Guidance for Policyholders on Losses Related to Coronavirus
Policyholders should not presume that insurance does not apply to business losses related to the Coronavirus Disease 2019 without first carefully studying their insurance policies and law that has developed in other contexts. Some businesses may have coverage for their unique losses. Pursuing business interruption insurance claims is often a complex and challenging process. Policyholders should take care to comply with all policy conditions and strategically approach their insurance claims to maximize coverage and avoid pitfalls. As businesses are assessing the possible impact of this ongoing event on their business and their employees and proactively creating plans to respond, they should consider a review of their insurance portfolio to ascertain whether coverage may be available to offset losses.
The outbreak of Coronavirus Disease 2019 (“COVID-19”), in Wuhan City, Hubei Province of China, raises questions of whether companies’ commercial insurance policies might respond to claims stemming from business losses related to this infection. The virus infection, which may manifest in pneumonia and in some unfortunate cases result in death, is believed to have originated from a Wuhan seafood and live-animal market. In the following weeks, person-to-person transmission occurred. At the outset, health workers in direct contact with those initially infected fell ill. As time passed, the virus infection spread by transmission to others less directly related to those who were initially infected, including to people worldwide.
More than 85,000 people have been infected and nearly 3,000 deaths stemming from the virus infection are confirmed with the numbers of reported cases across the world expanding almost daily. On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a “public health emergency of international concern.” The very next day, Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States.
In addition to health impacts, some of the world’s largest companies have been adversely affected by the outbreak, by closing retail shops and factories in China. Other companies have suffered losses due to decreased travel from China to U.S. and European destinations during the Chinese New Year, with resulting reductions in sales by customers from China that otherwise would have occurred had there been no travel disruption. One of the world’s most valuable public companies, technology giant Apple, announced it would miss its quarterly revenue guidance for Q1 2020, as Chinese factory work and consumer spending ground to a halt because of the virus. And, multiple companies worldwide have or will suffer production declines due to supply chain disruptions.
As the virus continues to spread and fears of a global pandemic grow, many major events are being canceled. For example, the world’s largest watch and jewelry event, Baselworld, canceled its 2020 edition in Basel, Switzerland, scheduled for April 30 through May 5, 2020, announcing that it will be postponed until January 28 through February 2, 2021, due to government measures enacted to contain the coronavirus. The Swiss government banned all large-scale events with 1,000 or more people until at least March 15, a move that was announced by the Swiss Federal Council in late February 2020. Professional hockey games in Switzerland are currently being played in empty arenas. While it remains scheduled for July 24 through August 9, 2020, many question whether the Summer Olympic Games will go forward in Tokyo, Japan, as planned.
A major event like the Olympics normally attracts tens of thousands of tourists for the event itself, not to mention the thousands more who will swarm the area just to be near the excitement of its festivities. Conservative estimates suggest that the event will generate hundreds of millions of dollars in revenue for the Tokyo area. The low-end ticket prices had been surging before the virus, and companies were contemplating paying upwards of millions of dollars for 30 seconds worth of ad time during the most watched events including the opening ceremony, media buyers said.
As losses continue to rise, and the virus spreads around the globe, important questions regarding economic impact are being addressed at all levels. For businesses assessing possible financial losses, their insurance portfolio should be carefully evaluated to determine bases for compensation. While traditional coverages may not seem like obvious sources of recovery because of a frequently seen requirement for “physical damage,” policyholders should not presume that insurance does not apply without first carefully studying applicable policy language, and law that has been developed in other contexts. Some businesses may have coverage for their unique losses.
Businesses, schools, and other entities are presently planning on how to prepare for and respond to COVID-19 and any mutated versions of the virus. Part of that should include a review of possibly applicable insurance policies to understand in advance whether insurance may be available to offset financial losses in the event the virus impacts your business.
Scope of Losses and Coverage
It is critical that policyholders assess as quickly as possible (i) the extent of their losses and (ii) the scope of coverage for those losses. Insurers will request detailed proof of the loss claimed under the policy and documented evidence of the expenses incurred in responding to that loss. Policyholders must fully understand the scope of coverage afforded by their policies to maximize the potential for recovering all covered losses.
Policy Conditions and Requirements
Policyholders should be wary of their policies’ potential time traps. For example, a policy may obligate the policyholder to provide the insurer with notice of a loss “as soon as possible” or “as soon as practicable” after a loss or other insured event. Some policies require that notice be given in as little as 30 or 60 days. The consequences of failure to give prompt notice differ depending on the type of policy and the jurisdiction. But, a failure to give prompt notice might completely bar a policyholder’s claim.
Potentially Applicable Insurance
Business Interruption Insurance
Many property insurance policies, including their business interruption and contingent business interruption coverages, are sold on an “all risk” basis, meaning that they cover losses caused by any peril not expressly excluded. Frequently, commercial property coverages require some level of physical loss or damage somewhere in the supply chain to trigger coverage. With respect to losses arising from COVID-19, the requisite physical loss or damage may not be present. However, not all business interruption losses must stem from property damage, and depending upon applicable law and policy language, policyholders may have a basis to argue for coverage even if financial losses do not stem from traditional notions of “property damage.” Many policyholders—especially those most likely to be affected by infectious diseases, and those previously impacted by disease such as SARS, Ebola, or Bird Flu—purchased property insurance policies that include extensions providing coverage for financial losses caused by notifiable or infectious diseases.
Policy wording used in these extensions varies greatly. One such example is the following:
“Access prevention: Your premises being rendered inaccessible to the public due to an order made during the period of insurance by a government authority or official acting with legislative authority (‘access prevention order’) following: health, safety, or infectious disease concerns (but not arising as a result of any highly pathogenic avian influenza in humans or diseases declared to be quarantinable diseases under the Quarantine Act 1908 and any subsequent amendments); infectious disease means an outbreak of a human communicable disease at the premises.”
Many places in the world infrequently issue an “Access Prevention Order” or the equivalent. In that event, an insurer may dispute whether this extension is triggered. Some companies purchased policies with a different variation of a notifiable or infectious disease extension, such as the following:
“Murder, suicide, and infectious disease. We will pay for loss of income that results from an interruption of your business that is caused by: (a) any legal authority closing or evacuating all or part of the premises as a result of: (i) the outbreak of an infectious or contagious human disease occurring within a [certain distance] radius of your premises; however, there is no coverage for highly pathogenic Avian Influenza or any disease declared to be a quarantinable disease under the Quarantine Act 1908 (as amended) irrespective of whether discovered at the location of your premises, or outbreaking elsewhere;…”
The policy does not define the term infectious disease, and states: “The definition of ‘insured damage’ does not apply to this extension of cover.” Meaning, the policy does not require physical loss or damage to trigger this infectious disease business interruption coverage extension. Given the significant variations in policy wording, it is important that policyholders examine and analyze their policies and the applicable law.
We also note that some large corporations may find applicable coverage in other types of insurance policies, including standalone contingent business interruption insurance (also known as “supply chain” insurance) for losses sustained by a policyholder’s suppliers or customers who face losses without physical loss or damages caused by infectious disease, access denial, or loss of attraction. Some “event cancellation” coverages also are triggered without actual property damage. And, other specialized coverages may exist for emerging risks, which are frequently categorized as technological risks, crystalizing risks, and aggravating risks.
Event Cancellation Insurance
Event interruptions and postponements can result in significant financial losses for insureds in many industries. For this reason, insureds with a stake in a major event frequently purchase event cancellation insurance. This broad form of insurance can provide coverage for a wide variety of perils that can negatively impact live events, including: governmental orders, earthquakes, floods, fires, power failure, damage to the event’s venue, denial of access to the venue due to a failure of public transportation, or even the interruption of a live television broadcast for major breaking news. The cost to purchase broad event cancellation or postponement insurance varies significantly from insurer to insurer, and will depend in large measure on the policy language and the limits of liability purchased. Some event cancellation insurance policies will provide coverage broad enough to cover losses arising from postponement or cancellation because of COVID-19.
Of course, as with all insurance policies, event cancellation policies can contain a number of exclusions and other policy terms designed to limit coverage. For instance, coverage under an event cancellation policy may not be available if an event is canceled or postponed simply because of insufficient financing or marketing efforts. Similarly, under most event cancellation policies, event cancellations, or postponements stemming from lack of interest or less-than-projected ticket sales are not likely to be covered.
The types of financial loss recoverable under an event cancellation policy will depend on the particular terms of the coverage purchased. At a minimum, most event cancellation policies will cover whatever marketing, organization, and other out-of-pocket expenses the insured incurred in the months and weeks leading up to the event. Insureds will also often purchase, for an additional premium, event cancellation policies that cover the profits and revenues lost as a result of the covered event’s cancellation or postponement (i.e., business interruption coverage).
Additionally, many event cancellation policies will cover any so-called “additional expenses” that the insured incurs to relocate or reschedule the event in order to avoid its cancellation. These covered “additional expenses” could, for instance, include amounts spent to rent an alternate venue and market the rescheduled or relocated event, and costs of transporting equipment to a new venue might also be covered.
Measuring Business Interruption Losses
Insurance policies typically contain provisions stating how business interruption losses are to be measured. They often address the issue in terms of the “actual loss sustained,” which frequently is measured in terms of either (i) the net reduction in gross earnings minus expenses that do not necessarily continue or (ii) net profit that is prevented from being earned plus necessary expenses that continue during the period of interruption. When policies indicate that the measurement is the difference between actual earnings or profits and, in essence, what otherwise would be expected, insureds frequently measure their loss by comparing the income they would have generated without the adverse conditions to the income they actually generated. This measurement may result in a lower insurance recovery than the law permits. An insured should consider measuring its loss not based on what it would have made but for the disease event, but based on what it would have made had its business not been affected by the event.
Maximizing Insurance Recovery
Pursuing business interruption insurance claims is often a complex and challenging process. Even sophisticated businesses unknowingly commit errors in assessing, documenting, and quantifying their losses, or when interpreting their insurance policies, that later limit or even bar potential insurance recovery. Policyholders should carefully review their coverages, comply with all policy conditions, and strategically approach their insurance claims to maximize coverage and avoid pitfalls.
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© 2020 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.