Authority portion of the policy, some courts have not enforced this requirement. Examples include an amusement park that was closed due to a mandatory hurricane evacuation order, where the hurricane did not make landfall and an order shutting down a movie theater due to rioting in the neighborhood.

There are also several other avenues for coverage that are policy specific and specific to a particular business. Those coverages include Dependent Property/Contingent Business Income, Communicable Disease and Contamination, Event Cancellation, Supply Chain/Trade Disruption, Ingress/Egress and Pandemic. These coverages are generally attached to the policy in a separate form or rider, and an additional premium amount is required for each.

Dependent Property/Contingent Business Income policies provide coverage where the direct physical loss or damage occurs at a location other than the business and the business is dependent on the damaged location to provide delivery of materials or services (suppliers), acceptance of products (shippers), manufacturers, transportation centers and/or power or water supply services. If the business is dependent upon any of these services and these services are damaged or inoperable, this coverage should apply. Ingress/Egress is a similar coverage in that if the business is prevented from accepting or sending goods or if customers and employees cannot safely access the business because the municipality or area around the business is unpassable, this coverage should apply.

Communicable Disease/Contamination, Event Cancellation and Pandemic forms and riders provide insurance coverage for those exact situations. An example of a claim for pandemic coverage already being paid is for the Wimbledon Tennis Championship. Wimbledon had purchased this coverage for about 2 million dollars a year for the last seventeen years and will receive approximately 141 million dollars for their claim due to the cancellation of this year’s Championship due to the current pandemic.

After determining that a policy covers a loss, unfortunately, the analysis is not complete. Insurers use specific exclusions to prevent losses from being covered. Those exclusions include, but are not limited to the virus, pollution/contamination, and bacteria exclusions. The specific language of each exclusion will determine its applicability to the COVID-19 situation. The exclusion most applicable for COVID-19 claims is the virus exclusion. The language of most policies does not indicate that the virus that causes COVID-19 is a pollutant or contaminant under the specific policy terms. Further, since the virus that causes COVID-19 is not a living thing, it will not be considered in the bacteria and microorganism exclusion, since both are living things.

The virus exclusion language was first proposed by the ISO in 2006 when it publicized to its insurance company members the “specter of pandemic” as a source of future business interruption claims. Insurers began routinely utilizing virus exclusion forms after the H1N1/Swine Flu pandemic in 2009. This virus exclusion generally exists as its form attached to the policy or can be part of the “Fungi, Spores, Bacteria or Virus” exclusion. Some virus exclusions apply to all forms and coverages in the policy, and some are limited to certain coverages. The language of the policy will govern.

Typically, the word virus is not defined in the policy, but insurers are repeatedly denying COVID-19 related claims in part because of the virus exclusion. It is tough to argue that COVID-19 is not caused by a virus. The argument for coverage will have to be more nuanced and dependent on policy language and the law of the state where the business is located. Some questions to consider: Is the loss really caused by or resulting from a virus infection or concerns about infection? Is the loss caused by a government shut-down due to the presence of a virus or to relieve pressure on the healthcare system?

Duty to Mitigate Your Losses
Each policy will have a provision that requires a business to do everything in its power to mitigate or lessen its losses. If a business has the opportunity to mitigate the loss and fails to do so, it will be prohibited from recovering that portion of the loss. Examples of mitigating losses are opening a restaurant for curbside pickup or delivery; working remotely when feasible; conducting business by video conference, and doing just about anything to help reduce the loss.

Documenting the Claim
When a business makes the initial claim, the losses will likely have just started and may not be complete for many months. Therefore, the business will not have the necessary information to document and support the claim initially. However, now is the time to collect the information necessary to prove the claim in court. That information should include the following:

  • Create a timeline that demonstrates dates of closure, governmental orders, presence of COVID-19 at the premises or in employees and important dates.
  • Save copies of all governmental orders and closure notices.
  • Save all business decisions to close and re-open the facility.
  • Save all correspondence to/from customers and suppliers
    regarding closure and re-opening.
  • Document new policies regarding employees (paid leave,
    remote work, etc.).
  • Save any pre-loss income and expense forecasts.
  • Maintain monthly profit and loss statements.
  • Document new sources of revenue.
  • Document lost revenue.
  • Document remote working expenses.
  • Create accounting codes for post-loss items.

Can Insurers Afford to Pay Claims
Nearly 6,000 insurers are operating in the U.S., collecting over one trillion dollars in premiums paid annually. Property and casualty insurance make up more than half of those premiums, totaling $618 million in premiums annually. The property and casualty sector has $1.7 trillion in cash and invested assets. In 2018, the property and casualty industry paid nearly $50 billion in catastrophe claims, and after operating expenses, their net income was $60 billion. It is estimated that businesses are sustaining $400-$500 billion in losses per month. This is ten times the amount paid in claims in 2018, and that is just for one month. So regular insurers cannot likely afford to pay all claims, but they do buy reinsurance, and the combination of the underlying insurers and reinsurers can likely pay a good bit of the claims that will be made.

Likely Outcomes
There is no quick fix with an insurance claim. Most, if not all claims, will be denied initially. Economic recovery for businesses will be the result of some variation of three possibilities. First, insurers will weigh the risk and cost of litigating the claims and may decide to pay certain claims or certain portions of claims to limit risk. An example that has already been accomplished is post-9/11. Despite the terrorism exclusions in many policies, the insurance
industry created a fund to help pay these claims after 9/11. Additionally, insurers may agree to pay into a fund to compensate all Civil Authority claims with a full release from the insured for any additional claims and hope that gets a good percentage of businesses to settle, thereby limiting their expenses and risk of losing a lawsuit. Second, the government may lean on the insurers to pay certain claims to infuse money into the economy and allow businesses to stay afloat. Several states and even the federal government have discussed legislation to force insurers to cover COVID-19 related losses. Finally, the insurers may not budge on their refusal to pay for any losses, deny all claims and all businesses are forced into litigation to recover under their policies.

The bottom line is that once a claim is made, it likely will be denied. If there is no other extra-judicial solution to the problem, litigation will take skill and patience with varying results from state to state and case by case.