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March 30, 2020

All Business: Will insurance protect your business from COVID-19 losses? It depends

By TRISTAN SWANSON
Miller Nash Graham & Dunn

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Swanson

The economic fallout from COVID-19 has been swift and severe. Moratoriums, quarantines and governmental orders of all types have and, will continue to, upend daily life and impose severe economic consequences on Washington businesses.

While the federal government struggles to prop up the overall economy, many businesses are looking to what, if any, specific relief might be had. This search inevitably leads to insurance.

However, whether an insurance policy will provide assistance depends on the type of insurance purchased, the wording of individual policies, and, potentially, the particular circumstances surrounding each business's loss.

POLICIES THAT MAY HELP

• Business income loss insurance: Almost every Washington business carries business income loss insurance. These policies are usually triggered by some variation of “direct physical loss or damage to” insured property.

While there is an overall precedent in Washington, courts nationwide have found things like bacteria and dangerous gases can constitute direct physical loss — meaning that courts may find that a property that is contaminated with the COVID-19 virus has suffered “physical damage.” This is good news to Washington policyholders. With rare exception, Washington courts will read insuring language broadly, in favor of coverage.

That said, policyholders should not expect insurers to greet their claims with open arms. Insurers are already pushing back on factual grounds (which may prove immaterial — like whether the business can show an actually infected person visited) and through exclusions for delay, loss of market, loss of use, and, in some instances, for losses caused explicitly by viruses.

Business income loss policies also usually provide “civil authority coverage.” This coverage kicks in when access to a business has been “prohibited” by a government directive due to a “direct physical loss or damage” event occurring somewhere other than the insured property itself.

Given the recent local and statewide decrees in Washington, winning the threshold argument — whether access has truly been “prohibited” as the result of the various COVID-19 governmental decrees — appears straightforward. However, policyholders still have to deal with same “direct physical loss or damage” issue insurers are likely to latch onto.

• Industry-specific coverage: Insurers write different coverages for different industries. Thus, it is fairly common for restaurants/retail operations to carry coverage for “communicable disease events.” While these coverages may still carry “physical loss or damage requirements” they often specifically allow mitigation and assessment costs to be recovered.

Small changes like these in policy language can often open doors for policyholders. Moreover, the more a court believes an average purchaser of insurance would think they had purchased insurance for a disease event like COVID-19, the more likely the court is to find that the policy provides coverage. This is especially true in Washington.

In the same vein as “communicable disease event” coverage, some polices in fact contain “pandemic event” endorsements.

Coverage under such endorsements can be triggered by an “infected person” entering the insured premises or an announcement by a public health authority that a specific location has been closed due to a pandemic event. Policyholders will want to comb their policies for such endorsements and, if the facts permit, began assembling their claim to be presented to their insurers.

Trade disruption insurance, dependent property business income insurance, pollution liability and cleanup coverage, and travel insurance are other examples of industry-specific coverages which may respond to COVID-19 related loss.

All these policy forms should be reviewed (the sooner the better) and, if coverage is a possibility, a claim should be made with careful attention to the specific policy language employed.

GATHER EVIDENCE

Initial coverage for COVID-19 losses will likely depend not only on the wording of an individual policy but also how the policyholder's actual loss materialized.

While these facts might not always matter from a legal perspective, policyholders will likely find insurers more receptive to claims where, for example, the policyholder has evidence that an infected person entered their premises. Likewise, the policyholder will need prove up its profits and loss — these statements will be given strict (and often unfair) scrutiny by insurers.

In every case, careful review of factual issues and contemporaneous documentation may mean the difference between a successful claim and an expensive wild goose chase.

KNOW YOUR DEADLINES

Most first-party policies (like business income) contain suit limitations clauses which essentially preclude a policyholder from bringing a breach of contract action against an insurer more than year (or sometimes two years) after direct, physical loss occurred. Knowing these deadlines is essential.

Likewise, policyholders should be aware that individual coverages may contain their own deadlines. For example, communicable disease coverages may require reporting the loss within 30 days of an order from a public health authority.

The same is true in the third-party/liability insurance context. For example, a professional liability claim brought on the basis that a person was sickened due to a business staying open will need to be reported within the policy's reporting period or all possibility of coverage for the claim will be lost. And claims-made pollution cleanup policies may require that the need for cleanup of contamination be reported to the insurer before any costs are incurred, in order for those costs to be reimbursed by the carrier.

These are difficult economic times in almost every industry. While there may not be an insurance solution for every COVID-19-related loss, it is certainly worthwhile for any Washington business to take a long look at pursuing an insurance claim.

Washington is one of the best states in the country to be a policyholder and the hope for almost every commercial enterprise is that the courts will recognize that Washington businesses paid premiums to their insurance carriers with situations exactly like this in mind — and then hold them to their coverage responsibilities.

Tristan Swanson is a partner at Miller Nash Graham & Dunn. His practice focuses on construction, real estate, and insurance coverage disputes.


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