The COVID-19 pandemic’s impact on business triggers a variety of potential insurance issues. In-house counsel and executive management are navigating a circumstance many thought would never occur in this fashion. Nonetheless, there are possible insurance coverage classes which may be available to alleviate the economic harm. Below is a roadmap for insurance considerations.
The language of the insurance policy controls. Begin with the policy, focusing on the precise wording of the coverages and exclusions, and then apply them to your factual circumstance. There are a number of sources of insurance coverage which may be applicable to the business losses incurred. These coverages include: (1) business interruption; (2) pandemic; (3) event cancellation; (4) political risk; and (5) employment practice liability insurance (EPLI).
In general, business interruption insurance can provide coverage when a policyholder suffers a loss of business income due to direct physical loss or damage to covered property at its location(s). Often, this coverage does not apply to loss of income from market conditions or a downturn of economic activity insofar as these are not a result of direct physical loss or damage. Accordingly, it is anticipated that many policies may not cover losses occasioned by the lockdown orders issued by state and local government. However, the physical presence of the virus on surfaces of an establishment could be considered physical damage or the tangible change in physical property sufficient to make a showing for coverage under the policy.
Pandemic insurance was uncommon because the risk is not well understood and it remained difficult to price for insurers. This coverage may be the most acute to this instance, however, and the policyholder should screen the policy for this coverage. Currently and coming off the back of this pandemic, companies are showing significant interest in seeking coverage for business losses stemming or arising from a pandemic. This may drive a new wave of commercial insurance. The challenge becomes the appropriate premium – how will insurance companies price this? Generally, an insurer prices coverage by assessing the risk through actuarial work – the likelihood of the covered event occurring, combined with the gravity of the loss. The insurance modeling works because the risk is spread across a wide swath of insureds. However, here, the race for immediate coverage by businesses, many of which are acutely affected by the pandemic, frustrates the actuarial analysis.
For business loss occasioned by a single event cancelled because of the pandemic, event cancellation coverage is the most applicable and quickest means for insurance coverage. However, it is prudent to, again, screen exclusions in the policy.
Next, political risk insurance hedges against unexpected losses arising from political violence, expropriation, currency inconvertibility, non-payment, and governmental frustration or repudiation of contracts, and is prevalent in policies secured by international businesses. Large companies which participate in international markets should consult their policies for this coverage.
Lastly, EPLI coverage may be a vehicle by which to combat employment claims arising from the pandemic. EPLI generally provides coverage to employers against claims made by employees alleging discrimination and wrongful termination. It is anticipated that the pandemic and employers’ responses (or lack thereof) to it may give rise to employment lawsuits.
If coverage appears to exist, it is important that an insured improve the likelihood to qualify for coverage by taking three steps: (1) providing timely notice to the insurer; (2) mitigating losses; and (3) organizing the documentation memorializing the triggering events and quantifying the losses.
Insurance policies generally require that insureds file a claim with the carrier within a certain number of days from the triggering event. Triggering events can include notice of default, notice of anticipatory breach, notice of termination/default based upon force majeure, or issuance of government orders or legislation. Further, a key precept contained within many policies and, in general, required by common law, is that the insured must take steps to mitigate losses incurred by a covered event. This is crucial and should be documented according to any requirements within the policy. This would involve the insured availing itself of alternative means to accomplish its business functions, including utilizing alternative sales and/or distribution methods. Third, the insured should gather and organize all information relating to the triggering event’s specific impact and documentation used as a basis to demonstrate the quantum of loss. This should be compiled and preserved in a central location, accompanied ideally with a well-organized memorandum to file which can ultimately be submitted to the carrier.
As an aside, another potential means for coverage is to examine whether the company is an additional insured on the contracting party’s policy. This would entail contacting the contracting party and requesting the certificate of insurance, the policy, and the additional insured endorsement.
Ryan Corkery is a partner in the firm’s Philadelphia office and advises corporate clients regarding risk management, insurance coverage, and related legal issues. Ryan is Co-Chair of the firm’s Commercial Litigation Practice Group. He can be reached at 267-528-0733 or via email at [email protected]