March 12, 2020

Is Your Business Insured for the Coronavirus?

How bad will the pandemic get? How much will it spread in the United States? Will we develop a vaccine in time to do any good?

As insurance lawyers, we have no idea. But we can help you figure out whether your business is insured for the coronavirus risks that keep business owners up at night.

Risk 1:  An outbreak forces my business to close until the outbreak ends. Are my financial business losses covered?

Maybe. Many commercial property policies provide “business interruption coverage” which may apply.  

This coverage typically requires that:

       (i) Your business is shut down. If your business actually closes for a period of time, you may meet this requirement. However, you wouldn’t meet it if your business slows because half of your staff is home sick.

       (ii) The shutdown is necessary. “Necessary” means something different than “desirable” or “prudent.” Whether a shutdown is necessary depends on the facts. If it is physically or legally impossible to enter your building, then closure is necessary. But if the government issues a public advisory recommending that businesses close, and you voluntarily comply, that’s a different story.

       (iii)  The shutdown is caused by physical damage to your property. Is a viral outbreak “damage” to your property?  There’s not a clear answer.  On the one hand, courts have found that hazardous contamination of a building constitutes property damage to the building. For example, asbestos incorporated into a building constitutes property damage to the building under a commercial general liability policy. Environmental contamination can also constitute property damage to the contaminated property. Policyholders whose businesses close during an outbreak will argue that property contaminated by the virus satisfies the “physical damage to property” requirement. On the other hand, insurers may argue that the real cause of the shutdown is not the contaminated building surfaces, but the need for social distancing in a neighborhood with many contagious people. Coverage will depend on the policy language and the details of the shutdown.

In short, finding coverage under a typical business interruption policy would require the right facts, and even then, you may get a fight from your insurer over the physical damage requirement.

Some business interruption policies offer broader coverage that applies when an order from a civil authority prevents you from using your property. Coverage under these policies depends on what caused the civil authority to issue the order. For example, a policy may require that the order result from physical damage to your building or neighboring properties. So, if a tornado misses your building but damages everything around it, and the local government precludes anyone from entering the area, this coverage may reimburse your business loss. Whether this coverage extends to a government-ordered quarantine depends on the policy language.

Finally, some business interruption policies are specifically designed to cover this type of loss. Some explicitly provide coverage for government shutdown orders during an outbreak of disease or virus. Some provide coverage for supply chain disruption that causes your business to shut down, regardless of why the supply chain disrupts. It will be easier to find coverage if your business has one of these policies.

Risk 2:  Someone sues my business for coronavirus-related injuries.  Does my liability insurance cover me against the lawsuit?

Again, maybe. Your business may have several types of insurance that may be implicated, depending on the nature of the injury.

First, commercial general liability insurance (“CGL”) protects your business against liability arising out of bodily injury or property damage. For example, suppose someone files a class-action lawsuit against your theme park, cruise line, or other recreation-oriented business for negligently allowing an infected person to transmit the virus to other guests. That lawsuit may qualify as a suit for bodily injury under your CGL policy.  

However, CGL policies often contain exclusions that may affect coverage for these types of lawsuits. For example, many CGL policies exclude coverage for specific viruses that have been problems in the past, such as SARS, and some exclude communicable diseases altogether. If your policy contains a SARS exclusion, an insurer may try to argue that the coronavirus qualifies as SARS. While the disease caused by the virus is formally known as COVID-19, the virus itself is SARS-CoV-2. Whether SARS-CoV-2 fits within a SARS exclusion will depend on the specific policy language.

Standard CGL policies also contain a pollution exclusion, which precludes coverage for the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape” of a “pollutant.” Some policies define “pollutant” as including a virus. The question is whether transmitting a virus constitutes a discharge, dispersal, seepage, migration, release or escape of a pollutant. Courts will grapple with that question in the wake of whatever litigation this outbreak spawns.

Second, Directors & Officers (D&O) and Errors and Omissions (E&O) policies provide broad coverage for a “breach of duty” or any negligent “act or omission.” But they usually exclude liability for property damage and bodily injury. These policies may provide coverage for a broad array of claims other than claims for property damage or bodily injury.

While no one should be taking advice from insurance lawyers about the threats to our nation’s health, safety, and economy posed by the coronavirus, it is never too early for businesses and individuals to start thinking about risk transfer and how to minimize exposure for the losses and claims that are certain to follow in the wake of this contagion.