By Alex L. Brockmeyer, Esq. and Justin M. Thomas, Esq.
The onset of the recently declared pandemic, COVID-19,
has injected great turmoil into everyday life and has disrupted business as
usual for companies and organizations, without prejudice to size or net worth.
The impact on businesses has been and will be devastating for many.
One question raised is whether insurance covers any of
the losses associated with COVID-19. The answer, as we are sure all readers
will be thrilled to hear is: it depends. Like most questions concerning
insurance coverage, the answer depends on the language in your insurance
policy.
There are a minimum of three insurance products that
might cover losses associated with COVID-19: (1) commercial property policies;
(2) builders risk policies; and (3) pollution policies. This article will focus
on the first two insurance policies.
Commercial
Property Policies
Commercial property policies traditionally cover “business
interruption” or “business income” losses. To trigger coverage under a
commercial property policy, a business must prove “direct physical loss or
damage” to the covered property caused the loss of income or business
interruption. At the outset, proving COVID-19 actually existed in the covered
property will be difficult. Some local municipalities, like Broward County,
have issued shutdown orders that state COVID-19 is physically damaging
property. Orders like Broward County’s can assist businesses in satisfying the
coverage grant of their commercial property policy.
Another avenue of recover under commercial property
policies is the “civil authority” coverage. “Civil Authority” coverage provides
coverage for, among other things, loss of business income caused by a
government order the limits access to the covered property. “Civil Authority”
coverage may be temporally limited. Governor DeSantis’ April 1, 2020, Executive
Order Number 20-91 (“Shut Down Order”) should provide businesses a basis to
make a “Civil Authority” claim.
However, getting through the coverage grant of the
“business interruption,” “business income,” or “Civil Authority” portion of
your policy does not end the battle. Most insurance companies will attempt to
deny the claim based on either a “pollution” or “virus and bacteria” exclusion.
Of these, the “virus and bacteria” exclusion presents the most obvious impediment
to coverage because COVID-19 is a virus. Don’t let this deter you from making a
claim. Not all commercial property policies have a “virus and bacteria”
exclusion.
Even if your policy has a virus and bacteria exclusion,
you should still make a claim. Why? There are many reasons. But this article
will focus on two insurance products. First, insurance companies must notify
their insured of a material change to the coverage afforded by their policy.
Failure to provide such notification can result in the striking of that particular
exclusion from the policy. Point being, if an insurance company insured you for
consecutive years and a prior policy did not have a “virus and bacteria”
exclusion, you may be able to get the exclusion struck from the policy.
Second, in getting the “virus and bacteria” exclusion
approved, insurance companies may have misrepresented to insurance regulators
the purpose of the “virus and bacteria” exclusion. The insurance industry put
the “virus and bacteria” exclusion into effect in 2006 after the Severe Acute
Respiratory Syndrome (“SARS”) epidemic. Typically, an insurance company must
get approval from the Florida Department of Insurance before changing its
policy form. The Insurance Services Office, Inc. (“ISO”) circular, which was
likely presented to the Florida Department of Insurance to enable insurance
companies to add the “virus and bacteria” exclusion to the commercial property
policy, indicates the “virus and bacteria” exclusion is needed to clarify a
commercial property policy does not cover losses associated with a virus or
bacteria. That, however, is simply not true. By 2006, courts repeatedly found
coverage under a commercial property policy for losses caused by:
- E-Coli bacteria;
- Radioactive dust;
- Noxious air
particles; - Asbestos;
- Mold and mildew; and
- Pesticides and other
vaporized chemicals.
The potential misrepresentation made by
insurance companies to the Florida Department of Insurance could enable
businesses to prevent insurance companies using the “virus and bacteria” exclusion
to deny the claim.
Builders
Risk Policies
Similar to commercial property policies,
builders risk policies require evidence of physical loss or damage to trigger
coverage. This analysis is the same as the analysis for commercial property
policies. Moreover, like commercial property policies, builders risk policies
usually have some form “Civil Authority,” or “delay in completion” coverage.
“Civil Authority” or “delay in completion” coverage may depend on the existence
of a physical loss or damage. Coverage under a “Civil Authority” or “delay in
completion” provision may be easier to attain in light of the Shut Down Order
because the Shut Down Order has impacted some sectors of the construction
industry.
Like the foregoing effort to prove
coverage under a commercial property policy, satisfying the coverage grant of a
builders risk policy is only half the battle. Insureds will still encounter
insurance companies seeking to deny claims based on various exclusions. Aside
from the “virus and bacteria” or “pollution” exclusions, most builders risk
policies contain some sort of “abandonment of work” or “cessation of work”
exclusion. At bottom, these exclusions apply if a contractor abandons a project
or stops work for a long period. In presenting a claim under a builders risk
policy, an insured should emphasize that it is not abandoning the project and
intends to resume work as soon as the COVID-19 restrictions lift.
When reporting the claim, make sure to
report any increase constructions costs. Additionally, document any other
damages. Insureds should be prepared to present documentation to support their
claim.
Conclusion
Coverage under a commercial property or
builders risk policy is not a given. That said, obtaining coverage is also not
impossible. If an insured has a potential claim because of COVID-19, it should
notify its insurer. Placing the insurance company on notice of a claim
preserves the insured’s rights. Finally, do not let an initial denial
discourage you. Insurance companies are receiving a large volume of claims and
will issue unjustified denials in hopes of discouraging insureds from
continuing forward with the claim. Keep fighting and work with your risk
management team.
