Insurance Coverage Considerations in the Age of COVID-19

The outbreak of COVID-19 has caused a significant economic impact for businesses across nearly every sector of the economy. The global pandemic has caused major event cancellations, disruptions to supply chains, businesses to go virtual – if not shuttered entirely – and countless numbers of employees to be furloughed, or worse. The economic effects of the virus are severe and will likely be felt by all Americans for a long time to come.

Now more than ever, it may be time to revisit your insurance policy to see to what extent unexpected losses resulting from COVID-19 are covered. While some insurers have begun notifying policyholders that few damages directly incurred by businesses are likely covered under typical business insurance policies, this may not actually be the case.

As with seemingly everything in this environment, we are in a rapidly evolving situation that remains fluid. As of the writing of this article, there has been increased pressure placed by lawmakers and regulators on insurers to go beyond the legal language of policies to offer relief to Americans from the mounting costs of shutdowns from COVID-19. In fact, there are currently at least three states that have proposed legislation forcing insurers to provide billions of dollars for business losses resulting from government-ordered shutdowns.

Documentation Is Key

We strongly recommend you sit down – virtually, of course – with an experienced insurance coverage attorney to carefully review the language in your policy. Further, to the extent you feel you may have a valid claim for lost profits and extra expenses arising from COVID-19, it is important that you substantiate your claim. To do so, the following actions are recommended:

• Track any occurrence of infection of an individual or reported viral contamination involving:
  • Your employee or a close relative to an employee
  • Your office and property locations
  • Clients with whom your employee has had close contact or who have visited your office recently
  • Project sites or other off-site locations your employee has visited recently
• Record any impact an occurrence, as listed above, has on your operations, revenues, or expenses, just as you would with a more traditional loss such as a fire.
  • Designate any extra expenses (e.g., cost of sanitizing insured property, equipment expenses from working remotely, etc.) for separate classification to be claimed.
• Document circumstances caused by operational decisions, orders of relevant governmental authorities, and impacts from other businesses, like vendors and transportation providers, that relate to the company’s inability to productively and efficiently meet contract or project requirements and client expectations.
• Provide blanket, or contract-specific if possible, notice to clients of disruptions to your operations caused by the coronavirus response.

Legal Strategies to Explore

Further, some legal doctrines businesses might explore to help provide relief for the economic damages suffered in this climate include the following. As with all legal strategies, before employing any of the below practices, consult with legal counsel first.

Business interruption insurance: Business interruption insurance covers the loss of income that a business suffers after a disaster or disruption in business operations. In an effort to stem losses resulting from the pandemic, businesses may consider filing a business interruption claim with their insurance. What losses are covered depends entirely on the individual policy. For instance, while policies may be similar, they may include different riders and endorsements. Many policies have virus exclusions, so it’s important to know what yours says. In order to make a valid claim, a business usually has to show that it suffered a “direct physical loss or damage to property.”

Earlier this month, a restaurant in Louisiana filed a case arguing it suffered direct physical damage to the property, in that employees who proved to have the virus actually contaminated the workspace, requiring the restaurant to shut down for decontamination. In this case, the insurance company could be liable for the cost of deep cleaning as well as loss of income. The premise of the claim is that health experts know the virus can survive on surfaces for up to 28 days. Further, health professionals have acknowledged the protracted waiting times to test potentially affected persons and obtain test results. This delay allowed the virus to linger and contaminate the physical space, the argument goes.

However, insurance companies may be less likely to entertain arguments for “presumed contamination” (i.e., injury based on the general knowledge (assumption) that the virus is omnipresent). Some insurance policies may cover government-ordered closures; others may not. Again, the language of the individual policy controls the claims businesses can file. Diligently document all losses, file claims, and await the response from the insurance company.

Force majeure clauses: In this unrivaled crisis, insurance holders may try to invoke force majeure clauses to escape certain contractual obligations. This French term, which means “superior force,” generally refers to uncontrollable events that make it impossible to perform under a contract. While there is no standard legal definition for force majeure, the language of a specific contract explains what events may allow a party to abandon the contract. Notably, force majeure clauses in contracts expressly exclude health crises. It is not clear whether federal, state, or local orders that prohibit or make difficult movement, the performance of certain services, and access to certain supplies qualify as force majeure. It is worth noting that parties to a contract cannot escape performance just because doing so has become too expensive. As such, we recommend that businesses notify their clients that the circumstances of the coronavirus pandemic may delay their ability to perform in accordance with the timeframe delineated by any contract, or the client’s expectations.

Given the swiftness and severity of the COVID-19 crisis, we are in an ever-changing environment, and strongly advise consultation with legal counsel to understand your options. If covered by your policy, the calculation of loss can be one of the most important and potentially contentious issues involved in making a business interruption claim. Keep good records, read your policy, and, as always, wash your hands!

Visit the KSM COVID-19 Resource Center