Novel Claims from a Novel Virus: Coverage Issues for COVID-19 Claims

The COVID-19 pandemic is at the front and center of all our lives.  Across the country, people are sheltering in their homes, and business are shuttering their doors.  The markets have responded to ongoing furloughs, layoffs, and business closures, and the economic implications snowball.  Federal, state, and local governments are working to contain both the spread of the virus and the potential for a recession.  People and businesses are tightening their belts and developing plans to keep themselves afloat.

In light of this, one issue surely crossing many distressed minds is whether their economic losses are covered by insurance.  It’s not hard to imagine many small business owners thinking to themselves: my insurance policy has business interruption coverage, and I’m currently experiencing a business interruption because of COVID-19 – so surely my losses are covered.  Indeed, it appears the first such lawsuit was filed last week.  See Cajun Conti v. Certain Underwriters at Lloyd’s London, Case No. 2020-02558, La. Dist. Ct., Orleans Parish.

Likewise, individuals who become infected with COVID-19 and suffer resulting bodily injuries may attempt to point the finger at whomever infected them or allowed them to become infected – and the individual or entity on the receiving end of those fingers will likely turn to their liability carriers for defense and indemnification.  The first of these such cases appears to have been filed two weeks ago against a cruise ship operator that permitted its ship to embark on a new cruise even though it had actual knowledge of passengers and crewmembers on the previous cruise exhibiting telltale COVID-19 symptoms.  See Weissberger v. Princess Cruise Lines, Case No. 2:20-cv-02267, C.D. Cal.

As your “Partner in Service,” our Firm’s Coverage Team is continually monitoring the COVID-19 situation and staying abreast of all the latest legal developments.  By remaining at the forefront of this constantly evolving circumstance, we are able to completely address any of your COVID-19 related questions or issues.  In fact, our preemptive work has already allowed us to get a “jump start” in servicing several COVID-19 claims and provide you, our clients, with a business advantage in this continually developing legal environment.

In this briefing, you will find a general overview of key issues which should help in the evaluation of your COVID-19 claims and the “new normal” affecting us all.  Of course, the language of each policy and the facts of each claim vary, and the availability of coverage for any particular claim can be determined only after performing an in-depth individual analysis of the specific circumstances presented – so please do not hesitate to contact us if you have questions or would like any assistance concerning any COVID-19 claim you may be evaluating.

First-Party Property Claims

The basic coverage “trigger” for first-party property policies (whether homeowner, businessowner, etc.) is that there be a loss caused by actual physical damage.  Thus, the insured would first have to prove that the COVID-19 virus was actually present on the insured property.

Assuming the insured could demonstrate the actual presence of the COVID-19 virus on the insured property, many states require there to be a tangible change resulting in material damage to the insured property for coverage to be available.  Under this standard, it is unlikely the presence of the COVID-19 virus on the insured property would trigger coverage because it could be removed simply by cleaning / disinfecting the insured property.  However, in the minority of states that require only a mere alteration of the insured property, the presence of the COVID-19 virus on the insured property may be enough trigger coverage.

Of course, there are coverage endorsements that do not contain a physical damage requirement, such as crisis management, interruption by communicable disease, etc., and these must be taken into account.  Cancellation of lease / bookings coverage may or may not contain a physical damage requirement, depending on the policy forms utilized.  And, while civil authority coverage does not require physical damage to the insured property, it does generally require physical damage to some property, such an adjoining parcel (i.e., access to the insured property is prevented or prohibited by the order of a civil authority issued as a direct result of some physical damage, caused by an insured peril, to other property in the proximity of the insured property).

But that is not the end of the coverage trigger analysis.  The insured need prove not only physical damage, if applicable, but also causation: did the presence of the COVID-19 virus on the insured property cause the claimed loss?  Using business interruption coverage as an example, did the business close because the COVID-19 virus was actually present in the HVAC system of the insured property, or did the business close because of the general COVID-19 threat which caused people to shelter in their homes and not patronize the business?

These are high hurdles for policyholders to overcome, and they are only the beginning of the coverage determination.  If coverage is triggered, there are still numerous exclusions that may apply to limit or eliminate the availability of coverage.  The most prominent of these is the virus exclusion (form CP 01 40 07 06), developed by ISO in 2006 in response to the SARS outbreak and which is now a standard provision in all ISO businessowner policies.  However, there are several other potentially applicable exclusions, such as ordinance or law, governmental action, etc.

If it is determined the policy does provide coverage for the claimed loss, the coverage analysis then shifts its focus to the amount of loss sustained.  Policies typically cover the cost to repair or replace the damaged property, whichever is less.  This raises the question of the actual cost to remove the COVID-19 virus – is this the cost of cleaning / disinfecting the insured property, or is this simply waiting an appropriate amount of time (likely 24 to 72 hours – but possibly up to 17 days) for the virus to die on its own?  Then there is the application of the policy deductible / waiting period, the number of loss occurrences (i.e., if there is a reinfection of the property, does this constitute a separate loss triggering a new deductible?), and the period of restoration (including whether a delay due to the unavailability of restoration contractors is included).

Overall, it appears that, in most first-party property claims, coverage for COVID-19 losses will be either unavailable or, if available, extremely limited absent an added endorsement specifically designed to provide coverage for pandemics or similar situations.  However, each claim should be thoroughly reviewed and analyzed to ensure a proper coverage decision is made and to protect the insurer against any possible “bad faith” allegation.

Third-Party Liability Claims

The basic coverage “trigger” for third-party liability policies (whether homeowner, general liability, etc.) is that there be either property damage (including loss of use of undamaged property) or bodily injury caused by either an accidental occurrence or a personal and advertising injury.  Liability policies contain two main coverages – indemnification and defense – and an insurer’s duty to defend is broader than and distinct from its duty to indemnify.  Other limited coverages may also be implicated in COVID-19 claims, such as medical payments for bodily injury caused by the activities of an insured.

To trigger the duty to defend, a claimant need only make an allegation that potentially, possibly, or arguably might come within the coverage provided by the policy, regardless of the actual merits of the claim.  This is a very low threshold that will be met in many COVID-19 claims.

To trigger the duty to indemnify, however, the claim must actually fall within the policy’s coverage provisions, and the claimant must additionally prove the insured’s liability.  This is a much higher bar.

There are several potentially applicable exclusions that may limit or eliminate the availability of coverage, such as mold, communicable disease, etc.  But the standard mold exclusion does not include “virus” (though it does include “bacteria”), and many liability policies do not include the communicable diseases exclusion.

Even if a COVID-19 claim is covered by the policy, the claimant must still establish the requisite legal elements of the particular cause of action alleged.  For example, in a negligence claim, the claimant must prove duty, breach, causation, and damages – and, with COVID-19 claims, proving proximate causation against the insured will be particularly difficult (because, in the vast majority of instances, it is nearly impossible for a claimant to establish exactly where the exposure to the COVID-19 virus happened).

Because the duty to indemnify will not be triggered in many COVID-19 claims, insurers should provide defenses to COVID-19 claims subject to complete reservations of rights (ROR).

In sum, it appears that, while third-party liability COVID-19 claims may potentially trigger a duty to defend (which should be made under a ROR), most will ultimately not trigger a duty to indemnify, either because the claim does not fall within the policy’s coverage provisions or because the claimant is unable to establish the required elements of the legal cause of action alleged.  However, just like first-party property claims, each third-party liability claim should be thoroughly reviewed and analyzed to ensure a proper coverage decision is made and to protect the insurer against any possible “bad faith” allegation.

By: Matthew F.X. Craven