The actual policy terms are what matter
This is another of our series of articles where we present a short action item related to COVID-19 topics.
Many companies have insurance coverage beyond the standard commercial liability, automobile, errors & omissions, and directors and officers coverage. Examples of this additional coverage are Business Interruption insurance, environmental insurance and for some companies engaged in the business of national and international professional conferences, event cancellation insurance. Each of these could potentially be a source of insurance coverage in the COVID-19 scenario. In this short “FYI” article, we will focus on Business Interruption and to a lesser extent, environmental insurance coverage. What matters are the actual technical policy terms, and not what a policy summary says or how a broker or agent interprets them.
Do Not Assume. The COVID-19 pandemic is by its nature, global in scope. Insurance risk profiles and their associated premiums are designed for losses occurring to only a very few insureds (fire at a facility) or those in a specific geographic location (severe weather such as hurricanes or floods). Insurance companies would suffer enormous losses if they had to pay out claims due to business interruption losses attributable to COVID-19. For that reason, we have heard that many insurance companies are summarily denying claims on the grounds that COVID-19 has not caused any physical damage, and thus there is no coverage. Alternatively, it is asserted that COVID-19 is a form of pollution, and they point to a pollution exclusion.
However, merely assuming that an answer of non-coverage is correct based on blanket statements from insurance companies or even agents and brokers (who may be financially connected to the insurance companies) is not advisable. The actual technical terms of the policy itself (and not a mere summary of terms) should be carefully read by an independent advisor who is skilled in reading and evaluating complicated technical language. Insurance contract terms are tedious to read, technical and often very long. That is why many insureds only read the summary, which is not the official policy contract.
Is There an Express Exclusion? In the aftermath of the previous outbreaks often referred to as “swine flu,” “bird flu,” and “SARS,” some insurance policies inserted express exclusions for pandemics, epidemics and viruses. In addition, some policies may have express exclusions for loss of use attributable to governmental orders. If the applicable policy has these types of express exclusions, then the evaluation of the actual policy terms may be a brief task. The rest of this article assumes there are no such express exclusions in the policy, although later in this article we briefly discuss potential legislative relief.
Is Physical Damage Required Before the Policy Applies? Not necessarily, and that is why the actual policy terms must be carefully evaluated. Business Interruption policies are generally written on either an “all risk” or “named perils” basis. There are decisions from the Courts that show that “all risk” policies are interpreted broadly for coverage purposes absent an express exclusion, and that express exclusions are interpreted narrowly. An example of where a critical and independent review of the actual policy terms is important would be where the Business Interruption policy terms cover “all risk of physical loss or damage.” The use of the conjunctive “or” is critical. Stated another way, the policy covers both “all risk of physical loss” and also covers “all risk of damage”. Thus, damage may be broader than just physical damage. Depending on the relevant jurisdiction, some courts provide that a sufficient loss has occurred to qualify for coverage if events occur where the property can no longer be used by the insured for its purpose, even if the physical structure itself suffered no damage.
What if my policy excludes pollution? To further the idea that making assumptions is unwise, it should not be assumed that the COVID-19 virus is pollution. Unless the actual policy terms contain an express exclusion for viruses, pandemics or epidemics, an argument exists that pollution applies to human-made pollutants, and that naturally occurring substances are not pollution. The current general thinking as of the writing of this article is that COVID-19 is a virus that developed from nature, and was not a human-made pollutant such as lead-based paint, asbestos insulation, chlorinated solvents, contamination from leaking fuel tanks or a bio-weapon (although a few outside the mainstream scientific community believe that COVID-19 may be a laboratory-created virus that was accidently released).
Could Changes in State Law Matter? Yes they could. Nearly all insurance policies for routine insurance are based on template forms from the insurance companies. But in the United States, insurance is generally regulated at the State level by a State’s Insurance Commission (or similar office) and led by a senior state official often referred to as the Commissioner of Insurance (or similar title). The fifty States of the United States, as is well known, are not uniform in their laws and regulations. For that reason, the applicable policy may have a provision that provides that the policy terms will be deemed automatically amended in order to conform to the State law where the particular policy is issued. Accordingly, actions by a State’s legislature could lead to an automatic amendment to an insurance policy that could potentially provide insurance coverage even if previously the policy did not. As an example, as of the date of this article, the New York legislature (both the General Assembly and the State Senate) are considering legislation that provides:
- Notwithstanding any provisions of law, rule or regulation to the contrary, every policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic….
- Any clause or provision of a policy of insurance insuring against loss or damage to property, which includes, but is not limited to, the loss of use and occupancy and business interruption, which allows the insurer to deny coverage based on a virus, bacterium, or other micro-organism that causes disease, illness, or physical distress or that is capable of causing disease illness, or physical distress shall be null and void…
- This section shall apply to policies issued to insureds with less than 250 eligible employees in force on the effective date of this act. “Eligible employee” means a full-time employee who works a normal work week of 25 or more hours.
Other States are considering similar legislation, and while the full-time employee number varies, the theme is to provide relief to small businesses. Accordingly, where the business is located could have a significant impact on the available insurance coverage, regardless of the printed policy terms.
Action items. Generally speaking, policies require the insured to file claims within a certain period of time. After a thorough review and analysis of the actual policy terms (again, not the summary terms but the actual policy terms) your professional advisors may recommend providing notice to the insurance company and commencing the claim process. Even if the claim is denied, the insured is on record of making a timely claim. That not only preserves the right to argue with the insurance company if the business feels the claim has been wrongly denied, but also preserves the right if future legislative changes act to legislatively amend the policy terms to provide coverage.
We wish you and your families good health in these difficult times.
Jonathan M. Minnen