As the world responds to the COVID-19 pandemic, many businesses have closed, either voluntarily or in response to governmental orders. Such closures are obviously going to have an adverse effect on revenues, and businesses should be assessing their available insurance coverage for lost income.
Some companies may have freestanding supply-chain policies, and many more have business interruption (BI), contingent business interruption (CBI) and civil authority coverage as part of their property policies. There is a good deal of uncertainty as to how that coverage may ultimately respond to COVID-19-related closures, and the answers will not be clear until the questions have been fully litigated. The trigger for BI and CBI coverage typically requires the insured to show “direct physical damage” to property. Whether COVID-19 virus contamination to insured or nearby property is sufficient to trigger coverage is an open question, with the answer to be decided under applicable law in each state. Some state lawmakers have proposed legislation to expand the scope of coverage for businesses in their states, but it is unknown what effect those may have.
Policyholders should take steps now to fully understand their coverage and protect their rights. First, remember that there are no clear answers on coverage. Opinions offered by brokers and risk managers, while well-intentioned, should not be treated as the final word — particularly when millions of dollars may be at stake. Companies should ask an experienced coverage lawyer to analyze their policies and explain the available coverage. Any such analysis should include answers to the following:
- What is the trigger for BI, CBI or supply-chain coverage? Usually it’s “direct physical loss or damage” or something similar.
- Does the policy contain an express exclusion for viruses?
- Does the policy have civil authority coverage for closure of the business due to a government order? If so, what are the terms?
- When does the policy expire/renew?
Second, property policies cover losses that take place during the policy period. As current policies expire and are renewed, it is almost a certainty that carriers will insert COVID-19 exclusions in the new policies. The market has seen some examples of this already. Companies need to immediately understand when their policies expire, so they can make an informed decision about whether to give notice of a claim under the current policy year while they still can. This is a delicate dance as the property insurance market is hardening. For policies up for renewal, coordination with the company’s risk management department and insurance broker is vital to securing coverage going forward.
Third, policyholders should track any COVID-19-related losses they are experiencing. Insurers will require detailed proof of loss. Policyholders should consider setting up a separate accounting code to track losses.
Fourth, businesses that close voluntarily may have less of an argument for coverage than those who close because the government orders them to close. Companies should fully understand their coverage triggers to better inform business decision-making in this regard.
This is a time of great uncertainty, and there are no guarantees of coverage, but reasonable measures now can help preserve a policyholder’s rights as the issues become clear in the coming months.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues.