Coronavirus (COVID-19) insurance policy issues

March 24, 2020 | Mark R. Frederick, Ana Simões, Paul Sahota

As a special service to our insurance clients, we present an outline of some typical insurance policy issues that may arise out of a contagion such as the Coronavirus.

Throughout the current pandemic, we will be available to advise you or defend claims arising out of this current threat. Please feel free to email the authors or our team at any time.

Ana Simões

Mark Frederick

The advice contained in this memo is intended to be informative only and does not constitute legal advice for any specific scenario. Should you have specific questions relating to a specific factual scenario, please do not hesitate to contact us.

Introduction

Coronavirus Disease 2019 (COVID-19) has profoundly and swiftly changed the landscape of the world. The transmission of a virus causing respiratory illness was first reported to the Wolrd Health Organization on December 31, 2019 in Wuhan, China.[1] Events escalated quickly as the coronavirus was declared a global pandemic as of March 11, 2020.[2] As of March 21, 2020, the World Health Organization reports that there are a total of 292,142 confirmed cases resulting in 12,784 deaths .[3]

Given the seriousness of this pandemic, there has been a dramatic negative impact on the global economy. The stock market is declining and business activity seems to be coming to a halt. Some of the decline in the Canadian economy is directly linked to government action such as: recommending that Canadians no longer engage in recreational travel, restricting access through our borders, and mandating that restaurants and bars close. In the end, businesses are left to tackle the plethora of issues arising from the fallout of COVID-19 including contemplating shutdown and risking critical income loss.

Coronavirus and Canada

 The Federal and Provincial Crowns across Canada and some municipal governments have ordered some businesses to temporarily close, if not shut down completely. In some provinces and cities, states of emergency are being declared, prohibiting public assembly and shutting schools and business. Most governmental, educational and transportation operations have been suspended for at least two weeks, or, restricted severely. Hospitals are gradually filling to capacity. Senior homes are in lockdown. Our borders are closed to international travel.

As a result, most public commerce has effectively ceased to function, while remaining professional and other service and retail businesses operate on reduced scale. Construction sites with over 25 workers are closed. Museums, galleries, cinemas, theatres and restaurants all sit idle as hundreds of thousands of workers are sent home indefinitely.

Given the grim reality, business owners are turning to their insurance policies to cover losses and potential future claims arising from the spread of COVID-19. This article will discuss the various policies that may apply.

Other Jurisdictions

In the United Kingdom, the Association of British Insurers clarified on Monday, March 16th that only a handful of companies had insurance that covered closures due to infectious diseases. Moreover, an even smaller number of those companies had insurance policies under which they could potentially claim for losses caused by the coronavirus pandemic.[4] However, Chancellor of Exchequer Rishi Sunak recently claimed that the UK had struck a deal with British insurers to ensure that the small number of pandemic policies in place are triggered by the government’s recommendation that citizens socially distance themselves.

In the United States, senators have written to four US insurance trade bodies to request that insurers cover financial losses due to COVID-19 under business interruption policies. However, there has been significant pushback on this front. This was following an attempt in New Jersey to introduce a bill that would mandate insurance providers to cover COVID-19 business interruption claims. Currently, the bill has been pulled with the expectation that insurance providers engage in good-faith practices to assist clients.[5] Additionally, the US government is in talks with insurers about using their infrastructure to funnel large amounts of aid to distressed businesses.

Commercial General Liability

Commercial general liability (CGL) provides legal compensation to businesses in the event that a third party brings a claim against them. For example, a customer could commence a claim that they contracted COVID-19 on a business premise. These types of policies typically cover bodily harm and property damage that is caused by an occurrence, meaning an accident, including continuous or repeated exposure to substantially the same general harmful conditions, in a specified coverage territory.

The typical CGL policy must be carefully scrutinized to gauge whether common exclusions null the insurance coverage.

Many policies contain specific pathogen exclusions, such as:

ORGANIC PATHOGENS

(a)        All liability or expense arising out of any actual, alleged or threatened infectious, pathogenic, toxic or other harmful properties of any Organic Pathogen, including exposure to any Organic Pathogen; and

(b)        Any loss, cost or expense arising out of any:

(i)        request, demand, order or statutory or regulatory requirement that any Insured or others test for, monitor, clean up, remove, contain, treat, detoxify or neutralize, or in any way respond to, or assess the effects of any Organic Pathogen,

(ii)  Claim or suit by or on behalf of a governmental authority for damages because of testing for, monitoring, cleaning up, removing, containing, treating, detoxifying or neutralizing, or in any way responding to, or assessing the effects of any Organic Pathogen, or

(c)        All liability or expense arising out of any actual or alleged failure by an Insured to properly quarantine those affected by an Organic Pathogen.

This exclusion does not apply to Bodily Injury caused by any Organic Pathogen in or on any food or beverages sold, distributed, served or handled by the Insured.

DEFINITION: ORGANIC PATHOGEN

 Organic Pathogen” means any:

(d)        Bacteria; mildew, mold or other fungi; other microorganisms; or mycotoxins, spores or other by-products of any of the foregoing;

(e)        Viruses or other pathogens (whether or not a microorganism); or

(f)        Colony or group of any of the foregoing.

Other policies do not have such exclusions, though they may have exclusions that speak to pollutants or moulds.

Discussion

The issues with the application of this type of exclusion will be whether the pathogen has caused the loss, or whether the threat of the pathogen has caused the loss. Case law on the subject is not entirely clear given the few occasions in which these circumstances have arisen.

Underwriters and claims managers should carefully review policy language to ensure that reference to viruses are clear and concise.

Many insurers are now inserting specific Coronavirus exclusions or are clarifying language within their policies to make it clear that virus exposure is excluded. Such efforts will be successful only if the intention was always to exclude pathogens.

Nonetheless, on a go-forward basis, underwriters may very well wish to improve their exclusionary language on this subject.

Even if coverage is found to exist, a policy may not apply in circumstances where a business owner kept operating the business despite governmental mandate to shut down or where the operation was high risk such that bodily harm was expected.

The policy would also have to be reviewed to see if coverage is excluded where the harm is caused by pollutants and whether COVID-19 qualifies as a pollutant.[6] Disinfecting measures themselves often involve a certain amount of pollutant or toxicity. The requirement of using sterilising hand gels may cause other health problems that may trigger other exclusions. This would include the disposal of such materials or materials said to be contaminated with the virus.

Different industries will have differing exposures. The common issue will be to see that insureds are all advised to take prudent measures to establish a virus response and protocol to ensure that premises, employees and customers are kept safe.

The most difficult areas for exposure will be hospitals and other medical facilities. Most of these will have detailed plans in place to contain the spread of virus.

Commercial Property and Business Interruption Policies

Commercial property insurance, which can also include business interruption insurance, may cover loss of income, employee wages and clean-up expenses during a suspension of operations due to COVID-19. A commercial property insurance policy protects and compensates the insured in the event that there is direct physical loss or damage to covered property. These policies can also include coverage to protect owners from income loss due to direct physical loss or damage to covered property.

It is unclear that a COVID-19 related contamination would qualify as direct physical loss or damage to covered property. Typically these provisions operate to protect owners in the event a natural disaster, such as a flood, earthquake or fire, occurs and causes physical property damage.[7] However, insurance policies can be negotiated to include infectious disease extensions to capture non-physical damage where government authorities mandate closures in order to control notable infections.[8] It is unlikely that, without negotiation, a commercial property policy will cover this type of claim given that coverages have been restricted following previous infectious outbreaks such as SARS, H1N1 and Ebola. If the policy is ambiguous, local law may shed light on how courts have interpreted physical loss or damage clauses and whether non-physical damage arising from infectious outbreaks qualify.

Business income loss and expenses can also be potentially covered through ordinance or law provisions that indemnify businesses in the event that government action interferes with operations. This may include enactments of laws that mandatorily force closure. However, typically, such provisions tend to limit coverage to when government actions lead to the direct seizure or destruction of covered property.

Our concern rests with policies that are unclear or may be broad enough to cover situations beyond underwriters’ intentions. For example, many policies contain this type of endorsement:

Civil Authority

This Policy insures loss, as covered herein, which is sustained by the Insured as a result of damage caused by order of civil authority to retard or prevent a conflagration or other catastrophe.

Discussion

If a municipality or province orders one to stay home and effectively shut one’s business on account of a virus, the argument will be whether the virus qualifies as a conflagration (usually a fire) or “other catastrophe”, which has usually been taken as some sort of physical disaster. Pressures are already being exerted by the US government on American insurers to treat such interpretations as including viral threats.

Contingent Business Interruption Coverage

Contingent business interruption coverage compensates a business owner in the circumstance where a vendor fails to meet supply obligations leading to business income loss. However, this type of policy typically requires that the vendor or supplier have suffered direct physical loss or damage that rendered them unable to meet their supply obligations. The insurance policy would have to be interpreted and analyzed through local law. The insurance policy may cover a circumstance where COVID-19 leads to a supplier failing to meet its obligations to a business owner.

Discussion

Insurers who insure in this area are well-advised to determine positions in advance of claims so that they may consistently respond to insureds and put the onus on insureds to take immediate measures as a prudent uninsured rather than await a determination allowing losses to pile up.

Director and Officer Liability Insurance

Director and Officer Liability insurance (D&O) compensates a corporation for certain loss stemming from actions taken by directors and officers. With stock markets experiencing a steep decline with seemingly no immediate bottom out, shareholder lawsuits will follow alleging that corporations did not follow disclosure guidelines or were not prepared for the impact of the coronavirus. Director and Officer Liability insurance will cover decisions that leaders made in managing the company in their capacity as directors and officers. However, this type of insurance does not often cover claims citing bodily injury or harm. Overall, the situation will call for careful analysis of both the shareholder claim and the insurance policy to see if any management related decisions during the coronavirus pandemic are indemnified.

D&O or other management liability may also flow from failing to make businesses or premises safe or seeing that measures are taken to implement a safe environment for the business.

Discussion

D&O will present a significant challenge for the market as the debate will rage about how well boards took efforts to plan out disaster scenarios and what effective steps they employed to deal with the crisis while keeping operations and company value intact. For some the answer will be how they coped, for others it may be how well they positioned themselves for the inevitable recovery, while for others it will be both.

Event Cancellation

Event cancellation insurance coverage protects organizers where scheduled events had to be cancelled due to circumstances beyond their control. This will be relevant in the context of Coronavirus as calls for social distancing have forced numerous event and conference cancellations, postponements or shifts to online platforms. Each policy will have to be reviewed to assess whether infectious illness claims are excluded under the terms. In the event that it is applicable, it will be prudent to determine when the policy is triggered. It may be the case that only a government mandated cancellation of events and conferences triggers the policy coverage.[9]

Discussion

We see this as a perfect storm for insurers underwriting in this area. While there will be losses, there will also be savings of expenses which need to be quantified in approaching any claim. There will also be opportunities for make-up events or other replacement activities that will take the sting out of some of the losses. These claims, if coverage exists, may involve significant accounting exercises to determine an accurate scope of damages.

Professional Indemnity – Non-Medical

Most exposures involving professional indemnity arise from either design, advice or organisation. Bodily injury is generally excluded. Liability may result from various grounds, including the inability to supply staff for crucial meetings causing delay, failure to see that appropriate measures are put in place to avoid infection in the carrying out of one’s practice, which may again lead to delay or other issues.

A significant exposure may result from missed deadlines and statutory filings where staff are not available. Insureds must be reminded to take reasonable measures to see their professional obligations are fulfilled.

On the personal injury side, where coverage is endorsed, saying that someone has the virus when they do not may lead to defamatory claims, with damages determined from resulting missed business or other impairment.

Insurance brokers may particularly be at risk if pandemic coverage was available in the marketplace but not sold to clients. The issues will likely include whether the event or business was too large to be accepted as a risk, or too small, and whether limits available were sufficient.

Discussion

There are a plethora of risks for professionals in the Coronavirus scenario in almost all aspects of their business in giving advice, not only involving general liability, but professional liability, particularly where their opinion as to issues such as timing and safety are raised.

Cyber Liability

Business disruption brought on by the virus may make computer systems more susceptible to attack and theft. With more and more employees working from home, networks and systems become stretched to capacity leading to greater exposure to data theft and other social frauds where verification and policing of systems is impaired due to staff shortages and the need for remote monitoring.

Discussion

Cyber liability is a complex topic, even without consideration of the intricacies created by a global pandemic. The Coronavirus makes this area seem like it is on steroids.  For the first time, major service businesses have employees at all levels operating remotely from home. Some workers are already familiar with this type of environment and the systems that support it. Others are not, and their function may be impacted as they get up to speed in an environment where help may not be forthcoming. Businesses who wish to “stay open” should take even greater care in circumstances where they operate with reduced staff at the office or with most staff functioning remotely to ensure they are not compromised by operation and needs created absent the discipline usually imposed within an office.

Discussion 

We recommend frequent calls and checks of the computer system to ensure that it is functioning optimally. Assistance should be given and all employees checked out to ensure that they can operate for prolonged periods of time in a remote environment.

Educational Institutions

Many post-secondary institutions have heeded the government’s advice regarding social distancing and have proactively shutdown campuses. This has included the closure of residences that house students on campus. In many instances, classes and exams have been moved to online platforms.

Universities and colleges are undoubtedly turning their attention to the current and potential future losses of revenue that they will experience due to this pandemic. These institutions will be looking closely at their insurance policies to see if they can file claims under existing coverage policies to curb their losses. However, it is not clear whether current property and business interruption coverages will cover costs associated with closures due to this pandemic.

Discussion

Property and business interruption policies typically require that property be physically damaged in order for claims to be successful. It is not clear that proactive closure due to a government’s recommendation of social distancing would qualify. Generally, even if the contamination is covered under an insurance policy, the building would need to be uninhabitable or unusable due to the contamination. Some policies further require that a civil authority deem that access to the building is prohibited in order for coverage to apply.

It is foreseeable as well that buildings and facilities with large rooms may be requisitioned for emergency space, further compounding losses.

Although the vast majority of post-secondary institutions do not have policies that would cover pandemic related revenue losses and incurred expenses, there are few unique policies that exist. For example, the University of Illinois Urbana-Champaign in the United States has an insurance policy with a subsidiary of Lloyd’s of London that covers losses due to decrease in enrollment of Chinese students. The policy is triggered when two things happens: first, enrollment of Chinese students drops by at least 18.5% and second, the drop-off in enrollment is due to a specified list of reasons, such as a pandemic.[10]

Next Steps

  • What is your firm doing about your own identified insurance threats?
  • What helpful messages are you getting to your clients to help them avoid losses or deal with losses they are experiencing?
  • Read and analyse various policies you offer to see if they indemnify businesses against losses and claims arising from COVID-19. If they do not, understand why they do not so you can quickly respond to any complaints with a factual summary of your position;
  • Consult previous legal interpretations of insurance policies during times of infectious illnesses; and
  • Consult Miller Thomson LLP if you have any further questions

If you would like copies of any of the cases or articles referenced in this memo, please let us know.

Miller Thomson is closely monitoring the COVID-19 situation to ensure that we provide our clients with appropriate support in this rapidly changing environment. For articles, information updates and firm developments, please visit our COVID-19 Resources page.


[1] World Health Organization, “Rolling updates on coronavirus disease (COVID-19)” March 18, 2020, online: Word Health Organization <https://www.who.int/emergencies/diseases/novel-coronavirus-2019/events-as-they-happen >

[2] World Health Organization, “WHO Director-General’s opening remarks at the media briefing on COVID-19” March 11, 2020, online: World Health Organization
< https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020>

[3]   World Health Organization, “Coronavirus disease (COVID-2019) situation reports (Situation report    58)”           March           18,           2020,                 online:          World       Health                 Organization
<https://www.who.int/emergencies/diseases/novelcoronavirus2019/situationreports>

[4] Terry Gangcuangco, “Coronavirus: Business interruption coverage explained” March 19, 2020, online: Insurance Business Magazine <https://www.insurancebusinessmag.com/uk/news/breaking– news/coronavirus-business-interruption-coverage-explained-217311.aspx>

[5] Harold Brubaker, “Insurance companies may not pay for business losses from coronavirus. N.J. bill  aims to change that.” March 19, 2020, online: The Philadelphia Inquirer
https://www.inquirer.com/health/coronavirus/coronavirus-small-business-losses-insurance-claims-coverage-20200319.html >

[6] Greg Meckbach, “How liability insurance responds (or not) to COVID-19” March 16, 2020, online: Canadian Underwriter <https://www.canadianunderwriter.ca/legal/how-a-liabilityinsuranceresponds or-not-to-covid-19-1004175448/>

[7] Kevin McPoyle, “Will business losses from COVID-19 be covered by insurance?” March 17, 2020, online: Leigh Valley Business <https://www.lvb.com/willbusiness-losses-covid-19-covered- insurance/>

[8]  Tow Lu Lim and Jenny W. Y. Yu, “COVID-19 and Insurance Coverage for Businesses” March 17,   2020,          online:          Mayer          Brown <https://covid19.mayerbrown.com/insurance-2/>

[9] Jonathon D. Moss, “Insurance Considerations for Companies Impacted by Coronavirus” March 16, 2020, online: The National Review <https://www.natlawreview.com/article/insurance-considerations-companies-impacted-coronavirus>

[10] Emma Whitford, “Are Any Colleges Insured Against Coronavirus Fallout?” March 9, 2020, online:  Inside Higher ED <https://www.insidehighered.com/news/2020/03/09/insurancecoverage-scarce coronavirus-threatens-college-finances>

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