COVID-19 and Business Interruption: How Insurance Can and Cannot Mitigate Losses

By: Finley Harckham | March 17, 2020

Finley T. Harckham, a senior litigation shareholder in the New York office of Anderson Kill, represents corporate policyholders in insurance coverage matters and has successfully litigated, arbitrated and settled hundreds of complex coverage claims. His areas of focus include property loss, business interruption, directors and officers liability, construction, professional liability, cyber and general liability claims. He can be reached at [email protected]

In addition to its rapidly growing human toll, the coronavirus is causing massive disruptions and losses to businesses in this country and worldwide.

As of this writing, states nationwide have shut schools, discouraged or prohibited public gatherings, and limited restaurants to takeout service.

Similar shutdowns are occurring throughout Europe, while travel bans crisscross borders and oceans — all in the wake of major supply chain disruptions originating in China.

The loss of income stemming from closures, supply chain disruptions and individuals’ curtailment of their ordinary activities will induce businesses of all sizes to seek insurance coverage through the business interruption provisions common to commercial property insurance.

Coverage Under First Party Property Policies

Most businesses’ first party property insurance policies include coverage not only for property damage but also for lost profits resulting from that damage.

The coverage for lost income often covers loss resulting from:

Damage to the policyholder’s own property (business interruption)
Damage to the property of a customer or supplier or a supplier’s supplier (contingent business interruption)
Government action such as evacuation orders (order of civil authority)
Damage to properties that attract customers to the policyholder’s business (leader property)

The event that triggers any of these coverages is property damage — without which there will be no coverage for lost profits under a first party property policy.

The fundamental questions with respect to property insurance coverage for every coronavirus-related loss are whether the mere presence of the virus can cause or constitute property damage and whether such damage played a role in the loss of income.

Non-structural Property Damage

While the coronavirus is not reported to have resulted in any permanent physical damage to property, it is transmitted either through the air or from touching infected surfaces.

Thus, the virus can be present in buildings, airplanes, trains, watercraft and other enclosed spaces and on surfaces outdoors.

In analogous circumstances, courts have found that the presence of harmful substances at or on a property can constitute “property damage” that triggers first party property coverage.

In Gregory Packing, Inc. v. Travelers Property Cas. Co. of America, a federal court in New Jersey found in 2014 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 reaching its decision, the court stated that “property can sustain physical damage without experiencing structural alteration.” Similar subsequent decisions in Oregon and New Hampshire have found property damage in the absence of structural damage.

A strong argument can be made from this case law that property damage has occurred in places where the virus is present.

New property damage can be introduced into an area by the same or additional infected people over time, which could strengthen the argument that places where large numbers of people congregate suffer ongoing property damage, no matter how long a single spore can survive there.

The Potential Extent of Contingent Business Interruption

A large portion of the losses suffered by American businesses will fall within the category of contingent business loss — a loss caused by damage to a supplier or customer. Many U.S. businesses have reported the loss of overseas suppliers and customers.

Such supply chain losses are likely to increase as the disease spreads in the U.S. and affects domestic customers and suppliers.

Importantly, the “supplier” whose property damage triggers contingent business interruption coverage may not be limited to the manufacturers or distributors of goods.

It could be the airline, cruise ship or subway that brings customers to your business. To qualify as a “supplier” it is not necessary that the policyholder have a supply contract with the third party.

For example, in Archer — Daniels Midland Co. v Phoenix Assurance Co, (S.D. Ill. 1996), the court held that the policyholder, a food processor, was entitled to contingent business interruption coverage because of property damage sustained by the Army Corps of Engineers, which operated the flooded Mississippi River boat channels, and farmers who lost crops that would have indirectly been sold to the plaintiff through intermediaries.

Closures of public gathering places and all nonessential business activity in major cities worldwide may trigger coverage for “order of civil or military authority” — that is, for loss due to the prohibition of access to a business’s premises if caused by property damage within a specified distance of the insured property, such as one or five miles.

Ordered closures could also trigger “leader property” insurance, which covers the policyholder’s lost earnings resulting from the closure of a property that attracts customers to the policyholder’s business.

The suspension of major league sports, for example, might trigger leader property coverage for hotels near stadiums and arenas.

Of course, the presence of coronavirus in the policyholder’s own premises could trigger both property damage coverage and business interruption coverage.

Defenses Against Coverage

A range of defenses may allow insurers to avoid, or limit, payment for losses stemming from the coronavirus.

First, some policies contain broad exclusions of damage caused by biological agents. Those exclusions may be found either in standalone provisions or be incorporated into exclusions for pollution or contamination.

Conversely, some property policies either expressly provide coverage for damage caused by disease or only partially exclude such damage, sometimes barring coverage for the presence of bacteria but not viruses.

Second, many policies contain sublimits for some of the coverages discussed above, have waiting periods before the coverage is triggered, or both.

Third, even if the presence of coronavirus is considered property damage, most time element coverages insure only the period of time needed to repair the damaged property.

Insurers will argue that the virus exists for only a very short period in the air or on surfaces, and that a quick cleaning is all that is needed to eliminate it and thereby restore the property, allowing a very limited period of recovery.

However, if the virus persists in people in an area, re-contamination is possible, which would extend the period of coverage.

Further, many policies provide extended period of interruption coverage to a certain number of days after property damage has been repaired to allow the policyholder’s business to resume normal operations and achieve pre-loss levels of income.

There will likely be disagreements over whether a business was closed or access was denied because of actual property damage or as a purely prophylactic measure to prevent the spread of the disease.

To that point, the Insurance Services Office recently announced that it has prepared forms that provide limited coverage grants for situations like the coronavirus pandemic, which, if incorporated into policies, will provide some coverage for purely preventive closures.

Unfortunately, such provisions will not apply retroactively and will likely be prohibitively expensive if marketed during the current crisis.

Loss Mitigation and Extra Expense

Insurance policies, as well as the common law, impose upon policyholders the obligation to mitigate property loss or personal injury and require the insurer to pay for those efforts.

Loss mitigation coverage is triggered by actual loss, damage or injury, so it probably would not apply to purely prophylactic measures taken to avoid a possible loss. However, once a loss or injury has commenced, efforts to contain it, such as closures or costs incurred to make alternative arrangements for employees, may be covered.

Extra expenses incurred in order to achieve safer means of production and deliveries of products and services may also be covered.

As the coronavirus crisis spreads and its impacts widen, it is important for policyholders to fully understand the property coverage they have — or potentially have — so they can keep proper records of loss, promptly notify their insurers and be prepared to pursue coverage. &

How a Carrier Partner Can Help Navigate a Challenging Management and Professional Liability Market

A combination of a choppy economy with increased claims frequency and severity could lead to rate increases in the Management & Professional Liability market.

Rates in the management & professional liability (M&PL) markets were on the rise from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including management liability (D&O), professional liability (E&O), employment practices liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into 2024, a big influence on the marketplace has been the extremely aggressive and softening public company D&O market.

Though these rates have been softening for management liability, that may change over the next few years as companies continue to adjust their business models motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes reported, even as other recession indicators, like the inflation rate, improved. A recession could lead to an increased claim activity and force carriers to raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim frequency pop up,” said George Schalick, Jr., senior vice president of the Management and Professional Liability Division at Philadelphia Insurance Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with pandemic-related claims should seek a carrier with a long history in M&PL products. They will provide much-needed risk management guidance and be better positioned to support their insureds during market fluctuations.

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

COVID-19 and Business Interruption: How Insurance Can and Cannot Mitigate Losses