Client Alert: Virus claims are here: A range of policies may be impacted.
Many U.S. businesses are experiencing large financial losses due to the coronavirus pandemic. Last month, governments imposed severe restrictions and businesses curtailed their customary operations in response to the crisis. The loss of business income due to these events will result in significant first-party property insurance claims. The availability and scope of coverage available to businesses is likely to be disputed between insureds and insurers and litigated for years to come. Policy details and careful analysis will determine the success or failure of these claims.
First-Party Business Claims for Coverage: Many “all-risk” policies afford coverage for “all risks of direct physical loss or damage by a covered cause of loss to a covered property.” Policyholders will argue that the inability to use property for its intended purpose – to generate income – constitutes direct physical loss or damage to such property. “Stay at home” orders may prevent customers from visiting the policyholder’s places of business or fully utilizing their services. Some property policies contain “interruption by civil authority” clauses that may afford coverage for those losses.
On March 27, the New York Legislature introduced Assembly Bill No. A10226, which provides:[E]very policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, shall be construed to include among the covered perils under that policy, coverage for business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.
This proposed bill applies to policies issued to policyholders with fewer than 100 full-time employees who work at least 25 hours or more. The bill could require coverage even for policies that specifically exclude virus-related claims. The bill is currently in the Assembly Committee. If passed, it is possible the insurance industry will question the constitutionality of the bill under Article 1 of the contract clause of the Constitution.
Exclusions and Defenses Against Coverage: Insurers are likely to claim that no coverage exists because the existence of the virus in an office or community does not establish a necessary prerequisite for coverage—physical damage to property. Property insurance policies afford coverage to insureds for property damage and lost business income as a direct result of such property damage. The lost income can result from damage to the insured’s property, damage to the property of a customer or supplier, or government actions.
In addition to the issue of property damage, a range of defenses may be available to insurers to bar or limit payment. These defenses may be in the form of exclusions, sub-limits or waiting periods for coverage, and time limitations for coverage. The policies also require loss mitigation by insureds. Thus, efforts to contain the virus and limit damages will be important.
Property owners should fully understand the scope of their coverage, keep records of the loss and promptly notify insurers. This will enhance proper claims investigation and adjustment such that resolution can be effectuated by both insureds and insurers.
Bleakley Platt stands ready to assist clients as they navigate the inevitable disputes that lie ahead over claims for coverage for lost business income, liability and employee safety losses from the pandemic.