By Danielle Gilmore and Linda J. Brewer
Movie theaters, gyms, hotels and golf courses have been forced to close temporarily. Long-standing sporting events, such as the NCAA basketball tournament, the Masters golf tournament, the Kentucky Derby and the Olympics, have been canceled or significantly postponed. Broadway has gone dark, theme parks such as Disney World have shuttered, and musical performers have called off their tours. The economic implications of such closures and cancellations is likely to be staggering. It is thus anticipated that an increasing number of businesses will look to their insurance policies to mitigate their losses.
Some policyholders may have purchased a specialized insurance policy that could provide coverage for the damages resulting from the necessary cancellation or curtailment of an event. Event cancellation policies generally do not require a specific type of event to trigger a covered loss, provided that the claimed loss is beyond the policyholder’s control. If a covered loss occurs, these policies generally indemnify the policyholder for any expenses incurred, as well as any lost revenues caused by the necessary cancellation, although this is not always the case. In the context of the COVID-19 pandemic, it is important to note that many existing policies specifically exclude losses caused by pandemics or government-ordered quarantines.
COVID-19 caused the cancellation: When evaluating event cancellation claims related to COVID-19, there are several factors that might affect the existence of coverage or the amount of damages. For a cancellation or postponement of an event to constitute a covered event, policies generally require that the policyholder show that it is unable to commence or keep open the event. For events that were scheduled to begin in early 2020, this may require an investigation as to whether the cancellation or delay was required by COVID-19, was an opportunistic decision or was caused by another event that may be excluded under the policy. For canceled events that were scheduled to take place later in the year, the policyholder may have to show that it was unfeasible to make alternative arrangements for the event.
Pandemic- or quarantine-caused losses: Another factor to consider is whether there are any policy exclusions applicable to a COVID-19 claim. For example, many event cancellation policies specifically exclude losses caused by pandemics or quarantines. However, some insurers offer endorsements that will provide coverage in the case of a pandemic. As is always the case with insurance, the specific wording of the policy must be scrutinized.
Event cancellation policies generally also exclude pre-existing circumstances, which may preclude coverage under policies issued in 2020 — after the outbreak was first reported in Wuhan, China — even if COVID-19 is not identified as a specifically excluded risk. Additionally, the policy may contain an exclusion for pollution or contamination, which may apply to COVID-19 based on the policy wording.
Damages: Calculating the amount of covered damages from a canceled or curtailed event is likely to present difficult questions and may require detailed investigation. Event cancellation policies generally require that any covered damage be caused directly by the cancellation or curtailment, requiring a fact-specific determination if claimed damages are too remote to be covered. In addition, depending on the policy language, lost profits may or may not be covered. If lost profits are covered, calculating those profits may require production of documentation by the policyholder, and possibly the retention of an expert to assist in the adjustment.
Business interruption insurance compensates a business for its lost profits and certain expenses when operations are affected by physical damage to insured property caused by a covered peril that prevents normal operations. These policies may also provide coverage for lost profits or extra expenses resulting from an interruption of business at the premises of a customer or supplier. The coverage can be purchased as a standalone product or as part of a comprehensive property policy. These policies contain specific limitations to the scope of coverage that will be relevant to the current pandemic. Insurers and policyholders should therefore carefully consider the policy terms for COVID-19-related losses under such policies.
Virus exclusion: Business interruption policyholders will first need to consider whether the policy contains an exclusion that applies to losses related to a virus or illness. The virus exclusion, which originates from a form published by the Insurance Services Offices Inc. and is part of its standard property policy, excludes coverage for any “loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” The exclusion explicitly applies to “forms or endorsements that cover business income, extra expense or action of civil authority.” Other policies may include “virus” within the definition of “pollution or contamination,” which is also subject to exclusion. Even if such exclusions are present, there may be avenues to coverage so the language of any exclusion must be scrutinized closely.
Damage to property: In policies in which the virus exclusion is not present or found not to apply, other terms in the policy will have to be considered. For example, business interruption policies typically only cover losses caused by, or occurring in connection with, “physical loss or damage” to the insured’s property.” However, the question of whether the presence of a harmful substance, like the coronavirus, constitutes loss of or damage or destruction to a property is highly fact-dependent. Courts have found for example that the presence of mold does not constitute physical damage. But, they have also found that vapors, odors, or fumes do constitute physical loss or damage.
Quarantine-caused losses: Another important additional consideration is whether the business interruption policy will extend to losses associated with government-enforced quarantines or travel restrictions. While many business interruption policies do include coverage for certain losses caused by the actions of civil authorities, policyholders often will need to establish physical loss or damage to nearby property caused by a covered peril. Policies also generally require that the business disruption be the result of a specific order by authorities that prohibit access to the insured property. Therefore, many policies may not cover situations where a business is interrupted or severely impacted by government directives that do not amount to an outright prohibition on operations. As such, whether a business interruption policy covers losses will depend heavily not only on the scope and terms of the policy, but also on the terms of the relevant order issued by the government authority.
Extent of covered losses: Business interruption policies can also differ with regard to the language used to describe the extent and scope of covered losses. Although business interruption insurance is generally regarded as a means of replacing lost income, business interruption claims often arise in situations in which the economic impact can stretch well beyond the policyholder’s own business. To address this, courts have taken two approaches: 1) an “economy ignored” approach, which looks backward and measures the policyholder’s loss only against pre-catastrophe business levels but does not take into consideration the impact of actual post-catastrophe conditions on the economy, market or demand; and 2) an “economy considered” approach, which seeks to place the policyholder in the position that it would have occupied in the actual post-catastrophe environment had it been able to continue its operations. On this issue, the determination of which approach a court will use most often depends on the language of the policy, as opposed to the forum interpreting the policy.
More insurance and risk management news on the coronavirus crisis here.