Commercial Insurance Lines
Feeling the Effect
The possible impact COVID-19 will have on commercial property insurance lines remains uncertain, but it is likely many claims will be coming before the courts.
- Laura Foggan and Michael A. Sabino
- May 2020
Photo by Jonas Gustavsson/Sipa USA Sipa via AP Images
SORRY, WE'RE CLOSED: U.S. commercial businesses, like those in New York's largely empty Times Square in March, are looking to their insurance policies to cover their losses from lack of customers due to the coronavirus lockdown.
- What Happened: The spread of COVID-19 is causing businesses to turn to their insurance policies to cover losses.
- At Risk: Most lines are expecting claims including property/casualty insurance, directors and officers/management liability, workers’ compensation/employers’ liability, and specialty lines such as event cancellation, travel insurance and more.
- Looking Ahead: It is essential that legislators—and the courts—recognize the limits of insurance in accordance with policy terms and exclusions.
Insurers and reinsurers are grappling with the implications of COVID-19 for underwriting losses in a wide range of coverage lines. Exposures are by no means limited to life and health coverage. Other lines of coverage also will be called upon to respond, including property/casualty insurance, directors and officers/management liability, workers' compensation/employers' liability, and specialty lines such as event cancellation, travel insurance, and more. The difficulty in assessing the likely impact of COVID-19 on the industry stems from at least two sources: remaining uncertainty in projecting the full impact of the disease itself, and unpredictability in forecasting how courts will handle policyholders' potentially innovative claims seeking recovery under commercial business lines of coverage.
Both public and private responses to the COVID-19 pandemic reflect efforts to reduce the severity of the virus' impact—on individuals and on the economy. Despite these efforts, businesses across the globe have already felt the effect of the virus. The Wall Street Journal has reported that the U.S. and Europe saw record declines in business activity in March, as economic activity slowed around the world as a result of measures aimed at containing the new coronavirus. As losses mount, pressures on insurers are growing. Regulators and legislators are asking questions about the extent to which insurers will cover losses related to COVID-19, and policyholders are pressing a variety of claims for coverage.
On March 18 a bipartisan request from 18 members of Congress asked that insurers treat “financial loss due to COVID-19 as part of policyholders' business interruption coverage.” The letter stressed: “as the international community works to mitigate the evolving threat of this virus, America's businesses are, understandably, concerned about the potential financial impact the continued global spread of COVID-19 may have on their operations.”
The American Property Casualty Insurance Association, National Association of Mutual Insurance Companies, and other trade groups responded, emphasizing their “commitment to identifying and implementing solutions to the ongoing economic challenges caused by COVID-19 and to providing immediate liquidity and economic support to those in need.” Yet the trade groups made clear that business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19. Their response also stated: “The U.S. insurance industry remains committed to our consumers and will ensure that prompt payments are made in instances where coverage exists.”
This exchange reflects the real pressures being placed on insurers to find coverage where it may not exist, and to respond to the economic stresses with payouts, whether properly within the coverage of their policies–or not. The National Association of Insurance Commissioners has urged that “as Congress considers further legislative proposals to address the devastating impacts of COVID-19 pandemic, we would caution against and oppose proposals that would require insurers to retroactively pay unfunded COVID-19 business interruption claims that insurance policies do not currently cover.” On a bright note, recognizing the difficulties of insuring against pandemic risk, Congress also has discussed proposed legislation that would provide a go-forward mechanism for a federal backstop for pandemic risk insurance. If enacted, it would create a reinsurance program similar to the Terrorism Risk Insurance Act for pandemics, by capping the total insurance losses that insurance companies would face.
Members of Congress are not the only ones exerting pressure on the industry. A number of state legislatures, including Massachusetts, New Jersey, New York, and Ohio, are considering bills [as of early April] that would mandate that insurers pay business interruption claims, regardless of any virus-related exclusion. Some of these proposals would be applicable only to insureds in the jurisdiction with 100 or fewer employees, and all propose some form of relief for paying insurers through assessments against all licensed insurers in the state. Each of these proposals would retroactively alter the terms of private insurance contracts, and if enacted would almost certainly draw challenges based on constitutional protections against such governmental actions. Supporters of the bills will point to the emergency proclamations regarding the COVID-19 pandemic to contend that these measures are justified, but there are substantial questions about their viability.
Legislative proposals—or, as discussed below, judicial holdings—providing for insurers to shoulder the losses of COVID-19 without regard to policy terms would be shortsighted, as well as unjust. Courts such as the United States Court of Appeals for the Fourth Circuit in Pennsylvania National Mutual Casualty Insurance Co. v. Roberts, have discussed the dangers of “holding an insurance company liable for risks for which it never contracted and for which it never received premiums.”
They have recognized that, if an insurance company cannot limit its risk through policy definitions and terms, “it will be unable to determine the precise risks assumed under a contract, which in turn will prevent it from accurately pricing coverage.”
“Not only will this hinder rational underwriting, but the higher premiums necessary to compensate for this rising uncertainty will be passed on to policyholders everywhere.” Moreover, as the NAIC noted, “while the U.S. insurance sector remains strong, if insurance companies are required to cover such claims, such an action would create substantial solvency risks for the sector, significantly undermine the ability of insurers to pay other types of claims, and potentially exacerbate the negative financial and economic impacts the country already is experiencing.”
COVID-19 Claims Under Commercial Business Policies
Beyond legislative action, insurers are beginning to see claims and litigation seeking insurance coverage for economic loss and liability resulting from COVID-19. Although initial assessments stated that property and business income coverage should not face excessive exposures, policyholder advocates have made clear they will challenge the assumptions that most such claims are not covered. Commercial policies offering business interruption or business income coverage are likely to be among those business lines at the forefront of insurance claims for COVID-19-based losses.
This is borne out by recently filed claims. For instance, restaurateur Cajun Conti LLC sued its insurer in Orleans Parish, Louisiana on March 16 in what is likely the first of many coverage disputes over business income losses under an “all-risk policy,” which allegedly covers “direct physical loss unless the loss is specifically excluded or limited” without a virus exclusion.
Native American Chickasaw and Choctaw tribes have sued several insurers seeking coverage for financial losses sustained because their casinos and related hospitality operations cannot be used for their intended purpose because of civil emergency orders. More than a dozen Chicago-based owners and operators of restaurants and movie theaters have sued their insurer for allegedly giving short shrift to business interruption claims, and renowned restaurants The French Laundry and Bouchon Bistro brought suit to recover, among other things, losses sustained by restaurant operations following an ordered shutdown. These are just the beginning of a possible onslaught of claims.
Many other companies impacted financially by COVID-19 will look to their insurers to recover, asserting claims under property policies in hopes of recouping business losses arising from any closure of operations—seeking “business interruption (BI),” “contingent business interruption (CBI),” “civil authority” or similar coverage. Many of these claims will be excluded under the plain language of virus and contamination exclusions, which often form a part of commercial property policies. If policies do not reflect such exclusions, a key issue under widely used policy language for the viability of any COVID-19 claim for BI, CBI or civil authority coverage will be whether the policy trigger of physical damage can be met by a coronavirus claim and, if so, how. Most property policies that cover business income loss provide that, to be covered under any policy part, the loss must “be caused by direct physical loss of or damage to property at premises” described in the policy declarations.
Policyholder advocates will contend that “contamination” of a premises should qualify as direct physical loss of or damage to property. They will point to prior case law involving friable asbestos in buildings, smoke rendering a facility uninhabitable, and ammonia fumes, among other factual settings, in a search for authority to support their views. Yet even if contamination could qualify as direct physical loss, policyholders will likely be unable to prove, in nearly all instances, that their business premises was contaminated and business income loss was caused by an alleged contamination of the property.
In most cases, policyholders would need to claim that preventative action to avoid contamination can trigger the policy. Similar arguments will be made over business income loss from government shut-downs. There will be pressure to cover such claims as preventive measures, for instance. In the coming weeks and months, these issues will become the battleground in efforts to shoehorn business losses into widely issued commercial property forms.
COVID-19 also has prompted swift action by the plaintiffs' securities bar, with at least two COVID-19-based securities actions being filed by mid-March. A putative class action by investors against Norwegian Cruise Lines, filed in federal court in Florida, alleges the cruise line employed misleading sales tactics related to the outbreak that endangered the lives of customers and crew members and that, as a result, statements about the company's business and operations were materially false and misleading or lacked a reasonable basis.
In another D&O suit, pharmaceutical company Inovio Pharmaceuticals Inc. and its chief executive officer were targeted in federal court in Pennsylvania based on the CEO's statements about the company's development of a COVID-19 vaccine. The complaint asserts investor claims based on the allegation that misleading statements—later found to be false—had prompted a surge in the pharmaceutical company's share price, followed by a stock drop.
As more public companies make disclosures through SEC filings or public statements, more suits will follow. SEC Chair Jay Clayton recently acknowledged that the effects of COVID-19 “may be difficult to assess or predict with meaningful precision both generally and as an industry- or issuer-specific basis” and that “actual effects will depend on many factors beyond the control and knowledge of issuers.” But he also warned that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.”
Recent “event-driven” securities claims, where stock drops after a materially adverse event have prompted claims against a company for allegedly failing to adequately disclose the risk, are a model for potential claims by plaintiffs firms watching COVID-19 events.
Other D&O suits may allege specific management failures in relation to emerging standards of care and regulatory requirements. Some of these D&O claims may be covered, but one issue likely to arise is the effect of exclusions for bodily injury and property damage. While some exclusions simply provide that the insurer “will not cover claims for bodily injury,” others are broader, barring coverage for “any claim arising from, related to, or in any way connected with, directly or indirectly bodily injury or property damage….” The application of these provisions could come into play, as will exclusions for virus and pollution.
Commercial General Liability Coverage
General liability insurers, particularly those who may insure the hospitality or public entertainment industries, also will face claims as a result of COVID-19 events. These may involve both premises/operations claims brought by infected individuals who allege an insured failed to exercise reasonable care in guarding against, or warning of, the risk of viral exposure to customers or invitees, and products claims based on the contention that a product failed to perform as promised, i.e., to safeguard someone from exposure to COVID-19.
Insurers for companies in the health care and pharmaceutical industry face exposure, as do insurers of the hospitality industry, transportation and retail sectors. But insurers of manufacturers and others are not immune from liability claims. The Insurance Information Institute has stated that liability is “among the largest insurance lines with the greatest potential exposure to COVID-19-related claims.”
Already, two passengers have sued Princess Cruise Lines alleging passengers were unreasonably exposed to COVID-19 and left at risk of contracting the virus. They allege the company took a “lackadaisical approach” to customer safety, and failed to properly screen customers for the virus. Their suit highlights the risk of liability exposure arising from failure to follow and communicate emerging standards of care under public health guidelines. More claims will follow, as individuals and businesses seek to shift the costs of bodily injuries and economic harm by making claims against others.
In advancing these claims, policyholder advocates will look to precedents such as cases finding coverage—despite pollution and mold/bacteria exclusions—for claims against a hotel related to a Legionnaire's disease outbreak. Claims also may involve allegations about the failure of protective equipment, or failure to provide masks, hand sanitizer, and lack of hand sanitation stations to prevent third-party harm.
Commercial general liability (CGL) policies often contain exclusions that should bar coverage for these claims. For instance, CGL policies generally bar coverage for claims arising from the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants, and define pollutants to include irritants or contaminants. But policyholders will contend that pollution exclusions address environmental cleanup issues, not indoor air quality, and this is an issue on which courts have divided. There are other exclusions for mold, bacteria and viruses, and many policies expressly exclude communicable or transmitted disease, although some offer sub-limited coverage.
The viability of claims under CGL policies will depend on their individual terms, the facts presented, and the forum in which they are litigated. If COVID-19-related claims are not excluded, these claims may pose future exposure to insurers under CGL policies as pressure grows to find relief for individual and businesses' economic and other losses.
COVID-19 is predicted to substantially impact workers' compensation and employers' liability coverage. According to the III, this is particularly the case for insurers providing coverage to medical professions and first responders, as well as transportation and retail. Workers' compensation coverage varies across states, but one key point is that, for workers' compensation coverage to respond, the source of infection must be directly work-related. This will serve as a break on some potential claims. But new exposures may be presented from work-related injury to employees working from home in new telework arrangements.
Specialized coverages, such as event cancellation, travel insurance and trade disruption policies will also be implicated. Where communicable disease exclusions aren't in place, several disputes about the reach of event cancellation policies already have emerged, centering on voluntary decisions versus “inability” of the insured to commence or maintain the event. These claims may well enter on the timing of decisions in relation to government directives such as those limiting gathering sizes, restricting travel and directing individuals to shelter in place.
Finally, cyber-related events have surged, directed at individuals searching the internet for information about COVID-19 and at the new use of telework by hundreds of thousands of employees. The growth in telework, particularly by employees who may not have experience working remotely, translates to an increased vulnerability to cyberattack. Although cyber insurers will face more claims and greater exposures as a result of COVID-19, the heightened exposure is not expected to be on a scale that would create systemic concerns.
Commercial insurers are facing extraordinary pressures to respond to the devastating economic impacts of the COVID-19 pandemic. While shouldering losses to their investment portfolios, launching remote work plans, and taking necessary steps to protect their own workforce from unnecessary risk, insurers are moving forward to evaluate, investigate and pay covered claims, including claims arising from COVID-19.
The insurance mechanism is essential to society and it works well to spread risk associated with business and societal activities. But as the NAIC explained in its statement about Congressional action relating to COVID-19, insurance “is not typically well-suited for a global pandemic where virtually every policyholder suffers significant losses at the same time for an extended period.” It is essential that legislators—and the courts—recognize the limits of insurance in accordance with policy terms and exclusions.
Best’s Review contributors: Laura Foggan chairs Crowell & Moring’s Insurance/Reinsurance Group. Michael A. Sabino is an associate in Crowell & Moring’s Insurance/Reinsurance Group in the New York office. They represent insurers in a wide range of complex matters and can be reached at firstname.lastname@example.org and email@example.com.