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Many commercial policyholders will likely make claims for supply chain-related losses resulting from the coronavirus outbreak in China, but they may have some high hurdles to clear before they receive payments, expert say.
Business interruption and contingent business interruption policies typically require that lost production and profits be caused by physical damage, they say.
Some wordings allow coverage for virus-related losses, though, and other policy wordings may be tested in court, given the amount of money at stake, they say.
After originating in China, as of Tuesday the disease had spread to an additional 25 countries and territories, with more than 72,000 ill from the virus and a global death toll of 1,873. The virus, which remains unchecked, has led to plant closures, cancelled flights and quarantined cruise ship passengers, among other things, while a vaccine remains elusive.
A major telecommunications industry event slated to be held in Barcelona later this month was canceled last week after withdrawals due to the virus. The Formula One-Chinese Grand Prix, which was scheduled to be held in Shanghai in April, was postponed due to the outbreak.
The current situation for businesses is in flux, observers say. The Insurance Services Office Inc., part of Verisk Analytics Inc., based in Jersey City, New Jersey, for instance, said it has developed, but not yet filed with regulators, drafts of two advisory endorsements that can provide limited coverage for business interruption caused by certain actions of civil authorities taken to avoid infection by coronavirus, or to limit its spread.
Policyholders should make sure their brokers pay attention to any endorsements insurers try to add on to their policies, said Rob Lane, executive vice president at Newport Beach, California-based Alliant Insurance Services Inc. “Now’s the time to be very mindful of what your insurer’s doing,” he said.
Most supply chain-related losses for U.S. companies will likely not be covered by business interruption or contingent business interruption policies because both coverages require physical damage for coverage to be triggered, said Jill Dalton, managing director at Aon PLC’s U.S. property risk consulting group in New York.
“The CBI coverage has the same trigger that direct BI has, so there has to be physical damage,” she said.
Some policies have narrow coverage for disease-related delays, but the virus must be present at the affected facilities rather than at a third-party supplier, Ms. Dalton said.
“It’s very limited and only for direct business interruption,” she said. “I’m sure there are opportunities for product development, but that takes time.”
Peter Fallon, senior vice president with Boston-based Risk Strategies Co. Inc., said, “There could be coverage for a business interruption claim” provided policyholders have obtained a coverage extension offered by some major insurers that provide coverage for interruption by communicable disease or for communicable disease response.
“That we would look to as the first line of recovery in the event of a time element loss,” he said. These coverages, though, are subject to sublimits, so “they may not go very far” depending on the extent of the contamination, how long a facility is shut down, and if it involves more than one location. There may be coverage also only if there is a shutdown ordered by a civil authority, he said.
“It’s too early right now, but contingent business interruption, I think, is going to be one of the battlegrounds, if not the main battleground, particularly in the supply chain area,” said policyholder attorney Michael S. Levine, a partner with Hunton Andrews Kurth LLP in Washington. He noted, however, that claims could be complicated by the physical damage requirement.
“The big challenge in this area is, there’s a great amount of variation in policy language,” said Laura Foggan, a partner with Crowell & Moring LLP in Washington and chair of the firm’s insurance/reinsurance group, who also noted that physical damage requirements would generally preclude claims payments.
However, Ty Childress, insurance recovery practice leader at Jones Day in Los Angeles said contingent business interruption coverage may “depend on the language of the specific policy.”
“Some do require direct physical loss or damage, but some jurisdictions have held that an incident that renders a property uninhabitable, or otherwise unfit for use” or somehow contaminated is sufficient to qualify as physical loss, but “that would be a heavily debated issue with insurers,” Mr. Childress said.
Another layer of difficulty with respect to contingent business interruption is “you’re talking about what’s happening to a supplier’s premises as opposed to your own,” and the ability to investigate if the supplier is overseas is “extremely limited,” said David F. Klein, a partner with Pillsbury Winthrop Shaw Pitman LLP’s insurance advisory and recovery practice in Washington, D.C.
Another possible area of coverage, Mr. Levine said, is for business interruption resulting from orders from civil or military authorities, “because that acts as a trigger in most property policies.”
If a loss is the result of a civil authority’s order, “that’s actually perhaps the strongest hook for coverage,” although the coverage in that case may be sublimited, Mr. Lane said.
Policyholders should closely review their policies now, experts say.
“For both insurers and policyholders, the key is to carefully examine whatever policy language may be in place and to kind of check in on what exposures may exist, and whether they would fit within the coverage of any existing property polices for business losses,” Ms. Foggan said.
Policyholder attorney Finley T. Harckham, a shareholder with Anderson Kill P.C. in New York , said, “At this point, it’s not too soon to be providing notice to your insurance companies if you think you may have a valid claim, and it’s not too soon, certainly, to be taking a look at your different types of coverages to see what might apply to your situation.”
“Closely track costs,” Mr. Childress said. These could include losses incurred in connection with employees working overtime, having to move to new facilities, and lost or deferred sales. “It’s a lot easier to calculate and capture those costs in real time than to engage in a forensic analysis down the road,” he said.
Many observers predict the issue of coronavirus coverage will eventually lead to coverage litigation. “I’m sure there will be some litigation,” said Julie E. Nevins, Miami-based special counsel with Stroock & Stroock & Lavan LLP. “There’s lots of money at stake.”
Gavin Souter contributed to this article.
More insurance and risk management news on the coronavirus crisis here.