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Maximizing Insurance Assets for Business Losses Relating to Coronavirus (COVID-19)

March 17, 2020

With significant business disruptions occurring as a result of coronavirus (COVID-19), companies should consider how insurance coverage, including business interruption, supply chain, and event cancellation coverage, can help mitigate losses.

Certain industries have seen significant business disruption, particularly those businesses immediately impacted by travel disruption, including airlines, cruise lines, hotels, entertainment, sports, and tourism-related businesses. Similarly, supply chains and manufacturing have been disrupted by facility closures worldwide. As COVID-19 continues to spread in the United States, greater losses may occur especially if extreme lockdown measures are taken.

Further, even if lockdown measures are not employed, potential liability risks exist for all businesses with regard to customers, employees, and visitors, including fans and spectators. There is not a sector or business that will not be impacted by and face potential liability or losses from COVID-19. It is essential for every business to use risk management tools in assessing potential liabilities—and insurance for those liabilities—to minimize losses resulting from COVID-19.

Insurance assets exist for certain losses resulting from COVID-19. The availability of insurance will depend on the provisions of the insurance policy and the facts of the case. However, if a business suffers losses for business interruption, supply chain disruption, event cancellation, exposure liabilities, and workers’ compensation for job-related exposures, an insurance specialist should be contacted to review your coverages. The specialist can determine if insurance for the insured’s domestic operations and properties as well as operations and properties in other countries may offset the losses.

Business interruption and supply chain coverages, including contingent business interruption, generally require a showing of physical loss or damage that gave rise to the loss. The coverages also may be triggered by local, state, or federal government orders or other actions of “civil authorities.” Additionally, some or all of an insured’s policies for its domestic or international properties may provide extensions for “notifiable disease” coverage. Although the ramifications of COVID-19 are causing the insured’s losses, the question will be whether the conditions for coverage have been established to trigger the coverage.

Insurance for Business Losses Relating to COVID-19

COVID-19 is having dramatic economic effects on the global economy, including in Asia, Europe, the Middle East, and the United States, and on industries as diverse as electronics, auto manufacturing, airlines, passenger cruises, shipping, travel, transportation, hospitality, healthcare, and event planning.

In recent years, the insurance industry has limited the available coverage for pandemic diseases. Further, one insurer has already taken the position that it intends to narrowly construe the coverage that it provided for losses arising out of “notifiable diseases” to exclude COVID-19 as falling within a category of excluded virus types in its policies, even though the exclusion does not reference the virus. The insurer’s preemptive position is telling, and informs policyholders that insurance claims relating to losses from COVID-19 will be evaluated strictly by insurers.

Companies therefore should take action to minimize their losses and to put forth the strongest insurance claims for losses resulting from COVID-19. Further, with the possibility of a second season of COVID-19 or even future pandemics, companies should make assessments now of their vulnerabilities and insurance that may address future losses.

A brief overview of insurance coverage that may respond to losses arising from COVID-19 follows.

Business Interruption Insurance

Business interruption insurance is typically a component of first-party property insurance. Business insurance coverage protects against losses sustained as a result of periods of suspended operation due to physical loss or damage. Contagious diseases, like COVID-19, may constitute physical loss or damage that triggers insurance coverage. It is possible that respiratory droplets produced when an infected person coughs or sneezes on property may constitute physical loss or damage. If physical loss or damage forces your business to shut down facilities and causes losses, then business insurance coverage may respond. But there are important limitations:

  • In recent years, insurers have added specific exclusions for bacterial and/or viral infections to their coverage and then added coverage back through a defined list of diseases. The specific wording of the exclusion and coverage added back for certain diseases will be determinative if coverage exists for COVID-19 losses. For example, an argument exist that viruses are not bacteria and, therefore, if your policy only excludes coverage for bacteria, coverage may exist for COVID-19 losses.
  • Insurers can also be expected to argue that other exclusions may apply to bar coverage. Once a claim is tendered, the insurer provides its reservations setting forth all of the potential coverage issues relating to losses. Insurers are starting to examine this issue and further information will be disclosed as insurers take positions in response to tendered claims.

Supply Chain Insurance

Supply chain insurance, also known as contingent business interruption insurance, protects against losses stemming from supply chain disruptions. Policies exist to cover interruptions of deliveries of raw materials, parts, or supplies. Specialized insurance has been written to cover certain industries, such as healthcare, hospitality, and pharmaceutical. Supply chain insurance covers losses, typically including increased costs, from lost or reduced operations resulting from physical damage on material or on the premises of an identified supplier. Like first-party property cases, some supply chain policies cover loss of services to the insured business, such as loss of utility services. Limited coverage may also exist for loss of markets for your own products.

  • Importantly, supply chain insurance generally covers only losses stemming from disruptions from specific suppliers scheduled in your policy.
  • Supply chain insurance also usually requires that the supplier suffer the type of property damage that would be covered in the insured’s own first-party policy. As discussed above, this would typically require physical loss or damage at the supplier’s facility to trigger coverage.
  • Exclusions noted above may be applicable to the supply chain coverage.

Event Cancellation Insurance

Event cancellation coverage may provide coverage for losses that are cancelled as a result of COVID-19. Typically, this type of insurance is specially purchased for a specific event. Like other insurance, coverage will depend on the exact wording of the policy and any potentially applicable exclusions. Before and after cancelling an event, a policyholder should review its cancellation insurance policy to make sure that it is complying with the requirements of the policy. Also, before purchasing special event coverage in the future, one needs to review the policy as it is expected that insurers will place exclusions that will preclude losses from a cancellation based on COVID-19.

Liability Insurance

All businesses face a risk of liability for failing to protect others from exposure to infection on their premises. Property owners, providers of healthcare, transportation, hospitality services, and retail establishments are particularly vulnerable in this environment. General liability insurance covers liability for bodily injury and property damage. The insurance also typically provides a defense obligation. If a lawsuit is filed alleging bodily injury from exposure to COVID-19 on your business premises, the lawsuit should be tendered for coverage to your general liability insurer.

Workers’ Compensation

Workers’ compensation insurance covers your employees who suffer injury or illness in the workplace. This coverage extends to injuries “arising out of or in the course of employment,” meaning that claims for compensation must allege work-related losses. In most situations, there may be uncertainty as to whether employees were exposed to COVID-19 through the workplace, with the exception of healthcare workers working around COVID-19 patients or a known workplace exposure. To the extent an employee is infected by COVID-19, the business should assist its employees with workers’ compensation claims and make a prompt, careful record of the time, place, and circumstances of the exposure to the extent that it can be determined.

How We Can Help

The Morgan Lewis insurance recovery team is ready to provide advice on ways to maximize your insurance assets arising from losses relating to COVID-19. If your business is suffering losses from COVID-19, Morgan Lewis can review your coverages to determine if the losses may trigger coverage in one of the policies, including the lines of coverage listed above. We can also provide advice on risk management, loss prevention issues, and proactive measures to minimize future losses, including counseling to take advantage of any and all available insurance coverages relating to COVID-19 or other infectious diseases.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Los Angeles
Charles Malaret
David Cox
Michel Horton

Washington, DC
Paul Zevnik
Daniel Chefitz
Jay Konkel
Brad Nes
Teri Diaz
Christopher Popecki

Philadelphia
Harvey Bartle IV

San Francisco
Jeffrey Raskin

Boston
Jeffrey Moss
Ariane Baczynski

Houston
Lauren A. McCulloch Semlinger