The Washington Supreme Court Issues an Important Decision Regarding Insurance Coverage for Covid-Related Claims

By on September 27, 2022
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The Washington Supreme Court recently issued an important decision that provides guidance on coverage for Covid-related claims and the application of Washington’s efficient proximate cause rule in Hill & Stout, PLLC v. Mut. of Enumclaw Ins. Co., 515 P.3d 525 (2022). In Hill & Stout, the Washington Supreme Court held that (1) Covid-related damages are not a “direct physical loss” and thus are not subject to property coverage, (2) the Virus Exclusion also precludes coverage, and (3) the efficient proximate cause rule does not mandate coverage.

The Hill & Stout case involved a dentist office (“HS”) that was insured under a property insurance policy (the “Policy”) issued by Mutual of Enumclaw Insurance Company (“MOE”). The Policy covered lost business income caused by a “direct physical loss of or damage to” the dentist office properties. The Policy also contained a Virus Exclusion that barred coverage “for loss or damage caused directly or indirectly by [a]ny virus … that induces or is capable of inducing physical distress, illness or disease.” The Virus Exclusion was amended by the Washington Changes Endorsement which, in relevant part, requires that in order for the exclusion to apply, the virus must “directly and solely result[] in [the] loss or damage,” or “initiate[] a sequence of events that result[] in loss or damage, regardless of the nature of any intermediate or final event in that sequence.”

HS tendered a claim to MOE for lost business income due to Governor Jay Inslee’s proclamation that prohibited non-emergency dental care for several months because of Covid (the “Covid Proclamation”). Notably, HS had actually ceased all non-emergency dental procedures several days before Governor Inslee issued the Covid Proclamation, and HS continued to have receptionists in its offices while the Covid Proclamation was in effect. MOE denied HS’s claim on the grounds that HS had not suffered a “direct physical loss” and that any alleged damages were barred by the Virus Exclusion. HS commenced a declaratory judgment class action lawsuit against MOE, and alleged that HS’s loss of business income due to Covid was covered since it was a “direct physical loss or damage as a result of the [Governor’s] proclamation[.]”

The primary issue in the case involved the meaning of the phrase “direct physical loss of or damage to” the insured properties, and whether HS’s inability to use its dentist offices due to the Covid Proclamation fell within this grant of coverage. Because the terms “physical” and “loss” were not defined in the Policy, the Supreme Court turned to a standard English dictionary to determine their meanings, and concluded that “physical loss of property” means “property that has been physically destroyed or that one is deprived of in that the property is no longer physically in their possession.” Hill & Stout, 515 P.3d at 532. The Supreme Court noted that the Covid Proclamation did not physically prevent HS from using its dental offices, especially given that HS’s offices remained open for emergency services and administrative staff continued to work there. As a result, the Supreme Court held that HS’s claim was not covered because there was no “direct physical loss of or damage to” its dental offices, holding as follows:

Accordingly, under the facts of this case we hold that the claim for loss of intended use and loss of business income is not a physical loss of property. HS was still able to physically use the property at issue. The property was in HS’s possession, the property was still functional and able to be used, and HS was not prevented from entering the property. Under the Proclamation, HS was not able to use the property in the way that it wanted, but this alleged “loss” is not “physical.” It is more akin to an abstract or intangible loss than a “physical” one.

Hill & Stout, 515 P.3d at 532.

The Washington Supreme Court also rejected HS’s request to apply the “loss of functionality test” for determining whether there had been a direct physical loss, as opposed to requiring that there be a physical alteration of the property. The Supreme Court recognized that the loss of functionality test had been applied in asbestos cases where the release of asbestos fibers contaminates property to such a degree “that its function is nearly eliminated or destroyed[.]” Hill & Stout, 515 P.3d at 532-33 (quoting Port Authority of New York & New Jersey v. Affiliated FM Insurance Co., 311 F.3d 226, 236 (3d Cir. 2002)). However, the Washington Supreme Court found that the “loss of functionality test” was inappropriate with respect to the subject claim “because there is no physical loss of functionality to the property.” Id. at 533 (emphasis original). The Washington Supreme Court held that the Covid “Proclamation did not physically cause a loss of functionality of the property because it continued to be functional.” Id. (emphasis original). Moreover, the Supreme Court held that “even under a loss of functionality test there must be some physical effect on the property” in order for there to be coverage under a property insurance policy. Hill & Stout, 515 P.3d at 534 (emphasis original).

The Washington Supreme Court further held that coverage was barred by the Policy’s Virus Exclusion and that the efficient proximate cause rule did not restore coverage. The Supreme Court noted that “the efficient proximate cause rule applies to mandate coverage when an initial covered peril sets a causal chain in motion and that causal chain includes later excluded perils.” Hill & Stout, 515 P.3d at 535. However, the rule does not operate in reverse, such that it does not “mandate exclusion [of coverage] when the casual chain is initiated by an excluded peril.” Id. Nonetheless, the Supreme Court noted that in its prior decisions “[w]e have left open the possibility that an insurer may draft policy language to deny coverage when an excluded peril initiates an unbroken causal chain.” Id. (quoting Vision One, LLC v. Phila. Indem. Ins. Co., 276 P.3d 300, 309 (2012)). The Washington Supreme Court found that the Virus Exclusion did in fact contain policy language that barred coverage when an excluded peril initiated the loss, because the Virus Exclusion had been amended by the Washington Changes Endorsement which, in relevant part, stated as follows:

We will not pay for loss or damage caused by any of the excluded events described below. Loss or damage will be considered to have been caused by an excluded event if the occurrence of that event:

…

b. Initiates a sequence of events that results in loss or damage, regardless of the nature of any intermediate or final event in that sequence.

Hill & Stout, 515 P.3d at 536.

The Washington Supreme Court held that “insurers can [include language in the insurance policy] contract to say that coverage is excluded for a causal chain initiated by an excluded peril. The exclusionary language in the policy does just that.” Id. The Supreme Court further found that it could not be reasonably disputed that Covid-19 caused Governor Inslee to issue the Covid Proclamation and HS’s loss. Accordingly, the Supreme Court held that the Virus Exclusion barred coverage, and reasoned as follows:

There is no issue of material fact needed to determine that COVID-19, an excluded peril, initiated the causal chain in this case and that the policy excludes the causal chain of losses initiated by an excluded peril. As the causal chain is initiated by an excluded peril, the efficient proximate cause rule does not apply to mandate coverage, and, under the language of this policy, the virus exclusion applies.

Hill & Stout, 515 P.3d at 537.

The Hill & Stout decision provides important guidance on coverage for Covid-related claims. However, the Washington Supreme Court’s holding regarding the efficient proximate cause rule is of even greater significance beyond just Covid-related claims because as the Supreme Court stated, “this issue will likely repeat in other cases regarding the interpretation of similar insurance policies[.]” Id. at 535. To the extent you have any questions regarding the Hill & Stout case or other issues involving insurance coverage, please feel free to contact the attorneys in the insurance coverage group at Gordon Rees Scully Mansukhani in Seattle.

Filed under Coverage Claim, Covid Claims, COVID-19

Insurers Face Two New Cases Seeking Commercial Property Coverage For COVID-19; One Alleges Extracontractual Claims

By , and on March 31, 2020
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Two Napa-based restaurants and a number of Chicago-area businesses claiming economic losses from closing their doors to prevent the spread of COVID-19 filed suits in California and Illinois, respectively, late last week. The plaintiffs in the Illinois suit allege statutory bad faith based, in part, on a memorandum setting forth the insurance company’s views on coverage and an alleged failure to investigate.

The owners of French Laundry, a prominent restaurant in Napa, California and another Napa establishment owned by prominent restauranteur Thomas Keller filed suit in Napa County Superior Court. See French Laundry Partners, LP d/b/a The French Laundry, et. al. v. Hartford Fire Insurance Company, et. al. The plaintiffs are represented by counsel including the Louisiana-based attorneys who filed the Cajun Conti case, believed to be the first case of its kind seeking coverage under a commercial property policy for business closures related to COVID-19. Additionally, owners of restaurants, pubs, and a theater in Chicago filed suit in the United States District Court for the Northern District of Illinois. See Big Onion Tavern Group, LLC, et. al. v. Society Insurance, Inc. In what appears to be one of the first cases to do so, the Big Onion plaintiffs assert extra-contractual claims based on an alleged failure to investigate and seek statutory penalties.

The French Laundry plaintiffs make allegations similar to the Cajun Conti plaintiffs. However, the French Laundry plaintiffs further allege that their “Property Choice Deluxe Form specifically extends coverage to direct physical loss or damage caused by virus.” The French Laundry plaintiffs further rely on an order of the health officer of Napa County which they assert “specifically states that it is being issued based on evidence of physical damage to property.” The Order states, in part, that it is “issued based on evidence of increasing occurrence of COVID-19 throughout the Bay Area, increasing likelihood of occurrence of COVID-19 within the County, and the physical damage to property caused by the virus.”

The French Laundry complaint goes on to allege that “property that is damaged is in the immediate area of the Insured Properties.” This allegation is apparently aimed at triggering Civil Authority Coverage, which can provide coverage following civil action or order by a civil authority where there is direct physical loss or damage to other or adjacent property. The common allegation in the initial COVID-19 coverage lawsuits that the presence of a virus on any property—whether the covered property or adjacent property—will continue to be a hotly contested issue in the absence of any actual evidence that COVID-19 is present inside the insured premises or nearby properties, let alone causes direct physical loss or damage. Further, the primary bases for the orders that are being issued by various state and local governments and agencies are to prevent the spread of COVID-19 due to public health concerns and to promote social distancing.

The Big Onion plaintiffs allege that they obtained business interruption coverage “to protect their businesses from situations like these, which threaten their livelihoods based on factors wholly outside of their control.” The Big Onion complaint cites to the lack of a virus exclusion in the subject policies. According to the Big Onion plaintiffs, such exclusions typically provide that the insurer will “not pay for loss, cost, or expense caused by, resulting from, or relating to any virus. . . that causes disease, illness, or physical distress or that is capable of causing disease, illness, or physical distress.” Some exclusions go on to provide that the policy does not apply to any expense incurred as a result of contamination or “denial of access to property because of any virus. . . .” The plaintiffs in Big Onion appear to focus more on the lack of an exclusion for viruses for the proposition that the presence of a virus should be viewed to involve physical harm, rather than on specific allegations that COVID-19 is present within any covered premises or other or adjacent property. They contend that if viruses could never cause “physical harm,” there would be no need for a virus exclusion, which is a debatable proposition at best.

Of note, the Big Onion complaint cites to and attaches a memorandum purportedly issued “before many of the Plaintiffs had submitted their claims” by “the CEO of Society Insurance . . . prospectively concluding that Society Insurance’s policies would likely not provide coverage for losses due to a ‘governmental imposed shutdown due to COVID-19 (coronavirus).’”1 The complaint asserts a claim for “Statutory Penalty for Bad Faith Denial of Insurance Under 215 ILCS 5/155” based on an alleged failure by Society Insurance to conduct an investigation as well as the referenced memorandum. The Big Onion plaintiffs allege that “[t]o make matters worse, based on information and belief, Society Insurance directed its insurance agents, who are not Plaintiffs’ agents, to make sham claim notifications before Society Insurance’s policyholders even noticed their claims. Society Insurance took these actions, before claims were even submitted, as part of its plan to discourage claim notifications and to avoid any responsibility for its policyholders’ staggering losses. . . .”

It remains to be seen whether the insurer defendants in these cases will seek to dismiss these complaints based on the lack of a triggering event. Indeed, without any evidence that COVID-19 contaminated covered property or adjacent property, the mere order to close a business to prevent the spread of the virus should be insufficient to trigger coverage. This is in addition to the fact that case law across the country supports the conclusion that the presence of a virus, which can be removed with ordinary cleaning products, does not constitute physical harm. Nonetheless, insurers should take heed of the inclusion in the Big Onion complaint of the memorandum, possibly prepared in anticipation of a request for such a statement from state regulators, before preparing such statements for public distribution.

Visit our COVID-19 Hub for ongoing updates.

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1 The risk of—and due process implications of—states such as New Jersey attempting to require insures to issue such advance statements is demonstrated by the Big Onion complaint. The Maryland Insurance Administration took a different approach and on March 18, 2020 issued an Advisory on Business Interruption Insurance that states, in part:

“Business Interruption coverage is typically triggered under a commercial insurance policy when a covered risk / peril causes physical damage to the insured premises resulting in the need to shut down business operations. . . . Some commercial policies provide Business Interruption coverage when a business is shut down due to an Order by a civil authority. However, the policy still typically requires a physical loss from a covered peril as the underlying cause of the business shut down to apply.”

Filed under Coronavirus, COVID-19, Property Insurance Coverage

COVID-19 Is Not Direct Physical Loss Or Damage

By , and on March 27, 2020
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Is a cash register that is not being used damaged property? When you need to wash a table, a chair, or a section of flooring with readily available cleaning products to make them safe and useable, are you repairing damaged property? Is a spilled cup of coffee waiting to be wiped up actual damage to the premises? If your customers stay home to help stop the spread of a virus, has there been a physical loss inside your shuttered store or restaurant?

The insuring agreements typically found in commercial property insurance policies require “direct physical loss of or damage to” covered property as the triggering event. Without establishing direct physical loss or damage a policyholder cannot meet its burden to trigger coverage for a purely economic loss of business income resulting from shuttering its business due to concerns over exposure to—or even the actual presence of—COVID-19. Despite this well-understood policy language, it is already beyond question that insurers will confront creative—albeit strained—arguments from policyholder firms attempting to trigger coverage for pure economic loss. The scope of the human and economic tragedy we all face will be matched by the scope of the effort to force the financial harm onto insurance companies.

The plaintiffs in what appears to be the first-filed case seeking a declaratory judgment in the context of first-party insurance coverage rely on the assertion that “contamination of the insured premises by the Coronavirus would be a direct physical loss needing remediation to clean the surfaces” of its establishment, a New Orleans restaurant, to trigger coverage for business interruption.[1] See Cajun Conti, LLC, et. al. v. Certain Underwriters at Lloyd’s, London, et. al. Civil District Court for the Parish of Orleans, State of Louisiana. The complaint alleges that the property is insured under an “all risk policy” defining “covered causes of loss” as “direct physical loss.” The plaintiffs rely on the alleged presence of the virus on “the surface of objects” in certain conditions and the need to clean those surfaces. They go so far as to claim that “[a]ny effort by [the insurer] to deny the reality that the virus causes physical damage and loss would constitute a false and potentially fraudulent misrepresentation. . . .”

The complaint cites a case from the Court of Appeal of Louisiana, Widder v. Louisiana Citizens Property Insurance Corporation, 82 So. 3d 294 (La. App. 2011), writ denied, 76 So. 3d 1179 (La. 2011), for the proposition that “[s]imilar to the Coronavirus, Louisiana Courts have interpreted that the intrusion of lead or gaseous fumes constitute a direct physical loss under insurance policies that would need to be remediated.”

The assertion of fraudulent misrepresentation seems to be largely a matter of projection, as the truth seems to have been stretched by the claims that the possible presence of an easily cleaned virus damaged the restaurant sufficiently to trigger coverage for business interruption at the plaintiffs’ restaurant. As an initial matter, Widder involved a house contaminated with “inorganic lead which makes it uninhabitable until it has been gutted and remediated.” 82 So. 3d 294, 296. Gutting and remediating a home to remove materials which must be treated as hazardous waste is a far cry from cleaning property with disinfectant. In Widder an inspection revealed the presence of lead dust on walls, which originated in part from lead paint outside of the house. Id. at 295. Apparently without any scientific foundation, the Widder court compared the loss before it to the emission of gaseous fumes from Chinese drywall and reversed the trial court’s summary judgment in favor of the insurer.

Glaringly, the alleged presence of a virus on objects is not analogous to noxious odors or gaseous releases. In Widder the alleged physical harm involved tangible damage. Further, gaseous emissions from Chinese drywall corroded building components and in some instances required demolition and rebuilding of entire physical structures to remediate the condition. The proposition that the alleged presence of Coronavirus is somehow analogous to this type of harm is, at best, a contrived argument to attempt to trigger coverage. Indeed, whether and to what extent Coronavirus stays present on physical surfaces is as yet untested under Daubert. We do know that government health officials believe that proper cleaning with standard disinfectants will kill the virus. In any event, there is no indication or evidence that the virus corrodes physical surfaces.

Courts in other jurisdictions have addressed more analogous circumstances and found a lack of coverage. For instance, a federal district court applying Michigan law found that the presence of mold and bacteria in ductwork and a resulting odor did not constitute direct physical harm despite that the ductwork needed to be physically cleaned as part of remediation. Universal Image Productions, Inc. v. Chubb Corp., 703 F. Supp. 2d 705 (E.D. Mich. 2010). A water leak caused the mold, bacteria, and odor, and the policyholder argued that the “pervasive odor, mold and bacterial contamination (both visual and aerosolized), as well as water damage” constituted direct physical loss. The court concluded that the policyholder did not demonstrate “that it suffered any structural or any other tangible damage to the insured property. Rather, the bulk of [the policyholder’s] argument relies upon proof that it suffered such intangible harms as strong odors and the presence of mold and/or bacteria in the air and ventilation system within its Building which, in its judgment, rendered the insured premises useless.” Id. at 719. Citing a case from Oregon, the court stated that “even physical damage that occurs at the molecular or microscopic level must be ‘distinct and demonstrable.’” Id. (citing Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civil No. 98-434-HU 1999, U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999)).

At least two courts—a federal court in Florida and an appellate court in Ohio—have recognized that if the alleged physical harm can be cleaned, then there is no physical harm. Mama Jo’s, Inc. v. Sparta Ins. Co., No. 17-CV-23362-KMM, 2018 U.S. Dist. LEXIS 201852 (S.D. Fla. June 11, 2018) (debris and dust from road work required the insured to clean its floors, walls, tables, chairs, and countertops and the court held that “cleaning is not considered direct physical loss.”); Mastellone v. Lightning Rod Mut. Ins. Co., 884 N.E.2d 1130 (Ohio 2008) (affirming lower court’s ruling that dark staining from mold did not constitute “physical loss” where plaintiff’s expert testified that mold could be removed from wood surface by cleaning).

Further, the mere risk of contamination has been deemed insufficient to trigger coverage. Specifically, loss of income due to an embargo by the United States Department of Agriculture because of the risk that “mad cow disease” contaminated beef product was not “direct physical loss” to beef product. Source Food Tech., Inc. v. United States Fid. & Guar. Co., 465 F.3d 834 (8th Cir. 2006) (applying Minnesota law). The Eighth Circuit distinguished between the actual presence of contamination and the inability to sell a product because of the fear of contamination. “Although Source Food’s beef product in the truck could not be transported to the United States due to the closing of the border to Canadian beef products, the beef product on the truck was not—as Source Foods concedes—physically contaminated or damaged in any manner. To characterize Source Food’s inability to transport its truckload of beef product across the border and sell the beef product in the United States as direct physical loss to property would render the word ‘physical’ meaningless.” Id. at 838.

As of this writing the insurers had not yet moved to dismiss the Cajun Conti complaint. However, we believe that on the face of the complaint, which expressly incorporates the policy language requiring direct physical loss or damage, there is no triggering event. Even assuming that COVID-19 is, at a molecular level, present on physical surfaces, we also believe that disinfecting of surfaces does not constitute physical harm sufficient to trigger coverage.

Gordon & Rees is carefully tracking the coronavirus (COVID-19) pandemic and working to assist clients with the evolving legal ramifications of the outbreak to their businesses.

Visit our COVID-19 Hub for ongoing updates.

Filed under Coronavirus, COVID-19

Emerging Coverage Considerations for Insurers Relating to Claims in Connection with COVID-19

By , , , and on March 20, 2020
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The only thing equally inevitable to the spread of the novel coronavirus 2019 disease (“COVID-19”) will be the resulting onslaught of first-party and third-party insurance claims and insurance coverage litigation seeking to mitigate business losses through recoveries from the insurance industry. Prominent policyholder firms are already pitching corporate America to seek coverage first and ask questions later. The immediacy of claims and litigation will be expedited and their impact multiplied because of the economic downturn. Policy language and actual coverage will be subject to sustained attacks and creative arguments reflecting the huge sums of money that will be at stake. The impact and aftermath of the COVID-19 pandemic stands to present coverage questions for insurers under a variety of coverage forms, including Commercial Property, Commercial General Liability, Professional Liability and Healthcare Liability, and Directors and Officers Liability coverage forms. We summarize below the issues that have already arisen, as well as those that we expect to arise as policyholders submit claims under their insurance assets in connection with COVID-19.

First Business Income Claim Filed

Louisiana appears to be the first state in which an insured filed a lawsuit seeking first-party insurance coverage for business income loss related toCOVID-19. Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana. In response to the New Orleans mayor’s restrictions on restaurant operation in relation to the public health emergency, the restaurant owner sought coverage under its “all risks” policy, which provides coverage for “direct physical loss unless the loss is specifically excluded or limited.” In its complaint the policyholder asks the court to declare that s “because the policy provided by Lloyd’s does not contain an exclusion for a viral pandemic, the policy provides coverage to [the business] for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from Coronavirus contamination and that the policy provides business income coverage in the event that the contamination has contaminated the insured premises.” Notably, however, the declaratory judgment specifically “do[es] not seek any determination of whether the Coronavirus is physically present in the insured premises, amount of damages, or any other remedy besides the declaratory relief.” Gordon Rees Scully Mansukhani will continue to monitor this developing litigation and advise of developments that may impact insurers.

ISO Commercial Property Forms Typically Exclude Coverage for Communicable Diseases

Essential to the resolution of the Cajun Conti case and future claims like it will be the scope of coverage afforded under ISO Commercial Property forms. In 2006, after learning from prior major viral outbreaks, ISO adopted a mandatory exclusion for business interruption policies that specifically excludes coverage for lost business income arising from viruses. ISO form CP 01 40 07 06, “Exclusion for Loss Due To Virus Or Bacteria,” specifically applies to business income, and provides in relevant part that the underwriter “will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”

Absent this exclusion, however, triggering business interruption coverage under the ISO form fundamentally requires “direct physical loss of or damage to property at premises which are described in the Declarations.” Needless to say the proper interpretation of the terms “direct physical loss of or damage to property at premises” is expected to be one of the foremost topics of disagreement between policyholders and their insurers as these claims begin to mount. From a policyholder advocate perspective, the presence of COVID-19 in the building may be sufficient. In this regard, recent articles published by policyholder firms point to cases in which courts have held that the presence of gaseous or other non-visible substances constituted a “direct physical loss” to premises where the substance rendered the premises uninhabitable, even absent physical alteration to the structure itself. These arguments unreasonably expand the plain meaning of the language used in property policies. Indeed, many courts confronted with coverage disagreements involving similar conditions—such as the presence of asbestos, mold, or other debris in a building–concluded that the requisite “direct physical loss of or damage to” covered property was lacking

In Some Instances Manuscript Policies May Present A Closer Question

The focus of coverage disputes under manuscript policies are far less easy to predict, as they contain terms negotiated by the insured or its broker. One such area of attention may be the applicability of Civil Authority Coverage, which in some cases may extend business interruption coverage to orders or actions of a governmental agency or other civil authority. With everything from auto production factories to nail salons closing pursuant to state government emergency orders this will likely be hot button issue in the courts. As is the case with all coverage questions, the scope of coverage will be determined by the particular facts and circumstances of the loss and the plain meaning of the terms of the policy.

State Efforts to Extend Coverage

Insurers are cautioned to pay particular attention to state efforts to mandate the payment of business income losses related to COVID-19 under the property provisions of the Commercial Package and Business owner policies. The first state to offer legislation of this type is New Jersey, which has proposed a law titled as an act “concerning certain covered perils under business interruption insurance.” The draft bill in the state is aimed to force insurers to cover business income loss relating to COVID-19 and the governmental efforts to prevent its spread—including for policies that explicitly exclude viral coverage (such as policies bearing the ISO exclusion)—regardless of the policy terms and provisions.

Despite the legislature’s effort to hold harmless a segment of the business sector with the foresight to purchase business interruption coverage, this proposed legislation seemingly shifts the burden of compensating businesses for virus-related losses from the state or federal government onto private insurers, including those who have specifically contracted out of this coverage. It also raises a significant question of due process and the freedom of insurers to contract to limit the coverage provided under their policies.

The State of New York has also entered the fray, but not to coerce insurers to pay uninsured losses. On March 10, 2020, the New York Department of Financial Services (NYDFS) issued a letter directing insurers who write business interruption coverage to “explain” to policyholders the benefits under their policies and the protections provided in connection with COVID-19. While the directive is targeted to preemptively address insured questions concerning the scope of business interruption coverage, it fosters an erroneous “one size fits all” approach to construing policy coverage and it arguably requires insurers to issue advisory opinions concerning the interpretation of “covered perils” and “physical loss or damage” in their policies without first knowing the particular facts and circumstances of any given loss or claim. Notably, in October 2019, NYDFS implemented Section 308 of the Insurance Law requiring insurers to complete a questionnaire in order to ascertain the level of pandemic influenza preparedness, purportedly in the hope that this information would help raise the general level of preparedness of our licensees.

Most recently the Maryland Insurance Administration released and Advisory or Business Interruption on Business Interruption Insurance on March 18, 2020, which states that it has been received a high volume of inquiries related to business interruption insurance. The Advisory states in pertinent part:

Business Interruption coverage is typically triggered under a commercial insurance policy when a covered risk / peril causes physical damage to the insured premises resulting in the need to shut down business operations. For example, if a fire damages a business and the business cannot operate during repairs, business interruption coverage would be available subject to the terms and limits in the policy.

. . .

Some commercial policies provide Business Interruption coverage when a business is shut down due to an Order by a civil authority. However, the policy still typically requires a physical loss from a covered peril as the underlying cause of the business shut down to apply.

. . .

All insurance policies have exclusions of coverage for risks that are too great to be underwritten at an affordable price. For example, commercial and personal property insurance policies typically contain specific exclusions for loss or damage caused by war, nuclear action and radiation. The potential loss costs from such perils are so extreme that providing coverage would jeopardize the financial solvency of property insurers. Global pandemics like COVID-19 usually fall into this category. However, policies can be different. We recommend that businesses review their policies and reach out to their insurance professionals with any questions.

This approach is less aggressive than those taken by New Jersey and New York, and at least at this time Maryland has not required insurers to take on obligations for which they did not contract or otherwise issue advisory opinions. We will provided updates as other states and insurance departments begin to take positions on insurance coverage related to COVID-19.

Commercial General Liability

Commercial General Liability (“CGL”) policies will surely also be noticed by insureds and lead to extensive coverage litigation given the myriad of possible factual situations that will arise. Since CGL provides coverage for liability to third parties arising from “bodily injury” or “property damage” resulting from unintentional acts, there are many potential avenues for negligence claims around issues of exposure to COVID-19.

In CGL policies, the definition of “bodily injury” generally includes “sickness” or “disease.” The most likely avenue for claims will most likely be parties alleging liability for the spread of the coronavirus. Considering the ubiquitous effects of the virus on businesses worldwide, claims could come in many forms: restaurants, bars, or gyms that did not close, or theaters or concert venues that did not postpone events, are just a few examples. The early outbreak at the nursing home in Washington will raise many questions about the standard of care that should have been in place in any facility handling vulnerable populations. Airlines, hotels, conference centers, travel agents, or cruise ship companies could also be targets for moving forward with events or bookings in the face of worldwide news cycle warning of dangers. All of these entities could face liability for failing to take appropriate action to prevent infection from employees that appeared sick, or high-touch surfaces that were not appropriately de-contaminated. Similar claims could allege a lack of preparedness or training of employees that led to the spread of infection.

Other claims not directly related to the spread of disease, but rather as a result of the actions taken to prevent the spread, may arise. For example, if a real estate owner closes a building, there may be claims for wrongful eviction. This would fit within the standard definition of “personal and advertising injury.”

While it is true that CGL policies often include pollution exclusions, the effect of such exclusions will depend largely on the precise language of the exclusion and law of the state where it is being applied. Some CGL policies also contain exclusions for viruses or communicable diseases. The most difficult obstacle for claims will be sickened individuals attempting to pinpoint where they were sickened, and by whom. However, even the smallest claims that stick past the motion to dismiss stage may lead to a copycat effect. There are many jurisdictions where the insurance industry struggles to get fair treatment in the courts, which will present even greater peril if COVID-19 impacts a measurable percentage of the local population with serious permanent impairment or death.

Directors & Officers Liability

It is also worth considering the potential for claims against Directors & Officers, Errors & Omissions, Management Liability, or any form of Professional Liability Insurance policies, including Healthcare Professional Liability policies. Claims could be made against managers, directors, officers, or professionals for a failure to make decisions that would have prevented the spread of disease. Potentially more costly could be claims by investors, who have seen the value of their holdings dwindle, seeking to assert claims against officers alleging that a lack of response (or inadequate response) led to a reduction in share price. Policyholders will argue that pollution exclusions have limited effect against such claims.

Visit our COVID-19 Hub for ongoing updates.

Filed under Commercial General Liability, COVID-19