In recent years, the insurance industry has cut back on coverage available for pandemic diseases, introducing new or broadened exclusions, and applying strict sublimits to contain insurer exposure. Nonetheless, pockets of coverage continue to exist. It is important to make an assessment now of your own business’s vulnerabilities and of the insurance you may have to address future losses. Now is the time—before the pandemic potentially expands and pricing or terms limit available coverage—to assess whether it makes sense to purchase additional coverage, if it is reasonably available.
Business Interruption Insurance
Many businesses carry Business Interruption (BI) insurance as a component of their first-party property insurance or as a freestanding policy. BI coverage protects against losses sustained due to periods of suspended operation due to property damage. In most cases, contagious diseases do not constitute property damage, especially when passed from person to person. A February 9, 2019 New York Times report suggested that there might be reason for concern about contracting the illness through contact with tangible objects such as surfaces in medical facilities or airline tray tables. Such actual contamination of tangible property (as distinct from fear of contamination) may constitute property damage for insurance purposes. Likewise, contamination in HVAC systems has been held to constitute such property damage. If actual contamination of property forces your business to shut down facilities or assets, with concomitant losses, BI coverage may respond. But there are important limitations:
In recent years, particularly in the aftermath of the SARS epidemic, many insurers added specific exclusions for bacterial or viral infections to their coverage. We have seen both stand-alone Bacterial Exclusions and combined Bacteria/Virus Exclusions. It is important to understand that viruses are not bacteria. If your policy only excludes coverage for bacteria, you may still have coverage for the coronavirus.
Insurers can also be expected to argue that their standard pollution exclusions apply to bar coverage. Whether viruses or bacteria are pollutants is a controversial question to which no settled rule yet applies.
Supply Chain Insurance
Some businesses have purchased supply chain insurance or Contingent Business Interruption (CBI) insurance to protect against losses stemming from supply chain disruptions. Policies exist to cover interruptions of deliveries of raw materials, parts or supplies, and specialized insurance has been written to cover vulnerable industries, such as health care providers, the hospitality industry and manufacturers. CBI insurance covers economic losses, typically including increased costs, from lost or reduced operations resulting from physical damage on the premises of a named or unnamed supplier. Finally, some supply chain and CBI policies may also 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, CBI insurance commonly covers only losses stemming from disruptions from specific suppliers scheduled in your policy.
Moreover, CBI coverage 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 an actual contamination event to trigger coverage.
CBI insurance may well be endorsed with the same Bacteria and Virus exclusions noted above.
Event Cancellation Insurance
Some insureds may carry specialized Event Cancellation coverage. Variants of this type of insurance exist in the sports, entertainment and event planning industries (including convention planning). Such coverage may be written expressly to include specific insurance against cancellation because of infectious diseases. Nevertheless, we are learning that some insurers have already begun to insert endorsements to exclude coronavirus into this coverage. Policies written before the end of 2019 are unlikely to contain such exclusions. If you have purchased express coverage for infectious disease cancellations, be sure to check your policy to assure that no coronavirus endorsement has been added without your agreement.
Liability Insurance
Many policyholders face a risk of liability for failing to protect others from exposure to infection on their premises. Providers of health care, transportation or hospitality services and retail establishments may be particularly vulnerable. Your general liability policies cover liability for bodily injury and property damage, and primary Commercial General Liability policies will usually provide a legal defense against such claims. Insurers with a duty to defend should meet that obligation if there is even a possibility of coverage for the underlying liability. Do not overlook this coverage if you face third-party claims, and do not back down if your insurer pushes back on the duty to defend.
Workers Compensation
Workers Compensation insurance covers your employees who suffer injury or illness contracted in the workplace. This extends coverage to injuries “arising out of or in the course of employment,” meaning that claims for compensation must allege work-related losses. Coverage, based on “work-relatedness,” is analyzed based on the time the loss occurs, the place where the loss occurs, the specific activity the claimant was engaged in when the loss took place, and the specific nature of the loss. Thus, there would be a good argument for coverage of a health care worker who becomes infected because of exposure to patients on the job. In assisting employees with Workers Compensation claims, it will be critical to make a prompt, careful record of the time, place, and circumstances of the exposure.