Coronavirus (COVID-19): Coming Insurance Claims

Richard Goetz, Tancred Schiavoni, Allen Burton, Gary Svirsky, Kieran Humphrey, Zoheb Noorani and Janine Panchok-Berry | O’Melveny & Myers

While we do not yet have a firm fix on where the COVID-19 outbreak is heading, we do know one thing that is certainly on its way: a torrent of insurance claims. Every day we read about quarantined cities, cancelled travel plans, and disrupted supply chains across the globe. The scale of the outbreak—and its economic consequences—is almost like a natural disaster, but insurers do not typically sell coverage for corporate losses caused by epidemics or pandemics.

Based on recent natural disasters and epidemics, the claimed losses could fall into several categories:

  • Business Interruption: With massive shutdowns and disrupted supply chains, business-interruption claims are likely coming.
  • Decontamination Costs: Depending on the severity of the outbreak, organizations might incur voluntary cleanup costs. And governments and regulators may force other businesses to temporarily close to clean facilities.
  • Evacuation Costs: Several infected people have already been evacuated to their home countries. There could be more. To the extent that any business—such as the employer of an evacuee—is forced to bear these expenses, it will likely seek coverage for these costs.
  • Medical Expenses: Infected people may make claims for medical expenses—especially if they got sick during business travel. Either the employees themselves or their employers may seek coverage.
  • Travel Cancellation Losses: Many travelers have canceled travel and accommodation bookings (or may in the future be required to) as a result of the travel restrictions and quarantine laws being adopted around the world. This will inevitably lead to claims from individuals and businesses under their travel insurance.
  • Other: D&O claims and third-party liability suits are also sure to follow, particularly as the plaintiffs’ bar develops theories of liability.

Traditional property and casualty insurance policies have limited coverage for epidemics. In fact, following the SARS outbreak in 2003, many insurance carriers began to include exclusions for epidemics and pandemics in business-interruption policies. Thus, many policies exclude coverage for losses “in connection with a notifiable infectious disease”—that is, a disease that doctors and medical staff must report to the government by law. So, there may be less insurance available for claims arising from COVID-19 than some businesses expect.

Still, a patchwork of policies may provide some coverage. Beyond workers’ compensation, property, and business-interruption, coverages including professional liability and some marine policies might respond in specific circumstances. While the practices used by some employers to contain the spread of the virus could give rise to claims of discrimination against protected classes, employment-practices liability policies might apply in those situations. D&O policies could cover shareholder allegations about lack of preparedness or a slow response to the crisis. General liability policies could cover illnesses by customers or other third parties. Property policies could provide coverage for decontamination and cleanup costs. Obviously, the language of each policy would govern.

The unusual circumstances of the claims that may be made over COVID-19 could give rise to a number of coverage issues:

  • Liability of Hotels/Cruise Ship Operators/Venues of Public Gatherings: These businesses risk liability for any outbreaks that occur on their premises on grounds of alleged negligence. Such situations may trigger commercial general liability policies.
  • Bodily Injury Damages: Many general liability policies cover damages “on account of, or because of, bodily injury.” But, what damages will be considered related to COVID-19? Will loss of reputation and brand value diminution because of the outbreak be damage “because of” bodily injury?
  • Damages Calculations: If a policy provides business-interruption coverage, how will those damages be calculated and what categories of damages will policyholders be allowed to recover?
  • Site-Liability Policies: Some policies provide coverage for remediation and third-party liability based on the presence of biological agents at certain sites, such as hotels or common carriers. These policies could be triggered if there is an outbreak in a hotel or at an airport.
  • Maritime Policies: Some maritime polices provide coverage if there is an outbreak of disease on a vessel. Since cruise-ship operators have been severely impacted by COVID-19, they will search for all possible coverage—and they may be surprised to find some available coverage where they did not expect it.

Obtaining coverage based on the unique circumstances related to COVID-19 may, in many cases, be like trying to fit a square peg into a round hole. What is clear is that these coverage questions will put a variety of issues to the test in courtrooms and before arbitration tribunals around the world. Both policyholders and carriers should be mindful that the cases arising from the outbreak may be highly complicated and contentious.

* * *

Just as SARS and MERS preceded it, COVID-19 is surely not the last pandemic. The novelty and nature of the financial risks presented by the current outbreak may encourage entrepreneurial market participants to turn to insurance-linked securities—not unlike catastrophe bonds for hurricane risk. While it is too late for similar offerings related to COVID-19, we may see robust interest in such products in the near future.

Contractor Entitled to Defense for Alleged Faulty Workmanship of Subcontractor

Tred R. Eyerly | Insurance Law Hawaii

    Applying Nevada law, the Federal District Court in Florida found that the general contractor was entitled to a defense of claims based upon alleged faulty workmanship of a subcontractor. KB Home Jacksonville LLC v. Liberty Mutual Fire Ins. Co, 2019 U.S. Dist. LEXIS 151235 (M.D. Fla. Sept 5, 2019).

    KB Home completed six residential developments utilizing various subcontractors. One subcontractor was Florida State Plastering, LLC (FSP) for installing stucco. Eighty-eight complaints against KB Home implicated FSP’s stucco work. Plaintiffs alleged that the stucco subcontractor’s work suffered from construction defects, causing damages not only to the exterior stucco, but also the underling wire lath, paper backing, house wrap, wood sheathing, interior walls, interior floors and other property. 

    Ironshore insured FSP under a CGL policy. KB Home was an additional insured for liability for property damage caused by “your work.” KB Home was also insured under its own CGL policy with Liberty Mutual. Both insurers refused to defend.

    KB Home filed suit for a declaratory judgment. Liberty Mutual then agreed to defend. Ironshore argued that KB Home was not entitled to partial summary judgment because there were material facts in dispute. The court concluded that the underlying complaints alleged “property damage,” caused by an “occurrence” of FSP’s allegedly faulty workmanship. Further, there were allegations of damage to property other than FSP’s own work. The underlying complaints alleged that FSP’s faulty stucco installation caused damage to paper backing, house wrap, wood sheathing, interior walls and interior floors. 

    Ironshore next argued it still had no duty to defend because Liberty Mutual was providing KB Home a defense. The court disagreed. The presence of multiple insurers did not excuse any single insurer from fully defending the insured. Therefore, KB Home’s motion for partial summary judgment was granted to the extent Ironshore had a duty to defend. 

Can Negotiated Terms in Construction Agreements Reduce Uncertainty Surrounding Concurrent Delay?

Regan Schmidt | Taft Stettinius & Hollister

Concurrent delay is a frequently litigated construction claim. These types of cases tend toward both the complex and constructively technical. It may then come as a surprise that despite the prevalence of lawsuits, a majority of construction contracts fail to directly address concurrent delay in a project. The phenomenon of silence surrounding the concurrent delay issue is a critical problem for owners and contractors.

There is no regulation that governs the legal definition of concurrent delay in construction contracts. That is not to say there are no guidelines to assist owners and contractors as they negotiate terms. AACE International Recommended Practice (RP) 10S-90 and 29R-03 are often cited in litigation where damages are sought on this issue. The parties and their counsel should consider these references when negotiating documents. However, these sections are not dispositive of how concurrent delay should be defined for a specific project. Both RP 10S-90 and RP 29R-03 provide several tenets to defining the term. In some cases, concurrent delay is limited to delays where both the owner and contractor are at fault. In other instances, the definition is broader.

The construction industry itself has generally accepted the view that concurrent delay occurs when there are two or more delays that take place over the same period of time and result in project delay. Delay can occur from circumstances outside of the control of the parties, including force majeure events. A majority of construction agreements do not detail with specificity the rights and obligations of the parties in the face of such delay. What typically occurs is the agreement will include a project schedule setting forth deadlines for project milestones. When a delay is anticipated or occurs, a party has a contractual notification obligation. Construction contracts tend to be ambiguous in addressing the procedures to follow after notification occurs. Contracts may provide contractors an extension to project deadlines, but uncertainty following the identification of what happens next leads to frequent disputes arising.

Numerous failures to define concurrent delay in construction contracts and a lack of a generally accepted definition has led to inconsistent application of the law across adjudicating bodies. Construction claims are brought in numerous forums, including arbitration, panel review and local courts. Without a bright-line rule on how to define concurrent delay and resulting damages, an inconsistent precedent has been established across various forums. The best mechanism to control the outcome of any potential dispute is for the parties and their counsel to clearly define the rights and obligations of the parties at the onset of the relationship. Courts have increasingly decided that delays on the part of owners precludes their ability to recover liquidated damages for project delays. Such limitation in recovery can amount to a large loss for an owner. Allocation of risk and definition of available relief is a primary reason to negotiate concurrent delay. Parties should understand that general contract principles apply to these contracts, and the parties are free to negotiate to their best position.

Concurrent delay is defined largely by the construction contracts governing the project. Parties would be wise to head off potential litigation by addressing, at the forefront, the rights and obligations of each party. Since there is inconsistent precedent across various venues, the negotiation of terms leads to a more predictable outcome in the event of a dispute. Regulatory guide rails can assist owners and contractors as they work through terms. However, the parties are free to modify the definition of concurrent delay in their agreement to better suit the project. Owners and contractors are best advised to seek legal guidance on the negotiation of terms to ensure that the contract documents allow for the flexibility they need to meet reasonable deadlines and lower to risk of dispute in the event of a delay.

Gobble Gobble First and Then You Can Put Up the Christmas Tree. Well, Kinda.

Matthew DeVries | Best Practices Construction Law | November 26, 2019

As we enter the holiday season, some people have strict guidelines about when the Christmas tree or other holiday decorations are allowed to takeover our daily lives, offices, and homes.  The red and white ribbons and the colored lights of Christmas cannot be hung until after the orange pumpkins, brown leaves and turkey carcasses are thrown away.  In other words, it is premature to celebrate one holiday before the other holiday has occurred.  In the world of construction claims, according to one court, these same rules apply—it is premature to award damages before the claim has been considered and either approved or rejected.

In VVM Builders, LLC v. Atkins Construction Group, LLC, No. CV195021541S (Oct. 31, 2019), the Superior Court of Connecticut squarely addressed this precise issue in a case involving a change order dispute between a contractor and subcontractor.  The subcontractor filed a demand for arbitration against the contractor, seeking both its contract balance and approximately $40,000 in extra and/or change order work.  The parties’ contract provided that “the subcontractor shall have no claims for additional work or changes in the work without written authorization.”  The subcontractor submitted invoices for the extra work, but, according to the testimony at the hearing, the contractor had neither approved nor rejected the subcontractor’s claim.

Nonetheless, the arbitrator essentially awarded prospective damages based upon “not yet approved” changes or extra work, stating the following:

The [subcontractor] has submitted invoices for this extra work. The [contractor] testified that [it] has not yet approved any of those extra work/change order items and, therefore, the [subcontractor’s] claim cannot be awarded at this time. I find that should the contractor approve said work then the [subcontractor] shall recover same.

The contractor paid the contract balance to the subcontractor, but the subcontractor filed a motion to confirm the award on the change order work.  The court summarily denied the subcontractor’s motion, finding that the contractor’s interpretation of the arbitration award was correct.  While not explicitly stated in the one-page opinion, the court concluded that the arbitrator could not base its award on a change order claim that had not yet been approved (or even considered) by the contractor.

The short opinion makes sense—an arbitrator cannot rule on a claim that has not gone through the process required by the contract.  So what? A more difficult scenario arises when the claim has been submitted and either the contractor or the owner have refused to respond to the claim.  It is not clear from the VVM Builders case how long the subcontractor’s invoices for extra work had been pending, but I suspect it was not an excessive or unreasonable amount of time.  If it had been, the subcontractor could make an argument that the refusal to provide a response to the claim was a “deemed” denial and, therefore, gave the subcontractor the right to proceed with arbitration. Better yet, parties should draft a time limitation period within their contract for review and response to a submitted claim (i.e., “In the event Owner fails to respond to Contractor’s written claim for additional work within ten (10) days, the claim shall be deemed approved.”).

On a more personal note, to you and your family, Happy Thanksgiving!

When Does A Claim for Damages Not Require Notice? When It Is One For Liquidated Damages.

Matthew DeVries | Best Practices Construction Law | November 26, 2019

I just blogged about asking for what you want and the importance of complying with notice provisions in pursuing a construction claim.  A court in Oklahoma just reminded me that not all claims require notice.  Here’s what I mean.

In WinCo Foods, LLC v.  Crossland Construction Co., No. CIV-18-175-HE (Nov. 21, 2019) (PDF), the U.S District Court for the Western District of Oklahoma recognized the distinction between “notice” for purposes of asserting a delay claim by the contractor and “notice” for purposes of assessing liquidated damages by the Owner.  The contractor failed to attain substantial completion of the construction of a new grocery store by the contractually required deadline.  The contractor argued that the owner failed to comply with the notice provision when making its claim for liquidated damages.

The court held that the “notice of claims” provision in the parties’ contract was a separate provision from the liquidated damages provision and, thus, inapplicable to the claim for liquidated damages.  The court reasoned:

As set forth above, the terms of the liquidated damages provision govern the issue of liquidated damages “notwithstanding anything to the contrary in the Contract Documents”. Thus, any additional requirements set forth in the notice of claims provision, that are not included in the liquidated damages provision, would not apply. Because the liquidated damages provision does not require [the owner] to provide notice of any claim for liquidated damages and makes the entitlement to liquidated damages automatic where the circumstances warrant, [the owner] was not required to comply with that notice procedure.

It is important to note that the court’s decision was made at the summary judgment stage—first, finding that the liquidated damages provision was enforceable; and, second, finding that the owner was not bound by any notice provision in assessing liquidated damages.  However, since there were disputed issues of material facts as to the delays on the project and the architect’s bias conduct against the contract, summary judgment was not proper on either the contractor’s claim for additional time or the amount of the owner’s claim for liquidated damages.  Those issues would proceed to trial.

So what?  The primary lesson that comes to mind from WinCo is one of mutuality, or making sure that the contract provisions that apply to one party apply equally to the other party. This is especially true when one party is attempting unfairly to shift risk of attorney fees, indemnification or otherwise to the other party.  In this instance, the contractor could have made sure that notice of any type of claim by any party shall be made within the time proscribed.