As the COVID-19 pandemic has progressed over the past several months, participants in the insurance industry have recognised the likelihood of a resulting increase in claims volume. Much of the early focus has been on the ramifications to insurers that write business interruption policies. However, a broader look reveals that many disparate lines of coverage are likely to see a significant boost in claims, whether directly caused by the pandemic itself or by social, institutional and governmental reaction to it. Below we will discuss a number of coverage lines in addition to business interruption and the likely claims scenarios under each.
Business interruption coverage is commonly sold as a component of commercial property insurance policies to provide relief to an insured for lost profit and extra expenses when its business operations are disrupted by “direct physical loss or damage” to insured property. Closing a business due to a threat of exposure or spread of COVID-19 is not “direct physical loss or damage” to insured property. However, lawsuits over coverage for alleged business interruption losses due to the coronavirus pandemic have already been filed, and a veritable wave of claims is likely coming.
Important to note is that in the USA multiple states, including New Jersey, Massachusetts and Ohio, have proposed legislation that would mandate business interruption coverage for alleged COVID-19-related losses even where policies have explicit bacteria/virus exclusions.
- Denial of access to premises due to civil authorities’ orders
- Loss of use of premises due to coronavirus contamination
- Disruption supply and distribution chains due to COVID-19 factors
Event cancellation policies generally cover loss directly resulting from cancellation of an event due to circumstances beyond the insured’s control, e.g. weather events, terrorism, and communicable disease. This is specialized coverage intended to insure against financial loss, including lost revenue and other event-related expenses. An “all cause” event cancellation policy could, depending on policy wording, provide coverage for cancellations due to a pandemic, such as COVID-19. That said, depending upon the date of issue, policies may contain exclusions for communicable or contagious diseases, pandemics, or government-mandated quarantines.
Trade organisations, entertainment companies, music performers, professional sports teams and other athletic associations, and individuals forced to cancel personal events, e.g. weddings, may seek recovery for losses due to cancellation.
Viability of claims will depend upon the particular policy language, e.g. basic v. expanded “all cause” coverage, and specific circumstances of the loss, e.g. date of cancellation and/or location of event.
In addition to exclusions for communicable disease, coronavirus claims may not be covered if COVID-19 is considered a pre-existing condition and thus excluded on event cancellation policies from January 2020 and onward.
In the case of denials, insureds may also assert extra-contractual claims for bad faith to recover for consequential loss.
Commercial General Liability
Commercial General Liability (CGL) policies represent the most common liability insurance held by businesses. CGL insurance offers “bodily injury” and “property damage” coverage, as long as the “bodily injury” and “property damage” were caused by an “occurrence,” i.e., an “accident.” CGL policies may also offer “personal and advertising injury” coverage, which could come into play in coronavirus-related claims.
Given the nature of how COVID-19 spreads and the guidance and cautions provided, the majority of lawsuits implicating CGL policies are based on persons’ exposure to and contracting of COVID-19 allegedly due to the failure of a business to sanitize the premises, close/quarantine more quickly, or otherwise prevent the spread of COVID-19.
- These claims will typically be brought by customers, clients, students, independent contractors and invitees, tenants, and other non-employees.
- Targets are entertainment and hospitality venues, health care facilities, long-term care facilities, banquet spaces, schools/academic institutions, fitness facilities, airlines, cruise lines, trade organizations and purveyors of conferences, sporting leagues and teams, and other places where people gather in large groups.
- Manufacturers, suppliers, and vendors of air filtration and recirculation systems may also be targets of consumers, or more likely, third-party targets of the main defendants.
- Lawsuits have already been filed against a cruise ship operator for allowing its passengers to be exposed to and contract COVID-19.
Proving causation may be very difficult for plaintiffs. Guesswork as to where and how they contracted COVID-19 will not sustain these suits.
If a plaintiff does not allege they contracted COVID-19 and merely suffered emotional distress (without physical manifestations) from the prospect of contracting the virus, the majority of jurisdictions hold that does not qualify as “bodily injury” under a standard CGL policy.
Lawsuits also have been filed, and will continue to be filed, by consumers against businesses that make allegedly false representations that their products can prevent or slow the spread of symptoms of COVID-19. While these suits may allege “bodily injury,” we are sceptical whether they allege an “occurrence.” It is difficult to believe these lawsuits satisfy any of the “personal and advertising injury” offences.
There may be lawsuits alleging wrongful quarantining or disclosure of private information in connection with COVID-19 diagnoses. These could implicate the CGL policies’ “personal and advertising injury” coverage as either false arrest or detention or invasion of privacy.
Directors and Officers (D&O)
Directors and officers (D&O) policies provide claims-made coverage, typically covering companies for shareholder lawsuits and individuals for claims made against them while serving as a director or officer of a company. These policies protect against the insured’s “wrongful acts,” which are typically defined as the insured’s errors, omissions, misstatements, misleading statements, neglect, or breach of a duty. The first coronavirus related securities lawsuits have already been filed and lawyers and insurers expect the pandemic to generate a wave of claims targeting the line.
- Claims that companies have made inaccurate disclosures regarding the virus’s impact on the company’s health, such as the ability to deliver its goods and services.
- Claims that companies have failed to follow government recommendations, failed to enact business contingency plans, suffered privacy breaches, or failed to manage the virus’s impacts on the business.
- In the USA Securities and Exchange Commission (SEC) Chairman Jay Clayton advised on March 4, 2020, that companies should “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their businesses and operations resulting from the coronavirus to the fullest extent practicable.” Failure to comply with this SEC guidance may result in claims against the company.
Forecasting Claims and the Post-COVID-19 Coverage Landscape
As we have discussed, the COVID-19 pandemic is likely to materially affect many coverage lines beyond business interruption coverage. Carriers that write other lines should anticipate a proliferation of claims over the next several months and potentially for years after the pandemic dissipates. A significant number of these claims will be caused not by businesses closing and opportunities lost, but by individuals and businesses continuing to operate and minimize losses throughout the pandemic. Claims professionals and carriers alike should note the likely breadth of future claims across varying lines and continuing until the relevant statutes of limitations pass. By understanding the expected claims trends across lines, insurers will be better equipped to respond appropriately to the spectrum of COVID-19-related claims before they are reported.
Blog Submission: Peter Sellwood
PALTD InsureRight – Insurance & Risk Management
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