COVID-19 and Insurance Coverage

Hiscock-Barclay Update, 3/20

As the national economy continues to slow due to the outbreak of the novel coronavirus (COVID-19), there is much uncertainty for businesses. What is clear, however, is there will be a significant amount of claims and litigation stemming from the spread of the virus and, as a result, questions of insurance coverage will figure prominently.

Coverages at issue will include the following, among others:

  • Business interruption (i.e., first-party claims arising out of an insured’s need to close a facility due to COVID-19 contamination
  • Property damage (claims for cleanup costs required by contamination and losses sustained due to the closure of a supplier)
  • General liability, errors and omissions, and directors and officers claims (e.g., claims by hotel guests who allege the hotel failed to properly sanitize their room)
  • Workers’ compensation (claims by employees out of work due to the virus)
  • Event cancellation (claims for loss to facilities, vendors, etc.)
  • Professional liability (claims for negligent exposure to the virus)

Of particular importance are the implications for business interruption coverage, which many businesses purchase as part of their commercial property packages. Commercial property policies generally provide coverage for lost business income caused by a necessary suspension of the business. This coverage usually requires a “direct physical loss or damage” to the property. The question of what constitutes a direct physical loss has been litigated frequently and must now be considered in the context of COVID-19. It’s anticipated that businesses will claim contamination of property by the virus qualifies as direct physical loss, and insurers will disagree.

Another complicating issue is the presence of policy exclusions, such as for a loss caused by a virus. In 2006, after dealing with similar claims related to the SARS virus, insurers created endorsements to property policies excluding “loss due to virus or bacteria” (also known as the “communicable disease exclusion”). Some insurers offer additional coverage for the loss of business income caused by a temporary shutdown by order of local, state, or federal authorities because of a communicable disease outbreak.

With many manufacturers unable to produce products and restaurants and hotels closing and canceling reservations, insurance claims departments will likely be addressing numerous business interruption claims in the near future. In fact, one such lawsuit has just been filed in Louisiana by a restaurant in New Orleans’ French Quarter.

Like many other states, Louisiana has limited public gatherings, and New Orleans has ordered restaurants to limit their business to take-out orders. Plaintiff Oceana Grill alleges its property insurance policy issued by Certain Underwriters at Lloyd’s provides coverage for its business interruption because the virus contamination constitutes a direct physical loss. The restaurant further alleges the policy specifically includes loss caused by business closures by order of a civil authority and contains no “virus exclusion.” The precise terms of the policy at issue and the insurer’s coverage position are currently unknown.

The situation surrounding COVID-19 remains fluid. Insurers and insureds must monitor the outcome of business interruption claims closely to examine the terms of the policies at issue, the insurers’ positions, and how courts may rule.

Barclay Damon’s insurance coverage attorneys are actively working on these issues and are well prepared to assist clients in determining what may or may not be covered.