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The Novel Coronavirus (COVID-19) has already impacted the life of the majority of people in the world. The World Health Organization (WHO) has officially declared the outbreak as a global pandemic. Many businesses, large and small, have experienced an interruption to their business due to this virus. The losses we have seen, while significant for some, are simply the beginning of the bell curve. For many, the loss will be too great to return from.
This virus has and will interrupt supply chains, production, clients and revenue with almost no industries being left unscathed. Accordingly, there will likely be an unprecedented increase in insurance claims. Some insurance companies themselves and re-insurers may not make it through this either. Whether these claims will be covered depends on several factors beginning with the terms and conditions of specific policies, and the exclusions and riders defined by these policies.
Let’s back up a moment. Back in 2003 Severe Acute Respiratory Syndrome (SARS) put the insurance industry on notice when Mandarin Oriental International, Ltd. received $16 million from its business losses due to business interruption from SARS. Many carriers scrambled to update their policies to exclude certain types of communicable diseases. But many did not. And depending on the wording of those that did update their policies, coronavirus may still be covered. Policy language is going to be paramount as these terms are challenged in the months and years that lie ahead.
In another SARS-related case, the Court of Final Appeal ruled the insurance company’s liability was limited to the amount of disruption caused after the contagious disease was “required by law to be notified to an authority.”
This “trigger date” limits the amount of payment a carrier has to pay to the insured, even if the disruption began before the official reporting date. On January 8,2020, COVID-19 was included in the Prevention and Control of Disease Regulation 2020 and the Prevention and Control of Disease Ordinance, making it a notifiable disease.
The answer is twofold. Firstly, it depends. The policy wording has to be interpreted. And secondly – well, that is also, ‘depends’. These next few months are going to see legal challenges and legal precedents defining the landscape.
What are the specific clauses, endorsement and riders that will come into play?
Broadly speaking, ‘Business Interruption Insurance’ is a product that covers loss of income suffered by a business as a result of disruptions to their operations. The interruption of business typically is defined as such interruption that is caused by damage to property (caused by hurricanes or fire etc.). However, many jurisdictions have held that contamination and other incidents that render the property uninhabitable or otherwise unfit for intended use constitute “property damage” within the meaning of commercial property policies.
The Insurance Services Office (ISO) has defines ‘property damage as harm that is afflicted on someone’s property as a result of another person’s negligence, willful destruction of that person’s property, or by an act of nature.’
If, for example, fear that viral infection in the insured’s workforce causes the insured to close its doors and suspend operations, that should be a type of “property damage” covered under the insured’s business interruption policy. And, as discussed above, if the insured’s supplier shuts its doors for that reason, the insured should be covered for its resulting loss if it has contingent business interruption insurance.
In addition to Business Interruption Insurance, some policies include when there is a disruption in the supply chain. This is known as Contingent Business Interruption. Should a business need to shut its doors because of a shortage of supplies, this clause covers any loss of income from such disruption.
Also, many commercial property policies provide coverage for business income losses sustained when a “civil authority” prohibits or impairs access to the policyholder’s premises. Depending on its specific wording, a policy’s “civil authority” coverage often does not require that “physical loss” occur to the policyholder’s property. Accordingly, in the event that a federal, state or local government authority limits access to or from areas where active transmission of infectious disease has been identified, “civil authority” coverage may respond with insurance for the income losses of the affected business.
In many commercial property insurance policies, business interruption coverage is triggered when the policyholder sustains “direct physical loss of or damage to” insured property by a covered peril. This is not a separate insurance policy, but rather an additional coverage to an existing commercial property insurance policy. This type of coverage protects the insured’s lost revenues, rent or lease payments, relocation costs, employee wages, taxes, and even loan payments. And these financial losses will be covered during the time period it takes to restore business operations. In the event of a claim for coronavirus-related business interruption, certain insurance carriers may dispute whether this “physical loss” requirement has been met.
Policyholders should keep in mind, however, that courts across the country have not settled upon a uniform rule for when insured property has suffered a “physical loss.” Courts in a number of jurisdictions have determined that contamination and other incidents that render property uninhabitable or otherwise unfit for its intended use do constitute a “physical loss” sufficient to trigger business interruption coverage. The determination of whether “physical loss” has occurred will therefore continue to require a close examination of the particular facts of each case.
In addition, many commercial property insurance policies provide coverage for business income losses sustained when a “civil authority” prohibits or impairs access to the policyholder’s premises. Depending upon its specific wording, a policy’s “civil authority” coverage may or may not require that the access restriction result from “physical loss” by a covered cause of loss and, if so, often does not require that “physical loss” occur to the policyholder’s own property. The wording of the Civil Authority clause typically says, ‘We will pay for the actual loss of business income you sustain and necessary extra expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property . . . caused by or resulting from any covered cause of loss which prohibits access to the insured premises . . . The denial of access must be the proximate cause of loss of income.’
Accordingly, in the event that a federal, state, or local governmental authority limits access to or from areas where active transmission of an infectious disease has been identified, “civil authority” coverage may respond with insurance for the attendant income losses of affected businesses.
Here is an interesting read on Civil Authority. The proclamation was about a riot – but the same principles may apply. In Sloan v Phoenix of Hartford Insurance Company, 207 NW2d 434 (Mich App 1973), the city ordered all “places of amusement” closed due to riots and other civil disturbances. The insured sought to recover its losses under the business interruption policy which provided coverage for actual losses when, as a direct result of insured perils, access to the insured premises is prohibited by order of civil authority.
The court held that a plain reading of the policy would lead to the conclusion that coverage was provided when, as a result of a named peril, access to the insured property was denied. Since one of the insured perils was riot, and a riot ensued, prompting the city to require business closures, the court found that physical damage was not a prerequisite for the payment of benefits under a business interruption policy. See also Southlands Bowl, Inc. v The Lumberman’s Mutual Insurance Company, 208 NW2d 569 (Mich App 1973); Allen Park Theater Company, Inc. v Michigan Millers Mutual Insurance Company, 210 NW2d 402 (Mich App 1973).
This may be down the line – but we can position ourselves to capture this business. As the incidence of coronavirus illness increases, businesses—particularly those in the hospitality industry—could also face claims by infected guests that they allegedly failed to exercise reasonable care in guarding against, or warning of, the risk of exposure to coronavirus. Intended to protect businesses against third-party claims for bodily injury resulting from exposure to harmful conditions, Commercial General Liability (“CGL”) insurance policies should respond with coverage for these claims. Employees may hold their employers liable, especially if their responsibilities required that they go into the office, or have contact with clients or providers.