The recent outbreak of a novel coronavirus has created some apprehension, confusion, and potential complications for businesses across the United States and around the world. Whether they have operations and employees in China or rely on Chinese companies as customers or in their supply chains, different types of businesses may incur additional costs or experience some sort of business interruption or other loss as a result of the viral outbreak. In certain circumstances, those costs and losses may be covered by commercial insurance, particularly business interruption or contingent business interruption coverage.

The novel coronavirus under a commercial spotlight

"Coronaviruses," according to the World Health Organization (WHO) "are a large family of viruses that cause illnesses ranging from the common cold to more severe diseases..."As explained by the WHO, and as widely reported in the media, a "new strain" of a novel coronavirus recently has been identified.

Accordingly, on January 31, 2020, U.S. Secretary of Health and Human Services Alex M. Azar II made a formal determination "that a public health emergency exists and has existed since January 27, 2020, nationwide." The New York Times reports that, as of February 5, 2020, "12 cases of coronavirus had been confirmed in six [U.S.] states, and officials were awaiting test results on dozens more possible cases."

As a result of the outbreak, the operations of a number of businesses have been affected. Chinese manufacturers and related businesses have been hit by government-mandated factory shutdowns. The ripple effects from the containment measures are likely to impact supply chains and prompt the Chinese government to contemplate lowering China’s annual economic growth target. As The Washington Post reports, "[t]he battle to contain the ... coronavirus threatens to cut off U.S. companies from parts and materials they need to produce iPhones, automobiles and appliances and drugs to treat medical conditions including Alzheimer’s disease, high blood pressure and malaria."

The Post further reports, for example: "Major airlines in the United States and Europe are halting their cargo and passenger flights to China for up to two months." Travel restrictions, as well as other factors, are also expected to affect the retail, food and beverage, and tourism industries -especially in neighboring Hong Kong and Macau, as well as around the Asia-Pacific region.

Nevertheless, it is important to emphasize, as The New York Times reports, that "[w]hile the virus is a serious public health concern, the risk to most people outside China remains very low, and seasonal flu is a more immediate threat."

Coverage considerations

Coverage for coronavirus-related losses and costs may be available under various commercial insurance policies - most notably, those that provide business interruption and contingent business interruption coverage. Business interruption insurance is designed to pay a policyholder its lost profit and continuing unavoidable expenses when the policyholder's operations are disrupted by "physical loss or damage" to property at the place of those operations or a place critical to those operations. Contingent business interruption insurance is designed to pay a policyholder similar amounts -the difference being that it applies not when the policyholder's own operations are directly affected, but, rather, when the operations of suppliers, buyers, or others are affected.

There are a number of important considerations when it comes to coverages. For example:

  • Most business interruption insurance policy forms require physical loss or damage to the policyholder's or other property for coverage to attach; however, generally, a policyholder does not need to make a claim for property damage to seek coverage for a business interruption loss.
  • There may be an endorsement to the relevant insurance policy(ies) tied specifically to loss from orders issued in relation to communicable disease.
  • A policyholder need not own or lease the property, loss or damage to which forms the basis of a business income claim.
  • Policy language matters. A business should not just assume that because it has a certain type of insurance policy that it has insurance coverage for a coronavirus-related loss or claim. For example, an insurance policy may exclude coverage for losses or claims arising out of a "virus" or an "infectious disease." Insurance companies may also attempt to invoke other exclusions - such as the pollution exclusion - to avoid covering virus-related losses and claims.

Other coverages - such as civil authority, business travel/evacuation, and directors and officers - also may be implicated by the recent coronavirus outbreak.

Be proactive

In addition to requiring insurers to take certain actions, insurance policies obligate policyholders to take certain steps in the event of a loss or a claim or circumstances that could give rise to a loss or a claim. Generally, policyholders are obligated to give notice of such a loss, claim, or circumstances as soon as they learn of the loss, claim, or circumstances, or at least within a certain time period thereafter. Any business in any way affected by the novel coronavirus should carefully review its policies, understand and honor its contractual obligations, and comply with any notice or other relevant provisions.

For example, if and to the extent that an insurance policy covers business or supply-chain interruption losses attributable to viral outbreaks and if the implementation of precautionary steps (for instance, temporary office or business facility closures, travel bans and restrictions, remote working, quarantine arrangements) by the business or its counterparties could prove costly, do not wait. Consider lodging a protective notification of such circumstances as a preservative step for the business in case such loss or damage subsequently manifests.

When addressing insurance coverage issues relating to the novel coronavirus, policyholders should at least consider also taking the following steps:

1. Consult with insurance coverage counsel, or an insurance broker, who is experienced with and knowledgeable about the relevant insurance policy language and its application and therefore can help address, among other topics, the following:

  • whether and, if so, to what extent and in what circumstances the types of risk to which the business is exposed are covered - for example, employee sickness and medical care as well as business and supply-chain interruption losses that are caused by or attributable to viral and infectious disease outbreaks - and all of the policyholder's duties under the applicable policy(ies); and
  • in the case of individual employee sickness and medical care policies that extend to cover viral and infectious disease outbreaks, ensure that employees are made aware of such insurance coverage, the identity of the corresponding insurance carrier(s) and policy details, their entitlement to make a claim (including any restrictions and limits on doing so) for payment or reimbursement (as the case may be) under the policy, as well as any specific human resources policies concerning the submission and management of employee insurance claims.

2. Carefully document any lost profit or other expense incurred as a result of the coronavirus outbreak. Doing so now will make submitting a proof of loss or otherwise supporting a claim later easier.

3. Continue to act prudently (which would extend to taking reasonable steps to reduce the risk of contamination, infection, and spread of viral and infectious disease among staff and to implementing appropriate measures to protect them and the business from the effects of the viral and infectious disease outbreak).

We are continuing to monitor the impact of the novel coronavirus on businesses and will provide further updates on material developments as appropriate.