The New Coronavirus and Your Business Insurance Coverage: Steps to Take NowWith developing news of the new coronavirus and its impact on worldwide business operations, here’s a quick reminder to those professionals in charge of risk management for their company. This health emergency will have direct and indirect impact on companies around the globe. From international shipping and travel to reliance on component parts manufactured in China, we may not understand the full impact for years. That said, there are a few things companies can do now to maximize recovery under their current insurance programs.

First, as always, read the policies and confirm what you have. Commercial property policies should provide business interruption and extra expense coverage that may be triggered. Civil Authority coverage may also come into play: Even without physical loss to the policyholder’s own property, there may be coverage for income losses caused by government shutdowns that impair access to facilities such as manufacturing plants or shipyards. And don’t forget contingent business interruption coverage. Even if your business doesn’t have property overseas, you can suffer a contingent business interruption loss if one of your suppliers is impacted by this health crisis. Insurers may try to deny coverage without proof of direct physical loss to property, but the coverage issues arising out of this type of event can be complicated and should be considered on a case-by-case basis. Finally, third-party policies could also prove significant if businesses face future scrutiny or litigation arising out of their response to the crisis.

Second, track any possible impact. A business loss as a result of an international virus outbreak may not be immediately clear or obvious, so some investigation or creative consideration may be required. What’s most important is identifying possible losses and tracking those scenarios as they play out.

Third, remember any notice requirements. Once there is a loss, the insurer needs to be put on notice in accordance with any requirements in the policy. And keep in mind that some policies may even require notice of circumstances that could lead to a claim or loss.

Fifth Circuit Decision Excluding Coverage under Pollution Exclusion for Damage to Stream Caused by Rock FinesIn a sweeping decision, the U.S. Court of Appeals for the Fifth Circuit extended the absolute pollution exclusion to the unplanned discharge of “rock fines,” pellets produced during quarry operations, and denied coverage for the cost of removing the rock fines and defending a state law claim against the insured.

The insured, Eastern Concrete Materials, Inc., operates rock quarries in New Jersey. In July 2018, anticipating substantial rain, Eastern Concrete began to lower the water levels in the settling ponds that hold rock fines. Rock fines are the smallest particles resulting from drilling, blasting, and crushing pieces of stone off the face of a rock formation. Due to an operational error, substantial amounts of rock fines were released into a nearby stream, causing “physical damage to the stream and stream bed by changing the flow and contours of the stream.” The New Jersey Department of Environmental Protection issued Notices of Violation and required Eastern Concrete to remove the rock fines and take measures to prevent downstream migration. The department also found Eastern Concrete liable for statutory violations, including violations of the New Jersey Water Control Act.

Eastern Concrete remediated and sought coverage under a commercial umbrella insurance policy that incorporated an absolute pollution exclusion with standard wording. Rather than provide coverage, the insurer instead filed a declaratory judgment action arguing that the pollution exclusion abrogated coverage. After a lengthy discussion regarding personal jurisdiction and another determining that Texas law governed, the Fifth Circuit turned to the coverage question. The court recognized that the rock fines posed “no threat to drinking water, not to anyone who would use the area for fishing nor to the fish that they might catch.” But then the court concluded that the rock fines are excluded contaminants when looking “at the effects on the overall ecosystem” because their entry into the stream negatively impacted the stream and rendered the stream unfit for use as a habitat for trout and other species. So, the pollution exclusion eviscerated coverage for the accidental release of rock fines into the stream. Presumably all sorts of stones, stone dust, and anything else related to quarrying could be next. Insureds with quarrying operations should take note and steps to preserve coverage, because this broad interpretation of the pollution exclusion could eviscerate virtually all coverage for accidents relating to quarrying if adopted by other courts.

Katherine Henry, the author, representing amicus Gases and Welding Distributors Association (the umbrella membership association for welding rod distributors and manufacturers) and the policyholder, Clendenin Brothers, Inc., successfully persuaded Maryland’s highest court that a total pollution exclusion in a commercial general liability policy did not relieve the insurer of its duties to defend and insure the welding distributor against welding liability claims. Ms. Henry was retained after the policyholder lost the case at summary judgment. She persuaded the district court to certify the question to the state court, and persuaded Maryland’s highest court to reverse the lower court ruling; she also recovered all damages and attorneys’ fees for her client. This case remains a landmark decision. Clendenin Brothers, Inc. v. United States Fire Insurance Co., 390 Md. 449 (Md. 2005).

 

Insurance Services Organization Revises Policy Forms to Address CannabisThe Insurance Services Office, Inc. (ISO), which develops standard insurance policy forms for use by insurers, recently released its first cannabis-related endorsements (Cannabis Endorsements) to the businessowner policy form. This new release provides five cannabis exclusion endorsements; two of the endorsements change property coverage for cannabis, and the other three endorsements change liability coverage for cannabis. As with any insurance policy or endorsement, understanding the specific language of these new cannabis endorsements is critical to any insured engaging in cannabis-related activity.

The ISO businessowner policy is a package policy that provides a number of property and liability coverages for businessowners. Historically, property loss of cannabis-related businesses was not “covered property” under the Property Not Covered provision of the form, which provides that covered property does not include “contraband, or property in the course of illegal transportation or trade.” For decades under federal law, cannabis was effectively “contraband” for insurance purposes by statutes such as the 1937 Marihuana Tax Act and the 1970 Controlled Substances Act. The 2018 Farm Bill, however, changed the legal status of hemp, cannabis with a concentration of no more than .3 percent Tetrahydrocannabinol (THC). Specifically, the Farm Bill amended the Controlled Substances Act and the Agricultural Marketing Act to remove hemp from regulation as a controlled substance.

With an increasing number of states legalizing marijuana for medical or adult use and the 2018 Farm Bill legalizing hemp (in certain circumstances), ISO recognized that cannabis-related property may no longer constitute “contraband” under the businessowners policy. Thus, ISO released five Cannabis Endorsements, which were approved for use in a majority of states in September 2019.

  • BP 15 30-Cannabis Property Exclusion
  • BP 15 31- Cannabis Property Exclusion with Hemp Exception
  • BP 15 32-Cannabis Liability Endorsement
  • BP 15 33-Cannabis Liability Exclusion with Hemp Exception
  • BP 15 34-Cannabis Liability Exclusion with Hemp Exception and Lessors Risk

The Property Exclusion Endorsements (BP 15 30 and BP 15 31) clearly exclude coverage for cannabis by adding the term “cannabis” to the Property Not Covered provision of the businessowner property form. The Liability Exclusion Endorsements (BP 15 32, BP 15 33, and BP 15 34) add a specific exclusion to the liability portion of the businessowner policy form that broadly excludes from coverage any bodily injury, property damage or personal and advertising injury arising out of a laundry list of cannabis-related activities.

The most important part of these endorsements is the broad definition of the term cannabis. Each of the Cannabis Endorsements defines “cannabis” as “any good or product that consists of or contains any amount of Tetrahydrocannabinol (THC) or any other cannabinoid, regardless of whether or not any such THC or cannabinoid is natural or synthetic.” The Cannabis Endorsements each specify that the term “cannabis” includes “[a]ny plant of the genus Cannabis L. or any part thereof, such as seeds, stems, flowers, stalks, and roots, or [a]ny compound, by-product, extract, derivative mixture or combination, such as (1) resin, oil, or wax; (2) hash or hemp; or (3) infused liquid or edible cannabis.” For purposes of the Cannabis Endorsements, hemp, including CBD derived from hemp, is cannabis and is excluded from coverage – unless there is an exception to that exclusion.

As noted by their titles, three of the five Cannabis Endorsements contain a Hemp Exception. Form BP15 31- Cannabis Property Exclusion with Hemp Exception adds “cannabis” to the Property Not Covered provision of the businessowner form, but then provides that this exclusion does not apply to goods or products containing or derived from hemp, including (but not limited to) the following:  seeds, food, clothing, lotions, oils or extracts, building materials, or paper. Similarly, the hemp-exception liability endorsements provide that the cannabis exclusion will not apply to liability for bodily injury, property damage, or personal and advertising injury arising out of goods or products containing, or derived from, hemp.

Businessowners operating hemp-related businesses should be cautious in reviewing their insurance policies to ensure that if their policies have been endorsed with any of these new ISO Cannabis Endorsements, each endorsement includes the Hemp Exception. Otherwise, under the broad definition of “cannabis,” an ISO cannabis endorsement without a hemp exception would exclude coverage for any hemp-related products.