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Attorneys on both sides of the COVID-19 business interruption legal battlefront are examining potential legal precedents, policy wordings and jurisdiction issues as they prepare for what many expect to be a lengthy legal fight.
While there are few past rulings that directly apply to coronavirus-related cases, several cases centering on contamination, including rulings on the applicability of pollution exclusions, will likely be cited in courtroom arguments, experts say.
Legal disputes over business interruption claims stemming from government-ordered business shutdowns began last month and have continued over the past several weeks with businesses ranging from a dive shop to a Michelin-starred restaurant suing their insurers seeking declaratory rulings that their lost income is covered under business interruption policies.
“The focus of the insurance world is business interruption, and BI claims are coming into insurers at a rate never seen before,” said Jared T. Greisman, partner in New York with Goldberg Segalla LLP.
One of the key issues will be whether there has been any direct physical loss or damage, he said.
Insurer groups have asserted that direct physical damage is needed to trigger coverage, and policyholders have contended that coronavirus contamination and government-ordered closures constitute physical damage.
Exclusions for virus-related losses will also be important. “Most insurers have chosen, particularly after the SARS epidemic, to make clear that pandemic-related losses – communicable disease, virus-related losses – are excluded,” Mr. Greisman said.
“There’s no doubt that some policyholders have a very clear and likely enforceable virus exclusion,” but other policies may not have such an exclusion, said Lynda Bennett, partner and chair of the insurance recovery group at law firm Lowenstein Sandler LLP.
“The question is also not only is there an exclusion, but also what kind is it,” Ms. Bennett said. “What type of exclusion and where does it sit in the policy? Is it a standalone virus or something else?”
Pollution exclusions, for example, can be broadly worded, she said, and while some jurisdictions apply exclusions broadly “there are just as many other jurisdictions that say otherwise.”
Other exclusions, Ms. Bennet said, do not clearly and expressly apply to viruses, or are being shoehorned into a pollution exclusion.
The origin of exclusions will also be examined, said Angela Elbert, chair of Neal Gerber Eisenberg LLP’s insurance policyholder practice group in Chicago.
Many policies include the Insurance Services Office’s standard communicable disease exclusion, which was introduced in 2006. “ISO has a circular which explains the drafting history of that exclusion and why it came about,’ Ms. Elbert said.
“If you look at the reason it came about is because the insurance industry recognized back in 2006 that their policies covered viruses,” a tacit admission or “at least an acknowledgement that physical loss or damage would be caused by a virus.”
“I think it’s really important to show that the insurance companies acknowledged in 2006 that a virus could constitute physical loss or damage to property, and as a result of that they need to exclude it from an all risk policy that would cover everything that wasn’t specifically excluded,” Ms. Elbert said.
Comments made by authorities during the pandemic may also affect policy interpretations, she said. New York City’s emergency executive order on March 25 stated that it was “given because of the propensity of the virus to spread personto-person and also because the actions taken to prevent such spread have led to property loss and damage.”
In addition to exclusions, some policies expressly provide coverage for communicable diseases, but they generally include sublimits of between $25,000 and $50,000, she said.
FM Global has offered communicable disease response and interruption coverage with a sublimit since 2016, said Jeffrey J. Beauman, vice president-chief underwriter at the mutual property insurer in Johnston, Rhode Island.
The coverage has a dual trigger – contamination of a site and closure due to government order or based on the decision of the organization’s executive management, he said.
“Coming at it from the perspective of being a mutual organization, we felt it was a predictable type of risk that was something we could offer our mutual clients,” Mr. Beauman said. “We do expect that, through the adjustment process, we will find some coverages in many policies.”
Where disputes are heard may affect the outcome of legal disputes over business interruption coverage, said Ms. Bennett of Lowenstein Sandler.
“Jurisdiction is going to matter,” she said. “There are some jurisdictions that are known to be very insurer-friendly and just as many jurisdictions that are known to be more inclined to see the policyholders’ view toward things.”
“I think where will matter,” said Sharon D. Stuart, chair of the Insurance and Reinsurance Committee of the International Association of Defense Counsel and founding partner of law firm Christian & Small in Birmingham, Alabama. “Some of these early cases are going to be filed in states where there’s a strategic reason for doing so.”
Potential precedential rulings also vary by state, said Mr. Greisman of Goldberg Segalla. “Precedent includes cases where courts have said that in order to have direct physical damage there has to be some tangible damage, which we typically think of as visual, ” he said.
“In states which have considered substances such as noxious dust and gaseous substances as physical damage, it remains to be seen whether or not the courts would view coronavirus as direct physical loss or damage,” Mr. Greisman said. “We believe states which have ruled such does not constitute physical damage will not view coronavirus as physical damage.”
In the 2014 ruling Gregory Packing Inc. v. Travelers Property Cas. Co. of America, a U.S. District Court in New Jersey found that covered property damage had occurred when ammonia was accidentally released into a facility, rendering the building unsafe until it could be aired out and cleaned.
In Mellin v. Northern Security Insurance Company Inc., a couple sought a declaratory ruling that their homeowner’s policy with Northern Security included coverage for losses to their condominium caused by cat urine odor.
The lower court granted summary judgment to Northern Security, but the New Hampshire Supreme Court overruled the trial court.
The high court ruled that the couple were not required to demonstrate a “tangible physical alteration” to the unit to prove that it was rendered permanently uninhabitable.
“Rather, to demonstrate a physical loss” under their coverage, the policyholders had to establish “a distinct and demonstrable alteration to the unit.”
The high court also reversed with regard to a “pollution exclusion clause,” finding the exclusion ambiguous.
Gavin Souter contributed to this story.
More insurance and risk management news on the coronavirus crisis here.