Beware of Insurers’ Attempts to Use Fear of COVID-19 to Deny CoverageAs COVID-19 leads to event cancellations worldwide, the insurance market is scrambling to minimize its financial exposure to event cancellation claims. Although we have seen event policies with COVID-19 exclusions and others with contamination exclusions that insurers will cite to deny coverage, many event cancellation policies lack these problematic exclusions. But insurers are turning to another defense by contending that cancellation based on attendees’ fear of COVID-19 does not trigger coverage and are doing so by relying on a line of property damage cases. Insureds should not be fooled by this strategy. Event cancellation policies do not require property damage to trigger coverage and thus do not raise the question of whether fear suffices for that coverage.

Insurers are racing towards a line of cases interpreting United Air Lines, Inc. v. Insurance Co. of State of Pennsylvania. These cases do not support the insurers’ position. In United, the airline sought coverage under its property policy for losses related to the government shutdown of air travel due to the terrorist attacks on 9/11.  The court said the shutdown was based on fears of future attacks, not on actual property damage, as required under the policy. Similarly, in S. Texas Medical  Clinics, P.A. v. CNA Financial Corp., in which the plaintiff sought coverage for losses caused by a hurricane evacuation order, the threat of damage was not enough:  “[b]ecause the mandatory evacuation order for Wharton County was issued due to the anticipated threat of damage to the county and not due to property damage that had occurred in Florida and the Gulf of Mexico, [plaintiff’s] business interruption losses are not covered by its policy with Valley Forge.”

For events cancelled before governmental orders precluding gatherings, insurers may cite this line of cases to deny coverage. But these cases are irrelevant to event cancellation policies. Not surprisingly, almost no published cases interpret event cancellation policies. And none address the issues raised by the COVID-19 pandemic. This is novel ground, and insureds should not accept coverage denials without close examination of their policies.

Bottom line: Don’t be fooled by insurers importing property damage cases into your organization’s event cancellation claim. Review the policy’s terms and insist on the coverage that you purchased.

The “Physical Loss” Requirement for Business Interruption Claims Amid the CoronavirusThe massive economic disruption caused by the novel coronavirus pandemic raises questions about insurance coverage for business interruption losses from communicable disease. Does viral contamination constitute the “physical loss” required to trigger this type of coverage? Although courts have not yet provided guidance specific to COVID-19, past rulings suggest that coronavirus contamination may constitute physical loss or damage triggering coverage for business interruption losses.

Business interruption (BI) insurance, also known as business income or time element insurance, generally provides coverage for lost income and continuing expenses while an organization’s operations are shut down or limited following physical damage from a covered cause of loss. A business that has been damaged by fire, for example, may utilize BI insurance to replace its lost income while repairs are made. Contingent business interruption (CBI) insurance covers lost income and continuing expenses following damage to another organization on which the policyholder’s business depends, such as a key supplier or customer. Although BI and CBI insurance exists in other contexts, such as cyber insurance, this coverage is typically obtained in conjunction with a commercial property policy.

To trigger coverage, the policyholder must establish physical loss to property from a covered cause of loss. Standard business income coverage forms generally require that the suspension of the insured’s operations must “be caused by direct physical loss of or damage” to the insured premises.  The location where the damage must occur varies depending on the type of coverage. For business interruption, the physical loss must occur to the policyholder’s property, whereas for contingent business interruption, the loss must occur to the supplier, customer, or other organization for which coverage has been obtained.

Case law suggests that the presence of contaminants may constitute “physical loss,” particularly where the insured’s property is rendered unusable. In Motorists Mutual Ins. Co. v. Hardinger, for example, a 2005 homeowner insurance case, the Third Circuit addressed allegations that the contamination of the insureds’ well by E. coli bacteria had rendered their home uninhabitable. The court found that E. coli bacteria contamination could constitute physical loss if the “functionality of the [ ] property was nearly eliminated or destroyed,” or if “their property was made useless or uninhabitable.”

While the novel coronavirus may present practical challenges in establishing the presence of contaminants, preliminary scientific evidence indicates that COVID-19 is highly contagious and can live on surfaces for days or even weeks.  The mere presence of individuals diagnosed with the coronavirus may be strong circumstantial evidence of contamination of the premises.

Even if contamination constitutes physical loss, communicable disease exclusions, such as ISO’s Exclusion of Loss Due to Virus or Bacteria, may eradicate coverage.

Given the extent of the impact from COVID-19 and the uncertainty of future developments in case law, policyholders should take all necessary steps to preserve the possibility of coverage, including closely monitoring potential impacts, tracking potential economic losses, and putting their carriers on notice of loss.

New Jersey to Legislate Business Interruption Coverage for COVID-19Commercial property insurance policies frequently include business interruption or loss of business income coverage when a covered “cause of loss” creates a slowdown or reduction in business income. Companies suspending operations due to the COVID-19 pandemic should assess the availability of insurance coverage for those losses, particularly under business interruption policies. Even if that coverage appears unavailable now, state legislation may provide relief to some insureds. Because coverage could become statutorily available, insureds should comply with notice provisions to preserve any available coverage.

A standard commercial property policy typically provides coverage for “direct physical damage or loss to covered property.” Income loss suffered by the insured because of direct physical damage may be covered by a business interruption provision of the property policy. Thus, while a coverage analysis necessarily requires consideration of the applicable insurance policies, a threshold question is whether COVID-19 has caused physical damage or loss. Even if so, coverage for COVID-19 losses may be precluded by a virus exclusion.

In 2006, largely in response to Ebola and SARS outbreaks, the Insurance Services Office prepared an Exclusion of Loss Due to Virus or Bacteria Endorsement (CP 01 40 07 06) that excludes coverage for loss or damage resulting from “any virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness, or disease.” Insurers may also use a similar exclusion issued by the American Association of Insurance Services (FO 0675 10 06), which excludes coverage for “loss, cost, or expense caused by, resulting from, or relating to any virus, bacterium, or other microorganism that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.”

New Jersey Bill A3844 would require property insurers to provide coverage to certain small businesses for COVID-19 business interruption losses even if the policy at issue contains a specific virus exclusion. The draft bill provides:

Notwithstanding the provisions of any other law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic . . . concerning the coronavirus disease 2019 pandemic.

The proposed statute would apply to property policies “issued to insureds with less than 100 eligible employees, in the State of New Jersey, and in force on the effective date of this act.” The term “Eligible employee” is defined by the bill as any “full-time employee who works a normal work week of 25 or more hours.” Upon enactment, the statute would be retroactive to March 9, 2020, when the New Jersey governor declared a Public Health Emergency and State of Emergency.

Bill 3844 was reported out of the New Jersey Assembly Homeland Security and State Preparedness Committee on March 16, 2020.  We will continue to provide updates on the status of this and similar legislation related to insurance coverage for COVID-19 losses. In the meantime, all businesses with business interruption coverage should take steps now to protect the possibility of coverage for such claims, including documentation of lost profits and other costs incurred, as they address this rapidly evolving situation.