The coronavirus has now infected more than 30,000 people. Cases have been reported in every province of China as well as in Thailand, Japan, Hong Kong, South Korea, Vietnam, Australia, Europe, the United Kingdom, and the United States. More than a dozen cities have been quarantined. China, the United States, Europe, Australia, and others have imposed significant travel restrictions. Tech companies, auto manufacturers, banks, and others have imposed restrictions, as have food distributors and retailers. Conferences and events have been cancelled. If— and as—the situation becomes more complicated and more expensive, risk managers and in-house counsel will need to field questions about whether their companies have insurance for the potentially significant costs of a possible pandemic.
Is Coverage Available for Income Losses Related to the Virus?
Many businesses purchase event cancellation insurance, which provides coverage if an event — such as a conference, convention, trade show, concert, or sporting contest—is cancelled, cut short, postponed, or otherwise adversely affected because of a “covered event.” Under typical event cancellation policy wordings, a “covered event” can include the physical, practical, or legal inability to hold an event as planned, including as a result of a government order cancelling all events or a strict quarantine. Event cancellation insurance will reimburse lost profits and expenses arising from a cancellation, curtailment, or the like.
More generally, most businesses maintain first-party insurance policies that cover business interruption, including lost income and any associated extra expense, when covered direct physical loss or damage results in a slowdown or interruption of the policyholder’s business. Many first-party insurance policies also cover lost income and extra expense that results from such loss or damage to the property of a customer or supplier, typically called “contingent business interruption” losses. Obtaining coverage for business interruption or contingent business interruption claims arising out of the virus may require proof that the relevant property (for example, food stuffs, clothing, or factory premises) itself suffered some viral contamination. Early and thorough understanding of the causes of any shutdown or slowdown—and a record documenting those causes —may be critical in securing coverage.
Common policy extensions in first-party insurance policies may also provide a route to coverage for coronavirus-related losses. Some policies cover loss of ingress or egress from insured property; and importantly, such provisions may not tie such ingress/egress coverage to direct physical damage. See, e.g., Fountain Powerboat Industries v Reliance Ins. Co., 19 F. Supp. 2d 552 (E.D.N.C. 2000). Put otherwise, a quarantine order that prevents access to an insured location may trigger first-party insurance coverage, even in the absence of physical property damage. Or, the policy may cover losses where civil authorities prohibit access to insured property due to demonstrated property damage (such as viral contamination) at another site.
Policyholders should ensure they understand the wording of any potentially applicable policy language: both the words used and the words omitted. Understanding the legal landscape governing the interpretation and application of those words may likewise help identify avenues to coverage—and coverage gaps.
Understand and Manage the Loss Adjustment Process
Adjustment of policyholder losses after an insurance company concedes potential coverage presents a complicated process that requires careful, judicious management. The failure to participate in that process actively can mean leaving your money on the table. For significant claims, particularly those ranging in the tens or hundreds of millions of dollars, insurers typically will assemble teams of experienced claims handlers, third-party adjusters, forensic accountants, consultants, and counsel. Those insurer adjustment teams earn their living minimizing claim payouts by, in many instances, introducing unfavorable assumptions or methodologies in calculating the value of a covered loss. The insurer may, for example, seek to offset losses in an affected city by increased profits in an unaffected city even where the law or the policy language may not permit such an offset. Strong policyholder teams can help make sure that the insurers value—and pay— for business interruption or contingent business interruption losses fairly.
Be careful of mistaking an adjustment process that is moving forward—especially one moving forward rapidly—for a process that fairly and reasonably values your losses according to the policy language and according to the law. Demand the same level of diligence, deliberation, and scrutiny for an insurance claim of tens or hundreds of millions of dollars as you would for any other matter of a similar magnitude.