It is difficult to overstate the destruction and disruption caused in recent weeks by the COVID-19 outbreak. Federal and state governments have attempted to mitigate the social and economic damage by passing massive stimulus packages and issuing “shelter in place” orders. Despite these efforts, the spread of COVID-19 continues. Faced with ongoing losses and uncertainty over when the crisis will pass, many commercial insurance policyholders are examining their policies to determine whether they are covered for COVID‑related losses.
In this overview of potentially relevant insurance coverages, the following topics are addressed:
- Coverage-types that may insure against COVID-related losses;
- Potential obstacles to coverage;
- Best practices to follow in preparation for a potential claim.
Policies that May Provide Coverage for COVID-related Expenses
Policyholders should have all of their policies carefully reviewed to evaluate for potential coverage. The following are common sources of possible coverage for losses, but this is by no means an exclusive list.
Business Interruption insurance is primarily intended to protect policyholders against interruptions of, and disruptions to their business operations, and it is typically purchased as part of a commercial property insurance policy. Payouts are made for lost business income or extra expenses incurred, depending on the language of the policy. Importantly, coverage is typically triggered when the policyholder experiences “direct loss of or damage to” an insured property by a covered cause of loss. As discussed below, it is an open question whether the “physical loss” generally necessary to trigger coverage is caused by COVID-19 or the SARS-CoV2 virus.
A subset of this policy type, Contingent Business Interruption insurance covers losses arising from damage to a business’s customers or suppliers, such as input shortages and transportation delays. This type of policy is triggered by damage to facilities of those third-parties, rather than the policyholder’s. And depending on the situation facing a policyholder, this type of policy may offer another means to recoup losses stemming from COVID-19 or the SARS-CoV2 virus.
Civil Authority Insurance, another potential source of coverage, protects policyholders from losses that occur when a “civil authority” prohibits access to the policyholder’s property. Given the many “shelter in place,” “stay at home,” and similar orders currently in force across the country, this type of coverage is likely to be implicated. The wording of Civil Authority Insurance does vary, for example, as to whether there is a “physical loss” requirement and which type of civil order is necessary to trigger the policy, making it important for policyholders to review the specific language of their policy carefully.
As its name implies, All-Risk Insurance offers some of the broadest coverage available to policyholders. This type of insurance automatically covers any risk that the policy does not explicitly exclude. Accordingly, policyholders considering making a claim should review their policy for any of the potentially applicable exclusions discussed below, or other language that could limit their coverage. Another caveat – like the other policies discussed here, many All-Risk policies are only triggered by “physical loss or damage,” so policyholders should again consider whether that initial threshold is met.
Potential Obstacles to Coverage
“Direct Physical Loss or Damage” Requirement
As mentioned above, many of the policies that may extend insurance to COVID-related losses are triggered by “physical loss or damage.” This requirement leads to the question of whether COVID-19 or the SARS-CoV2 virus, even where its presence can be shown, causes physical damages or loss to property. Although COVID-19 has wrought enormous economic destruction, this is due largely to people’s reaction to infection and the risk of contracting the disease themselves, rather than to the virus damaging properties in the way a fire or hurricane would. Courts have interpreted the term “physical loss or damage” in somewhat analogous circumstances, such as those related to bacterial outbreaks and other forms of invisible contamination. Dealing with varying factual situations, courts have reached different conclusions as to whether there is coverage for losses caused by these types of conditions, which does little to definitively settle questions of policy interpretation. In light of this unsettled case law and likelihood of there being material differences in the operative policy language, the determination of whether a policy provides coverage will depend on the particular circumstances faced by each policyholder and the language in the policy itself.
Exclusions for Pollution or Contamination
Some policies contain exclusions for losses caused by pollution or contamination. Again, the issue of whether these exclusions will preclude recovery for COVID-related losses hinges on the precise language of the policy at is issue, and, like the “physical loss” requirement, this question has not been decisively settled. The presence of bacteria, for example, has not been uniformly categorized by courts as either coming within, or falling outside of exclusions for contamination. In light of the fact that “decontaminating” a property where COVID-19 is present may be as simple as wiping down affected surfaces with soap and water, it is unclear that courts will treat the existence of COVID-19 on a premises as rising to the level “contamination” or “pollution” necessary to trigger these exclusions. Any determinations of whether these exclusions apply will depend in large part upon the particulars of the coverage language at issue, state-specific court rulings, and the unique factual circumstances faced by the policyholder.
Exclusions for Viruses, Pathogenic Organisms, and disease
In the wake of the SARS outbreak in 2003, insurers began limiting their coverage of losses related to the spread of diseases, and by 2006 an exclusion for “Loss Due To Virus Or Bacteria” became standard in ISO policies. Unsurprisingly, policies that have this, or a similar, exclusions may not cover losses due to COVID-19. Despite coverage being potentially precluded, policyholders should still carefully determine an exclusion’s scope. Insurers use differing language within exclusions for diseases; some apply only to certain enumerated diseases, others exclude losses caused by bacteria, viruses, pathogenic organisms, or some combination of all three. A determination that COVID-19 is encompassed should rest upon specific policy language, not simply the exclusion’s title. Again, policyholders are best served by reviewing their policies to determine whether some version of this particular exclusion is in their policy and whether it applies to their losses.
Recommendations for Policyholders
Policyholders thinking of filing a claim with their insurer for losses related to COVID-19 should consider taking a number of steps as a matter of best practice.
- Review the policy
- Determine what notice conditions are required to comply with the terms of the policy.
- Document any losses related to COVID-19. These could include:
- Lost business income;
- Increased employee-sick leave or overtime;
- Expenses of decontaminating facilities;
- Price hikes for product inputs;
- Increased transportation costs;
- Consultant fees; etc.
- Retain information that will lend context to COVID-related claims, such as:
- Which employees test positive for or been exposed to COVID-19
- Were any changes made to corporate policies because of the risk of disease or governmental orders;
- How has pandemic affected customer and supplier relationships;
- Have business projections or future plans been changed due to COVID-19.
- Finally, make commercially reasonable efforts to mitigate the damage caused by COVID-19; these efforts should be documented as well.
While COVID-19 raises novel issues, many principles remain fixed. The language of the policy at issue, in conjunction with the facts, will be determinative of whether policyholders may recoup or minimize their losses from COVID-19. Business Interruption, Civil Authority, and All-Risk insurance policies are the most likely to provide coverage, although obstacles like exclusions for viruses and the requirement of “physical loss” may impede recovery. In these unsettled times, it is important to recall that as the COVID-19 spreads and it becomes necessary for policyholders to assess whether they are insured, immediate steps can be taken to preserve possible claims and maximize potential recovery.