By: Patricia McHugh Lambert, Esquire
Sometimes it is hard to imagine what the world was like before the COVID-19 crisis. There were crowd filled events, worker filled offices and customer filled restaurants and bars. Those former normal days are long gone, and anyone who thinks that business will revert back to the prior norm is surely mistaken.
There is no more ‘normalcy.’ This is particularly true in the world of insurance. Having read over 200 articles in the last several weeks, it is clear that the impact of COVID-19 on the legal field is both vast and developing. In navigating this new territory of COVID-19, it is important for insurance professionals to spot issues and to understand their potential impact on specific claims and cases.
With that goal in mind, this article is to set forth a checklist of the many COVID-19 issues that raise insurance related issues. The intent is not to do a deep-dive into these issues but to make insurance professionals aware of the range of issues raised by COVID-19.
Business Income and Civil Authority Coverage
Every insurance professional is well aware of the new business interruption claims that are being made across the country for business interruption insurance. Some of these claims relate to interruptions caused by alleged direct contamination of premises by the virus. Others more typically relate to executive orders issued by governmental officials that limit or restrict access to insured premises. These suits generally claim that the insurer should pay out under the “extra expense” coverage in the policy for expenses the insured has incurred, to minimize the suspension of its business and/or for loss of business income because of the governmental prohibitions.
According to various complaints filed, the Insurance Services Office drafted a new endorsement in 2006 that states that an insurer “will not pay for 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.” Many insurers adopted this new endorsement, but many, reportedly including Chubb and Westchester, chose not to put this endorsement into policies. For these insurers, the battle line will be whether the standard, unendorsed property insurance policies cover business interruption claims related to COVID-19.
With respect to Business Interruption Coverage, an insured will need to generally prove direct physical damage or, in some jurisdictions, some kind of direct physical impact to the premises. The exact parameters of what this requirement means in the context of COVID-19 will be litigated vigorously through the courts. Insurers are expected to argue that the presence of a virus on the insured’s property does not constitute direct physical loss or damage to property. Insureds will argue that the presence of a virus constitutes a damage and may rely upon past cases dealing with odors. See, for example, Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, No. 12-cv-04418, 2014 WL 6675934 (D. N. J. Nov. 25, 2014) (concluding that ammonia release physically transformed the air); see also Motorists Mutual Ins. Co. v. Hardinger, 131 Fed. Appx. 823, 825-27 (3d Cir. 2005) (finding that bacteria contamination constituted a “direct physical loss” when it rendered the home uninhabitable); see also Western Fire Insurance Co. v. First Presbyterian Church, 437 P.2d 53 (Sup. Ct. Col. 1968) (holding that a church vacated by a local fire department because of gasoline fumes had incurred “direct physical loss”). Insureds may also argue that COVID-19 is a ‘natural disaster’ and like other natural disasters there should be coverage for such losses. Insureds may also attempt to use cases where the presence of asbestos was considered property damage as support for their COVID-10 business interruption coverage claims.
For Civil Authority Coverage, courts will have to consider whether businesses were closed because access was forbidden by a governmental order or whether the businesses closed because of a governmental suggestion, as opposed to mandatory restriction. See, e.g., Cleland Simpson Co. v. Firemen’s Ins. Co., 11 Pa. D. & C.2d 607(Ct. of Common Pl. 1957), aff’d without opinion, 392 Pa. 67, 140 A.2d 41 (Pa. 1958) (finding no coverage because the city ordered businesses to close to prevent fire; there was no physical loss or damage); and see also Kean, Miller, Hawthorne, D’Armond McCowan & Jarman, L.L.P. v. Nat’l Fire Ins. Co., No. 06-770-C, 2007 WL 2489711 (M.D. La. 2007)(holding that coverage was not available for business losses suffered as a result of advisories and recommendations issued by the governor and other authorities “asking” and “encouraging” residents to stay off streets immediately before Hurricane Katrina coming ashore).
Courts will have to also decide whether there was physical damage to property, other than the insured property, which was caused by a Covered Cause of Loss. There has been extensive litigation in the contexts of hurricanes and riots over the degree and nature of damage to other property. Sloan v. Phoenix of Hartford Ins. Co., 207 N.W.2d 434 (Mich. App. 1973); Southlands Bowl, Inc. v. Lumberman’s Mut. Ins. Co.., 208 N.W.2d 569 (Mich. App. 1973); Allen Park Theater Co., Inc. v. Michigan Millers Mut. Ins. Co., 210 N.W.2d 402 (Mich. App. 1973); Dickie Brennan & Co., Inc. v. Lexington Ins. Co., 636 F.3d 683 (5th Cir. 2011).
The main thing that insurance professionals should know is that these types of claims have many layers of coverage issues.
General Liability Coverage
Based upon the articles reviewed, there are likely to be third-party bodily injury claims made against businesses such as grocery stores, airlines, medical facilities and nursing homes. These claims raise a number of coverage issues.
First, commercial general liability policies provide coverage, in accordance with the policy terms, for bodily injury caused by an ‘occurrence.’ Under many policies, ‘occurrence’ is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The issue for these types of claims, in the first instance, is whether the injury claimed was caused by an occurrence. A resolution of this issue will be based upon the allegations of the claim.
In addition, some insurers may try to force fit the Fungi/Bacteria exclusion to apply to coronavirus claims. With COVID-19 being a virus and not fungi/bacteria, it is doubtful this exclusion will be deemed to apply to exclude coverage for most claims under the traditional policy language.
Some insurers may argue the application of the pollution exclusion which excludes coverage for injuries arising directly or indirectly out of pollution. As noted by some commentators, whether viruses constitute a pollutant is “not well settled.” The law of each specific jurisdiction and the allegations of the claim are factors to determine whether this exclusion is even facially applicable.
Homeowner’s Policies
There are likely to be claims made against homeowners that violated executive orders. Among other claims that may be made are claims against homeowners who hosted parties in violation of such orders and then numerous guests became ill with coronavirus. While there may be coverage exclusions for such claims, insurers should expect that such claims will be made.
In addition, regulatory and civil complaints are being filed against insurers with respect to ALE issues raised by the pandemic and the stay-in-place orders. Expenses and needs of insureds may differ during the pandemic requiring an insurer to consider such issues in the evaluation of such claims.
Regulatory Issues
Many regulators have issued bulletins and regulations due to the pandemic. Insurance professionals need to be aware of those items, particularly those relating to claim deadlines, unfair claim settlement practices and policy interpretations.
Force Majeure Events
Prior to this most recent pandemic, few lawyers and fewer claims professionals had seen the actual invocation of a force majeure clause. The issue raised by such clauses is whether a party to a contract, may, under certain circumstances, be excused from performing when the failure to perform is caused by a ‘fortuitous event’—an event that makes it difficult or impossible to perform contractual obligations.
These clauses will impact many aspect of claims (including calculation of damages issues in business interruptions claims), as well as impacting relationships between insurers and their own vendors.
The state laws vary considerably as to what will be considered a force majeure event. New York, for example, is reported to be one of the toughest jurisdictions in which to invoke the use of force majeure, with the proponent of force majeure having to show that it was virtually impossible to perform the duties in question. Other states such as Florida, Delaware and California may not be as strict on the impossibility of performance issues and may require only impracticability of performance. For a sampling of cases, see Rembrandt Enterprises, Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, 2017 WL 3929308 (N.D. Iowa 2017) and the other case cited below. And, many force majeure clauses specifically include “epidemic” or “pandemic” in its laundry list of qualifying events. See Aukema v. Chesapeake Appalachia, LLC, 904 F.Supp.2d 199, 206 (N.D.N. Y. 2012) (“term ‘force majeure” as used herein shall be Acts of God, strikes, lockouts, or other industrial disturbances, acts of the public enemy, wars, blockades, riots, epidemics, lightning, earthquakes, explosions, accidents or repairs to machinery or pipes, delays of carriers, inability to obtain materials or rights of way on reasonable terms, acts of public authorities, or any other causes, whether or not of the same kind as enumerated herein, not within the control of the lessee and which by the exercise of due diligence lessee is unable to overcome”) (emphasis added).
The key to the applicability of force majeure will likely concern the specific restrictive language in executive orders. Where there has been a specific and unequivocal shut down of businesses by government orders, those orders are likely to allow the invocation of force majeure. However, many states will require strict compliance with the terms of the clauses and prompt notice of the clause’s invocation. See, e.g., Three RP Limited Partnership v. Dick’s Sporting Goods, Inc., Case No. CIV-18-003-RAW, 2019 WL 573413 (E.D. Okla. 2019), quoting Sabine Corp. v. ONG Western, Inc., 725 F. Supp. 1157, 1168 (W.D.Okla.1989) (“failure to give proper notice is fatal to a defense based upon a force majeure clause requiring notice”).
The key then to this issue, like so many other issues, is to gather executive orders, review local laws, and evaluate whether performance was impractical or impossible.
In considering such issues, past history needs to be reviewed. For example, Florida courts have a reported history of the applicability of force majeure clauses in the contexts of hurricanes. This past history will likely have strong precedential value to courts which will be considering how these clauses apply to the COVID-19 crisis.
As there is no ‘standard’ force majeure clause, the specific wording of a clause will need to be carefully considered. And, of course, there is the issue of whether force majeure can be invoked when there is no such provision in the contract. See Bayou Place Limited Partnership v. Alleppo’s Grill, Inc., No, RDB-18-2855, 2020 WL 1235010 (Mar. 13, 2020)(discussing Texas law).
Employment Issues
COVID-19 has created a situation whereby many individuals, who used to travel every day to the workplace, are now working remotely.
With the new normal for employees being working from home, many employers are struggling with how to deal with the myriad of laws and regulations that apply. Among other things, work from home issues raise issues as compensability under workers compensation policies for injuries that occur while working at home.
There are serious legal and causation questions as to whether or not COVID 19-related illnesses can be the subject of workers compensation claims. The key issue for such claims is likely to be whether the illness can be proven to have arisen out of the course of employment. In the past, the insurance industry has seen claims like MERSA and hepatitis, both viral infections, to be compensable under workers compensation laws. Some state executives and regulatory authorities have issued directives relating to the provision of coverage and/or benefits afforded to certain workers, primarily first responders.
Additionally, employment practices dealing with wage hours, FMLA, Emergency Sick Leave Act and Emergency Family and Medical Leave Expansion Act, and a variety of state and federal laws are likely to be raised by employees. Increased firings, furloughs and layoffs prompted by economic concerns are likely to spur the increase of wrongful termination suits. In addition, with the lessening of restrictions, employers are likely to have some sort of biometric or other type of testing and/or self-reporting that raise significant privacy issues.
Cybersecurity and Privacy Issues
As noted above, the pandemic has created a situation where more employees are working at home. Where employees are working remotely, cybersecurity can become compromised when employees use unsecure personal laptops, notebooks and cell phones.
Constitutional Issues
The COVID-19 pandemic has caused the issuance of numerous executive and judicial orders. These orders have, among other things, restricted civil liberties and extended statutes of limitations. The reach of such orders have raised serious constitutional issues, from rights of privacy to separation of powers.
It can also be anticipated that some extension of deadlines orders, which have allowed insurers to have additional time to respond to demands and claims, may also be contested as beyond the scope of the authority of the issuing authority.
In addition, to the extent that legislation attempts to change contractual terms retroactively, there are issues raised as to whether such changes violate the Contract Clause of the United States Constitution which states: “No State shall . . . [pass any] Law impairing the Obligation of Contracts.” This type of analysis may be of particular importance to insurers who, as discussed below, face significant legislative challenges. This type of analysis may also impact others that face legislative changes such as landlords, employers and health care providers.
While the law in this area is complex, the two key issues as to whether a legislative change that is retroactive violates the Contract Clause are: (1) Is there a substantial impairment of a contractual right caused by the legislation?; and (2) If so, does the impairment serve a significant public interest/purpose? To the extent that any issue is raised that concerns retroactivity, the constitutionality under the Contract Clause should be considered.
Some recent suits have also targeted state officials who have enacted and/or enforced stay-in-place legislation. Such suits may raise issues under the Eleventh Amendment of the United States Constitution, state constitutions and principles of sovereign and/or legislative immunity.
State Legislation
During this pandemic crisis, numerous commentators have cited United States Supreme Court Justice Louis Brandeis who described the 50 states as laboratories of democracy. Presently, some of these ‘laboratories’ are attempting to require retroactive coverage, particularly for business interruption losses caused by COVID-19. Among the states that are reported to have introduced or are considering such legislation are: Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina. If such legislation is successful, it will have serious long range consequences for insurers and potentially state guarantee funds if insurers, unable to absorb such losses, become insolvent.
Federal Legislation
There is expected to be a Congressional battle as to whether to shield businesses from civil lawsuits related to COVID-19. This legislation, if passed, could provide a shield to employers and business owners. Whether the legislation will pass and provide some safe harbor provisions is debatable at this time.
Construction and Building Services
It is anticipated that cleaning services and cleaning product companies will face claims, particularly if such companies have made representations regarding their practices and/or the safe and health of the work environment. In addition, there are likely to be delayed claims caused by the pandemic.
Professional Malpractice Claims
It is, of course, anticipated that there will be an increase in the number of malpractice claims related to this pandemic. Misdiagnosis and improper practices claims are likely to be made. Some health care segments, such as the nursing home industry, are likely to be particularly hard hit by claims. In addition, with the rise of telehealth during the pandemic, there will be issues raised as to the applicable standard of care, particularly since there is a patchwork of federal and state rules governing telehealth. Failure to provide appropriate care to those incarcerated may also be an area where additional claims can be expected.
Furthermore, it can be anticipated that there will be other industries targeted for malpractice claims. Attorneys that failed to include force majeure clauses in their contracts could face malpractice claims. Insurance brokers that did not advise insureds about exclusions for viruses might also face such claims (particularly if it can be shown that such coverage could be found with other carriers).
Third-Party Claims
Because of the anticipated number of COVID-19 deaths, there is likely to be an increase of third-party claims. When there is a viral illness such as coronavirus, there can be multiple sources of contamination and assumed responsibility. Claims professionals will have to give careful thought as to whether such alternative sources should be investigated and possibly the subject of a third-party claim.
With respect to third-party liability, claims professionals should be aware of the fact that there are new technologies that must be explored, including contact tracing and genetic testing.
Premises Liability
Businesses owe a duty of care to those who come onto their premises, particularly to protect them from foreseeable harm. If business owners do not implement sufficient protections when they reopen their businesses after a stay-at-home restriction is lifted, they could be sued, perhaps successfully, for anyone that becomes ill with COVID-19 post-opening. Among other things, there will be a tug and pull between the economic need to open a business and the need to follow the changing recommendations of the Center for Disease Control and other federal and state advice.
Causation will be a key issue for such lawsuits and may require specialized testing and the search for alternative sources of contamination.
Damages
In a traditional liability case, economic damages are a significant issue. With COVID-19, traditional analysis of such damages might need to be reconsidered. For example, the economic downturn and furloughs may require the reconsideration of prior economic reports in individual cases, because once tried and true assumptions may no longer be accurate.
Reinsurance Issues
As noted above there are many states that are considering legislative changes to retroactively mandate coverage for business interruption claims related to COVID-19. To the extent that such legislation passes, there are significant reinsurance issues because many, if not most, reinsurance contracts/treaties parallel with the underlying coverage. The language of the legislation will be critical to the issue of reinsurance coverage.
Property Owners, Developers and Managers
Property owners, developers and managers are likely to face claims relating to COVID-19. These claims may relate to how a landlord deals with tenants during the COVID-19 crisis. Commentators have mentioned prospective claims relating to evictions, defaults, and contamination in multi-tenant facilities. Additionally, there are risks relating to reopening and the possibility of renewed contamination.
Not only do these types of claims raise issues with respect to coverage and liability, they should raise concerns respecting underwriting. In light of the fact that pandemics can no longer be viewed as non-anticipated, underwriters may need to review whether potential insureds have anti-contamination plans to deal with viral risks.
Disability Insurance
Those who have contracted coronavirus and are unable to work should be able to make a claim for disability benefits under most typical disability policies. But there is a question as to whether those who become infected but are able to work because they are quarantined can recover under a disability policy.
Recovery under a disability policy may depend on the particular language of the policy. For example, if the policy does not distinguish between inability to perform because of ‘physical factors’ (e.g. the missing of a limb or digit) and ‘social factors’ such as a required duty to refrain from working due to a medical condition.
D & O Claims
It is likely that there will be claims against officers and directors relating to an alleged breach of their fiduciary duties related to coronavirus. Under such circumstances, a D&O policy could potentially respond to such claims.
There will, of course, likely be coverage issues relating to such claims. Generally, a bodily injury claim is covered by a CGL policy, not a D&O policy. However, where the D&O claim relates to issues regarding decisions made during the pandemic, there could potentially be coverage for such claims.
Marine Cargo Insurance
Like with so many of the other coverages discussed in this article, whether a claim for coverage can be made will relate to the specific nature of the claim and the specific provisions of the policy. For example, a claim that relates to perishable goods being damaged because of a delay in delivery caused by the pandemic might be covered. A claim relating to a loss of market would likely not be covered.
New Policy Forms
As reported, ISO responded to the coronavirus outbreak by offering two forms for optional use, both relating to limited business interruption coverage for civil authority orders related to coronavirus.
Further form changes are likely to occur based upon the outcome of the myriad of coronavirus issues that will make their way through the courts.
Changes in the Courts
From the lowest level of state courts to the highest level of the United States Supreme Court, this pandemic has changed the way that litigants and attorneys participate in hearing, trial and oral arguments. Where courts used to require attorneys to appear in person, attorneys are now allowed to appear by telephone or via video conference. These changes are likely to remain with us to some extent after the pandemic ends.
In addition, some courts have changed procedural rules, including rules relating to the expiration of statute of limitations. It is likely that these rules will be tested in future cases, particularly as some have suggested that emergency rules enacted by the court go far beyond their granted enumerated powers. Such litigation will likely focus on state constitutions and statutes.
Depositions and examinations under oath have also changed during the pandemic, through the use of video conferencing. One wonders whether video conferencing will become more of the norm after people return to the office. Claims professionals and attorneys will need to consider the efficacy and costs of video depositions in particular cases. No longer will in person depositions be the standard.
Experts
All of the above issues should cause insurance professionals to realize that there will be a need for experts who can provide solid scientific advice. Among other issues, it is likely that there will be a need for experts to testify in cases regarding the standard of care for applicable industries during a pandemic and causation experts. After all, many of the COVID-19 issues will hinge upon science.
Ms. Lambert has over 35 years of experience in handling complex commercial litigation and insurance matters. Ms. Lambert has worked on national class actions, significant litigation and regulatory matters for Fortune 500 companies. She has also assisted small and mid-sized companies and business executives with contract, real estate, liability assessment and commercial disputes that needed to be resolved quickly and efficiently. Ms. Lambert is best known as an attorney who knows the field of insurance. She has represented insurers, policyholders, and insurance producers in disputes both in court and before the Maryland Insurance Administration.
Ms. Lambert is the firm’s Co-Liaison for Harmonie, a national network of high quality law firms that serve the special needs of the risk industry, and was recently appointed to Harmonie’s Board. She can be reached by phone at 410-339-6759 or email plambert@pklaw.com.
