CGL Coverage and Coronavirus: Is Causing Exposure an “Occurrence”?

Randy Maniloff and Margo Meta | White and Williams

There is only one thing that can be said for sure about the extent of consequences — human and economic — of the new coronavirus outbreak. Nobody knows. But, as things stand now, minor, and even moderate, have left the barn.

History shows that, in the wake of widespread injuries and financial losses, focus often turns to the possible role of insurance to mitigate the damages. The new coronavirus — COVID-19 — will be no exception. Indeed, lots of lawyers have already published articles discussing the issue. History also teaches that, when novel claims arise, not everyone sees eye-to-eye on if or how insurance policies apply.

As policyholder lawyer Kirk Pasich put it in The Wall Street Journal last week: “There is no guesswork here: There will be insurance-coverage disputes.” He added that “[t]here is so much money at stake and strong differences of opinions as to whether insurance applies.”

Most of the coronavirus-insurance chatter so far has focused on possible coverage under business interruption policies. That makes sense. A business that has suffered a financial downturn, on account of the impact of the virus, would certainly describe it as an “interruption.” But Business Interruption policies typically require that there be direct physical loss of or damage to the insured property. And most business losses will likely be the result of a general decline in economic activity and not physical loss or damage to a structure.

But expect to see disputes over satisfaction of this requirement if a business is disrupted because the virus was present on its premises, say, in the HVAC system. Some policyholder-counsel are already beating this drum.

Other potential business interruption issues being bantered-about involve coverage for the consequences of supply chain disruptions and if a business is closed on account of a government mandate.

Coverage questions are likely to arise under a variety of other policies, including event cancellation. The Wall Street Journal reported that the South By Southwest festival in Austin is uninsured for its cancellation as its policy does not cover a shut-down caused by a disease.

According to the Journal, on account of its losses, the future of the mega-gathering is up in the air. The Chief Executive of SXSW told the paper: “We’ve had to show our insurance policy to all kinds of people, and nobody ever said, ‘Hey, there’s a big hole here.’”

ENTER THE PLAINTIFFS’ LAWYERS

Another history lesson: Injuries and financial losses are often followed by an assessment of blame. This is the tort system. Enter the plaintiffs’ lawyers. Some in the business of seeking compensation, for those that have been harmed, may be thinking that someone must pay for all this chaos.

Of course nobody here can expect to be sued for causing the coronavirus. But the same may not be said for those who allegedly failed to prevent others from becoming infected. Consider schools that did not close and its students became infected, conferences that did not cancel, stores and restaurants that should have shut down, sporting events that should not have gone on. The list is long. Some businesses, and employees, may be forced for reasons of economic necessity — survival even — to put financial interests ahead of safety.

Consider the suit filed on March 9th by Ronald and Eva Weissberger, passengers on the Grand Princess cruise liner, which was docked off the coast of California for several days on account of passengers and crew infected by the coronavirus. In their California federal court complaint, the couple alleges that Princess Cruise Lines had actual knowledge that two passengers, who had previously disembarked, had symptoms of the coronavirus. In addition, 62 passengers now on board were allegedly exposed to them. Yet, despite all this, the suit alleges that the ship still sailed, on account of the cruise liner choosing “to place profits over the safety of its passengers.”

Needless to say, there will be proximate cause challenges to tying one’s infection to another’s conduct. After all, the exposure could have happened in umpteen locations. There will also be duty of care issues that look at whether the business satisfied its obligations to invitees or others on the premises.

Such suits would presumably be reserved for those seriously injured or who succumbed to the virus. [Think egg-shell plaintiff for those who died and had other underlying illnesses.] So far that is not most people. Although those with minor injuries may still want lost wages, which is because of bodily injury. So how prevalent these suits are remains to be seen. But ruling them out entirely would be premature.

And what about if one’s conduct, in conjunction with taking coronavirus measures or not, causes another business to shut down. [The CGL definition of “property damage” usually includes “loss of use” of property.]

CORONAVIRUS AND CGL COVERAGE

Claims that seek to hold people responsible for causing others to contract coronavirus will put insurance in the spotlight. A business facing such a suit will turn to its commercial general liability policy. Despite the availability of defenses against these premises liability claims, the duty to defend does not consider the merits of the suit.

How might insurers respond to such suits?

Many CGL policies contain a Fungi or Bacteria exclusion. While it is often colloquially called the Mold exclusion, is it more than that. The endorsement typically also excludes coverage for “bodily injury” “which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any bacteria on or within a building or structure,” et seq. But COVID-19 is a viral infection and not bacterial.

There is a liability policy exclusion for communicable diseases. In Koegler v. Liberty Mutual Insurance Company, 623 F. Supp. 2d 481 (S.D.N.Y. 2009), the court held that no liability coverage was owed to an individual, for claims that he transmitted the human papillomavirus and herpes virus to his girlfriend and her daughter. The court held that the communicable disease exclusion, which excluded coverage for bodily injuries arising out of the “transmission of a communicable disease, virus, or syndrome,” precluded coverage. But the Communicable Disease exclusion is not seen often in CGL policies.

The pollution exclusion? Policyholders will maintain that, even states that apply it broadly, won’t go that far.

IS CAUSING PEOPLE TO CONTRACT CORONAVIRUS AN ACCIDENT?

While the possible role of exclusions come to mind, they are only reached if a claim first satisfies the relevant terms of the policy’s insuring agreement: “bodily injury” caused by an “occurrence,” usually defined these days as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

And that’s where the fight over the availability of general liability coverage, for insureds that allegedly caused others to contract coronavirus, is likely to take place: the gateway to the policy, its insuring agreement. Was the “bodily injury” caused by an “occurrence”/accident? [Coverage B — “personal and advertising injury” — does not require an “occurrence.” But only false detention or imprisonment — think wrongful quarantine — would seem relevant here.]

In general, whether there has been an accident, for purposes of securing insurance, is the oldest and most litigated of all coverage issues. The first “accident” coverage case that I know of goes back to 1835 — Howell v. Cincinnati Insurance Company (Ohio Sup. Ct.).

An interesting “accident” case from way, way back is Schneider v. The Provident Life Insurance Company (Wis. 1869). A man was killed when he fell under a slow moving train while attempting to board it. The push and pull in Schneider, over whether his death was caused by an “accident,” reads like the opinion was written last week. When an issue has been debated for nearly 200 years, and the arguments haven’t changed much, it would be fair to call it vexing.

There may be no better description of this confounding issue than how it was put by the Pennsylvania Supreme Court in Brenneman v. St. Paul Fire & Marine Insurance Company (1963). Nearly 60 years ago Justice Musmanno made this observation:

What is an accident? Everyone knows what an accident is until the word comes up in court. Then it becomes a mysterious phenomenon, and, in order to resolve the enigma, witnesses are summoned, experts testify, lawyers argue, treatises are consulted and even when a conclave of twelve world-knowledgeable individuals agree as to whether a certain set of facts made out an accident, the question may not yet be settled and it must be reheard in an appellate court.

So is “bodily injury,” on account of an insured’s failure to prevent exposure to coronavirus on its premises, caused by an accident?

At the outset, the standard for determining if bodily injury has been caused by an accident differs substantially between states. Even within states the standards are sometimes all over the board. Throw in that the cases can be wildly different factually. And there also seems to be an element of I-know-an-accident-when-I-see-one in the decisions. Did I mention that courts have been trying to figure out what’s an accident since Andrew Jackson was in the White House?

Liberty Mutual Insurance Company v. Estate of Bobzien, 377 F. Supp. 3d 723 (W.D. Ky. 2019) provides guidance on whether “bodily injury,” on account of an insured’s failure to prevent exposure to coronavirus, was caused by an accident?

Michael Bobzien sued his deceased father, Hugo Bobzien, for various injuries and conditions caused by exposure to second-hand smoke while Michael was a minor living in his father’s house. Hugo was insured under a series of homeowners’ insurance policies issued by Liberty Mutual. Each of the policies defined an occurrence as “an accident, including continuous and repeated exposure to substantially the same general harmful conditions, which results, during the policy period…in ‘bodily injury.’”

In the coverage case, the court concluded that Michael failed to allege an “accident” under the Liberty Mutual policies, as his complaint alleged that: (1) Hugo intentionally smoked in the presence of his children, and (2) Michael’s injuries and conditions were a direct, natural and foreseeable result of Michael’s exposure to second-hand smoke.

The court in the very recent decision of Campanella v. Northern Properties Group, LLC, No. 19-171 (D. Minn. Feb. 28, 2020) saw the accident issue differently. Matthew Campanella rented a residence from Northern Properties. Unfortunately it contained toxic levels of chicken feces. Campanella claimed he contracted histoplasmosis on account of Northern Properties carelessly and negligently failing to clean and maintain the residence. Histoplasmosis is a serious infection caused by a fungus in the environment, particularly in soil containing large amounts of bird or bat droppings.

Northern Properties sought coverage for Campanella’s suit under a CGL policy issued by Auto-Owners. At issue was whether the bodily injury was caused by an “occurrence,” defined as an accident.

As Auto-Owners saw it, no way, no how could Campanella’s injury have been caused by an accident: “[I]t is difficult to imagine any scenario in which the accumulation of chicken feces in a residential dwelling to a ‘toxic level’ due to a failure to clean the premises would be accidental.”

But the court disagreed: “Even if Northern Properties intentionally allowed a toxic build-up of chicken feces on the premises, Auto-Owners cannot point to any facts suggesting that any party foresaw Campanella contracting histoplasmosis. In fact, Auto-Owners admits that ‘most people who breathe in the [histoplasma fungi] spores don’t get sick.’ In other words, Campanella contracting histoplasmosis was unexpected and unforeseen—an ‘accident’ as both Minnesota and Wisconsin have defined it.”

Whether “bodily injury,” on account of an insured’s failure to prevent exposure to coronavirus, is caused by an accident, will generally turn on whether the insured foresaw the claimant’s injury. Given the vast warnings, about the need to take action to prevent exposure to coronavirus — not to mention if the insured had reason to know of a risk — some courts may answer this question in the affirmative and conclude that the bodily injury was not caused by an accident.

CONCLUSION

For sure there are legal and factual challenges to bringing suits against entities for failing to prevent exposure to coronavirus on their premises. And such hurdles may be what keeps the extent of efforts low.

But the duty to defend determination does not take the merits of a claim into consideration. In addition, while such “bodily injury” may not have been caused by an “occurrence,” that determination may not be possible at the complaint stage based on how the allegations are pleaded. Therefore, insurers may find themselves defending claims that their insureds failed to prevent others from contracting coronavirus.

These are strange times. And coronavirus coverage cases will be strange too. But despite their novelty, insurance coverage jurisprudence has long been in place to sort them out.

Commercial Property Insurance Coverage and Coronavirus

Shannon O’Malley | Zelle

No modern disease has dominated the news and affected the world-wide economy on such a scale as coronavirus (COVID-19). Coronavirus’s impact is widespread across almost all business sectors. Governments are shutting down whole regions and cities to quarantine and contain the outbreak. Workers are being urged to stay home for weeks, rather than days, to avoid contagion or spread of the disease.

These prophylactic and reactive governmental actions, and individual actions taken by businesses, are having a huge impact on businesses’ bottom lines. The ripple effects of shutdown factories and an absent workforce are being felt across many different business sectors. The disruption of supply chains from Chinese factories, for example, is affecting businesses like Apple, Microsoft, Toyota, and Samsung. Pharmaceutical companies are also facing potential shortages due to disruptions in the drug supply chain. Hospitality and travel-based industries such as airlines, hotels, and car rentals, not to mention local economies driven by tourism, are also facing cancellations and ongoing losses as a result of this disease. Many companies have restricted business travel. Conferences, festivals, marathons, and other events have been cancelled. Even more significantly, workers and managers are concerned with the potential exposure to this virus. People are contacting their employers, looking for alternative work arrangements. Schools and daycares may close for extended periods of time, leaving working parents scrambling for alternative child care.

Based on these substantial economic challenges, companies will undoubtedly look for ways to recoup or at least minimize their business income losses. Many may look to their property insurance policies for assistance. But unless the policies contain specific provisions for non-physical damage coverage, these companies are unlikely to find relief within the four corners of their policies.

A.    Commercial Property Insurance Policies’ Business Interruption Coverage is Tied to Insured Physical Property Damage

The policy language is key. While articles that provide a general analysis are useful, ultimately, the specific policy language at issue, in concert with the facts, will determine whether coverage is triggered by coronavirus and its impacts.

Generally, most property policies that offer business interruption coverage require a causal connection between insured physical loss or damage and the loss of income.

For example, the ISO commercial property business income form generally states:

We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration.” The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations…

The issue both insurers and insureds will face, therefore, is whether the insured’s lost business income was the direct result of physical loss or damage. This will be a key issue in considering coverage for coronavirus-related claims. Coronavirus-related losses that businesses are experiencing to date are typically due to causes other than physical property damage – e.g., people are staying home from work – they are not producing necessary good and services for other businesses, they are not traveling, and they are not purchasing goods and services to the same degree. None of these causes of economic loss are related to physical damage to insured property.

1.      What is insured physical damage?

Creative policyholders and their attorneys may try to link the virus and physical property damage. As always, the specific policy language at issue is key and should be thoroughly analyzed in the event an insured submits a claim under their property insurance policy arising out of any coronavirus event. Ultimately, the key factual issue is whether the insured property was actually physically altered and/or affected by the virus.

a.      Physical loss or damage generally requires an alteration of the property.

Importantly, there appears to be a split in jurisdictions as to what actually constitutes “physical loss or damage.” Some courts restrict their analysis to require tangible changes resulting in material damage to property.[1] Others more liberally find “physical loss” due to changes that cannot be seen or touched as long as there is a demonstrable alteration of the insured property.[2]

One court analyzed whether property exposed to high humidity, mold, and mildew from wet air constituted direct physical loss or damage.[3] The court determined there must be a distinct and demonstrable physical change to the property necessitating some remedial action to demonstrate physical loss or damage. “The recognition that physical damage or alteration of property may occur at the microscopic level does not obviate the requirement that physical damage need be distinct and demonstrable. In the methamphetamine odor damage cases, the physical damage is demonstrated by the persistent, pervasive odor. In the absence of such odor, no physical damage could be found. The mere adherence of molecules to porous surfaces, without more, does not equate to physical loss or damage.”[4]

Here, policyholders are likely to argue that the physical impact of a virus from an infected person’s coughing or sneezing physically damages property. But some courts appear to reject the notion that a simple sneeze or cough physically alters or changes property such to cause “physical loss or damage.” The fact that the virus may be cleaned without essentially altering the property is evidence that there is no initial damage. And the insured bears the burden to meet the threshold issue that there is physical loss or damage.[5] Nevertheless, it is not wholly clear whether all jurisdictions would follow this analysis and the facts in each case may be determinative.

b.      The property must actually be physically affected by coronavirus.

While policyholders will use cases discussing intangible losses to property such as odors and gases to support their claim that property potentially affected by the virus is physically damaged, it is important to be aware which jurisdiction’s law applies and the facts of the case. Regardless, courts appear to universally require the insured’s property to be, in some way, physically affected.

Therefore, there needs to be investigation to confirm that the virus did, indeed, touch the property. Courts actually require physical damage, rather than the supposition of damage. Courts have rejected insureds’ claims for loss when a federal authority prohibits import due to suspected contamination without a showing of actual physical damage.[6] Courts recognize that although property may be treated as if it were physically contaminated by disease and lost its function, insurance policies specifically require a physical loss. To characterize an insured’s inability to transport its product across the border and sell the product in the United States as direct physical loss to property, without showing actual damage, renders the word “physical” meaningless.[7]

Therefore, to the extent a company may seek damages because product may come from a region affected by coronavirus, or even from a location where an infected person worked, without a demonstration of physical damage (i.e. confirmation of coronavirus’s presence), it should not be covered.

Notably, the virus is thought to be spread from person-to-person through droplets (i.e. sneezes and coughing). While there may be spread from contact with infected surfaces or objects, this is not considered the primary way the virus is spread. Therefore, whether a company that shuts down to clean surfaces potentially impacted by the virus actually sustained physical loss or damage, rather than just suspected damage, is an important consideration.

c.       Other policy hurdles.

Even if coronavirus contamination could be considered physical damage to property, other policy terms and conditions may limit or preclude coverage.

First, an insurer is typically only liable for the lesser of the cost to repair or replace the lost or damaged property. The question is, then, what is the cost to remediate coronavirus from the property? Is it simply washing down surfaces with soapy water and testing? While the information concerning remediating the virus from surfaces is still new and likely developing, most experts agree that cleaning surfaces with soap and water, bleach, or vinegar will kill the virus. Moreover, there is evidence that the virus only lasts on surfaces between 2 hours and nine days. In fact, in at least one case, an office in Kuala Lumpur was closed for thorough cleaning following the confirmation of infection of an employee. That closure, however, was expected to last only one day.

Other coverage questions are also implicated. For example, most policies tie deductibles to the number of occurrences. How many occurrences of the virus may be triggered? Is it an occurrence each time an infected person sneezes or distributes particles of the virus on property? Similarly, if the property is cleaned, and someone re-infects the location, is that a separate occurrence triggering a new deductible?

Another factor is that business interruption coverage is tied to a policy’s period of restoration (aka period of indemnity or period of liability). In some ISO forms, the period of restoration has a waiting period, such as 72 hours, before coverage begins. And the period lasts only as long as it should take to repair the physical loss or damage using due diligence and dispatch. If the “physical damage” is the particles of virus on surfaces of a building, how long should it reasonably take to use soap and water, or bleach, to clean those surfaces?

In conjunction with the insured’s obligation to show actual physical damage, these other examples demonstrate that an insured will face numerous hurdles to recovery under a typical property policy.

2.      Exclusions may apply to preclude coverage.

If the insured can demonstrate that product or property was damaged by coronavirus, policies may also contain exclusions that preclude coverage.

Typically, policies exclude coverage for contamination and pollution. Many such policies include the words “bacteria” and “virus” in those provisions. If the policy explicitly excludes viruses, “damage” arising from coronavirus is not covered.

The contamination exclusion may also apply to preclude coverage. The language of the policy and the specific exclusion will be important. Also important is whether the virus is actually present to cause damage. For example, if an insurer seeks to rely on the contamination exclusion to preclude coverage for “damage” caused by the coronavirus, courts may require the insurer to demonstrate the property was actually contaminated by the virus.[8]

Some courts are loathe to expansively apply the contamination exclusion. They apply the term “contamination” contextually, and find it is a question of material fact for the jury to determine its ultimate meaning.[9] Many courts have expressed concern on the seemingly “limitless” application the term “contamination” may encompass. Therefore, the context of the contamination exclusion as a whole must be considered when applying it to coronavirus.

Accordingly, certain exclusions may apply to preclude claims for alleged property damage from coronavirus, but those exclusions must be analyzed closely in the context of the policy and the facts.

B.    Some Special Coverages and Policy Provisions May Have Non-Physical Damage Coverage Extensions

Typical property insurance coverage forms require the property to actually sustain physical loss or damage. Notably, however, some policies have expanded coverage to include non-physical types of loss. And certain insurance programs write coverage for cancellations specifically relating to epidemics.

A prudent insurer should look for endorsements or provisions within a policy that carve out and cover non-physical damage. This may include crisis management coverage, coverage for interruption by communicable disease, or cancellation of bookings coverage.

These provisions must be reviewed carefully to determine their breadth, including whether they may be extended to cover upstream or downstream losses due to closure of supplier or customer locations due to fear of infectious diseases. Many of these provisions make clear that they apply when there is actual, not suspected, presence of communicable diseases at the insured’s location.

These provisions also often have limitations such as sublimits and waiting periods that may affect the insured’s claim. Nevertheless, the provisions should be considered in the context of the policy as whole to determine whether coverage exists and how the policy responds.

C.    Specific Business Interruption Provisions Require the Income Loss to Directly Result from Insured Physical Loss or Damage

Property policies often provide business interruption coverage arising out of damage to the insured’s property. If there is no direct damage to the insured’s property due to the virus, however, the insured may look to extensions of coverage for indirect losses arising from the virus. This policy language must also be closely reviewed, however, because these provisions typically also require physical loss or damage to property to trigger coverage.

1.      There must be a causal connection between the property damage and the business interruption loss.

If an insured seeks business interruption coverage due to “damage” at its property arising from coronavirus, the insured’s loss of business must still be causally connected to the physical loss or damage. For example, an insured’s business may sustain losses due to causes other than insured physical loss or damage to property, such as a lack of workers, a decline in tourism, or a reduction in aggregate demand for goods and services as people stay home and businesses close. Property policies provide coverage for business interruption losses directly resulting from insured property damage. Courts interpreting the language “directly resulting from” as requiring the insured to demonstrate that there is a causal link between insured property damage and the claimed time element loss.[10]

Therefore, to the extent there are other non-covered causes of an insured’s loss, those must be assessed and considered in the evaluation of any claim. Losses that are not causally connected to physical loss or damage to the insured’s property may not be covered.

2.      The Period of Restoration may limit coverage.

Moreover, property policies do not provide business interruption coverage for an unlimited period of time following damage. Rather, business interruption coverage is limited to the Period of Restoration (also called Period of Indemnity and Period of Liability). Policies typically define a Period of Restoration as:

the period of time that:

  1. begins with the date of accidental direct physical loss caused by an insured loss at the described premises; and
  2. ends on the date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality.

Courts interpret this language to mean “the time by which an insured acting ‘as quickly as possible’ would have completed repairs to its property. This is a theoretical calculation reflecting ‘the length of time required with the exercise of due diligence and dispatch to rebuild, repair or replace the damaged premises. Where the actual restoration period exceeds the theoretical period or where the premises are not restored, the theoretical period becomes the computation period.’”[11]

Therefore, if the business interruption coverage is tied to the theoretical period of time it should take an insured, acting with due diligence and dispatch, to clean the property to remove traces of coronavirus, the Period of Restoration is likely to be relatively short. Companies may experience prolonged periods of delays, potential shutdowns, and loss of productivity due to employee illness or other issues unrelated to physical damage to their property that do not fall within coverage or the Period of Restoration.

3.      Civil authority coverage generally should not apply.

Because many companies are not likely to have a direct claim for damage to their property, they may look to other coverages in their business interruption policies. The most obvious type of business interruption coverage that policyholders may look to in making a claim arising out of coronavirus is their business interruption civil authority coverage.

Civil authority coverage generally does not require physical damage to the insured’s property. Rather, the coverage is based on the interruption of the insured’s business, when an order of civil or military authority impairs access to the insured’s property as a result of insured physical damage. Therefore, coverage is generally contingent on actual physical property damage, rather than fear of contagion.

Many civil authority provisions are reactive and do not provide coverage for prophylactic measures. Courts addressed this issue following 9/11 and rejected claims arising from the FAA’s closure of airspace.[12] One court determined the government’s order to shut down all air traffic was not the direct result of property damage, but rather was “based on the fear of future attacks.”[13] “The Airport was reopened when it was able to comply with more rigorous safety standards; the timetable had nothing to do with repairing, mitigating, or responding to the damage caused by the attack on the Pentagon.”[14] Based on this, the court determined the insured’s loss was not the “direct result” of damage to adjacent premises.

In locations subject to damaging weather events, such as hurricanes, courts have applied policies as written, and rejected insureds’ attempts to seek coverage when orders are issued before property damage occurs.[15] One court noted:

The Policy’s plain language requires that the civil authority prohibit access as a “direct result of direct physical loss or damage to property” within one mile of the [insured’s] premises. The Policy does not insure against impairment of operations that occurs simply because a civil authority prohibits access unless the civil authority order meets the requirements of the policy—one of those requirements is a nexus between the order and certain physical damage. Reading the Civil Authority section as a whole, it is clear that it was not written with the expectation that a civil authority order prohibiting access would issue before the property damage that forms the basis of the order actually occurs. The direct nexus between the damage sustained and the order that the policy requires suggests that the Policy was designed to address the situation where damage occurs and the civil authority subsequently prohibits access.

Accordingly, unless the insured can prove that an order of civil authority was directly due to property damage at or near the insured’s location, the Policy’s civil authority provision should not apply.

4.      Contingent BI coverage generally should not apply.

Another potential avenue for coverage that an insured may look to is an insurance policy’s contingent business interruption provision (“CBI”). CBI insures against a company’s lost business in the event the insured’s customer or supplier sustains insured physical loss or damage at their property. A typical provision provides:

This policy…is extended to cover the actual loss sustained by the Insured resulting from the necessary interruption of the business conducted by the Insured, whether partial or total, caused by loss, damage or destruction covered herein…to:

Property that directly or indirectly prevents a supplier of goods, services or information to the Insured from rendering their goods, services or information or property that directly or indirectly prevents a receiver of goods, services or information from the Insured from accepting or receiving the Insured’s goods, services or information.

Therefore, if a business sustains a loss because its supplier is a factory in China, which is shut down due to coronavirus, then that business may attempt to seek coverage under the CBI provision. But like the civil authority coverage, the supplier’s shut down generally must be caused by insured physical loss or damage.

The insured bears the burden to show that “the claimed business loss was caused by damage to property that ‘directly or indirectly prevent[ed]’ a client from accepting or receiving [the insured’s] services.”[16] If the insured cannot identify any interruption of its business due to property damage to a customer or supplier, there likely is no coverage.

Notably, it may be difficult to determine the reason behind the shutdown of suppliers’ or customers’ locations. Whether those shutdowns are due to actual physical damage, or (as is more probable) to quarantine and contain the spread of the virus from person-to-person, the insured bears the burden to produce evidence triggering coverage.

Even if the insured may be able to demonstrate there was damage at a supplier’s or customer’s location, other policy provisions may also affect coverage. Many policies have sublimits for CBI coverage, waiting periods, and high deductibles. These factors also must be considered when analyzing any CBI claim.

5.      Ingress/Egress.

Some policies have extensions of coverage for Ingress/Egress, which covers the insured’s loss due to the necessary interruption of the insured’s business due to prevention of ingress to or egress from the insured’s property, whether or not the insured’s property was damaged. Again, insureds seeking coverage under their policies’ ingress/egress provisions must show that their property cannot be accessed due to actual insured physical loss or damage.[17] With respect to coronavirus claims, it may prove challenging to demonstrate that any ingress is prevented due to physical damage, rather than fear of bodily injury due to person-to-person contagion.

6.      Other BI coverages.

Other typical BI coverages in policies may also be examined for coverage. For example, some policies provide coverage for Logistics Extra Costs or Attractive Property Coverages. Like civil authority, CBI, and Ingress/Egress provisions, however, these provisions generally tie the loss of income to insured physical loss or damage. Therefore, the insured typically still must prove that its lost income is due to actual physical damage. As discussed, the insured will likely have difficulty meeting this burden.

D.    Conclusion

Businesses are unquestionably being affected by coronavirus. Companies are suspending travel for their employees. Some employees are being urged to work from home. Even the CDC is recommending extended at-home stays when individuals suspect infection with the disease. The entire country of Italy is effectuating quarantine and curfew measures.

All of these actions will impact productivity and companies’ bottom lines. But the majority of these measures relate to labor force protections rather than physical property damage. And without the trigger of physical loss or damage that causally causes the loss of income, property insurance policies are unlikely to respond to these losses.

If history is any guide, policyholders and their attorneys will attempt to advance creative arguments for coverage in response to coronavirus. The key to responding properly is a careful analysis of the specific policy terms and conditions at issue, informed by experience and relevant legal authority.

[1]     Universal Image Productions, Inc. v. Chubb Corp., 703 F.Supp.2d 705, 710 (E.D. Mich. 2010) (holding that even though mold and bacteria permeated a floor, because the entire premises did not need to be vacated, and the insured could not meet its burden to show it suffered any structural or any other tangible damage to the property, there was no direct physical loss to property); Mastellone v. Lightning Rod Mut. Ins. Co., 175 Ohio App.3d 23, 41 (Oh. Ct. App. 2008) (holding that mold staining on exterior wood siding did not rise to the level of “physical injury” because it was only temporary and could be cleaned by using a solution of bleach and trisodium phosphate. The court concluded, “the presence of mold did not alter or otherwise affect the structural integrity of the siding. The experts all agreed that the mold was present only on the surface of the siding and could be removed without causing any harm to the wood. Absent any specific alteration of the siding, the [insureds] failed to show that their house suffered any direct physical injury as required by the homeowners’ policy.”).

[2]     In Mellin v. Northern Security Ins. Co., 167 N.E. 544 (N.H. 2015), the New Hampshire Supreme Court found that cat urine odor emanating from a neighboring condominium constituted “physical loss.” The court determined that an insured may suffer physical loss “from a contaminant or condition that causes changes to the property that cannot be seen or touched.” Id. at 549. Importantly, however, even the Mellin court recognized that “physical loss” should not be interpreted overly broadly. It concluded that the term “‘physical loss’ requires a distinct and demonstrable alteration of the insured property.” Id. at 550. For the Mellin court, this included changes perceived by the sense of smell.

[3]     Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. CIV. 98-434-HU, 1999 WL 619100, at *7 (D. Or. Aug. 4, 1999).

[4]     Id. (emphasis added).

[5]     Id. (recognizing it is the insured’s burden to show that a covered loss has occurred and the property was physically damaged).

[6]     Source Food Technology, Inc. v. U.S. Fidelity and Guar. Co., 465 F.3d 834 (8th Cir. 2006).

[7]     Id. at 838.

[8]     Duensing v. Traveler’s Companies, 257 Mon. 376, 849 P.2d 203 (Mont. 1993).

[9]     Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33, 45 (2d Cir. 2006).

[10]   See, e.g., Fresh Express Inc. v. Beazley Syndicate 2623/623 at Lloyd’s, 199 Cal.App.4th 1038, 1056, 131 Cal.Rptr.3d 129 (Cal. App. 2011) (rejecting an insured’s claim for business loss due to the FDA’s Advisory to consumers regarding potential E. coli in spinach and the subsequent reduction in the insured’s earnings because there was no causal link or nexus between the business loss and an event covered by the policy); Commonwealth Enterprises v. Liberty Mut. Ins. Co., 101 F.3d 705, 1996 WL 660869 (9th Cir. 1996) (rejecting the insured’s claim for lost business income under California law, even though a fire initially caused the insured’s interruption, because that interruption was primarily caused by the discovery of asbestos contamination, not fire damage); Syufy Enterprises v. Home Ins. Co. of Indiana, No, 94-0756, 1995 WL 129229, * 2 (N.D. Cal. 1995) (excluding coverage for business interruption loss due to curfews following the Rodney King trial because the loss was not a direct result of damage to or destruction of property and, therefore, the insured could not demonstrate the requisite causal link necessary for involving coverage); Pacific Coast Eng. Co. v. St. Paul Fire & Marine Ins. Co., 9 Cal.App.3d 270, 274, 88 Cal.Rptr. 122 (Cal. App. 1970) (finding that a property policy only provides business interruption coverage for losses directly resulting from interruption of the operations at the insured’s property, not merely from the interruption of the work being done at the insured’s location at the time of the loss).

[11]     G&S Metal Consultants, Inc. v. Cont’l Cas. Co., 200 F. Supp. 3d 760, 769 (N.D. Ind. 2016). See also Steel Products Co. v. Millers Nat. Ins. Co., 209 N.W.2d 32, 38 (Iowa 1973); Duane Reade, Inc. v. St. Paul Fire & Marine Ins. Co., 411 F.3d 384, 398 (2d Cir.2005); SR Int’l Bus. Ins. Co. v. World Trade Ctr. Properties, LLC, No. 01 CIV. 9291, 2005 WL 827074, at *3–4 (S.D.N.Y. Feb. 15, 2005) (collecting cases).

[12]     United Air Lines, Inc. v. Insurance Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006).

[13]     Id. at 134.

[14]     Id. at 135.

[15]     Jones, Walker, Waechter, Poitevent, Carrere & Denegre, LLP v. Chubb Corp., No. CIV.A. 09-6057, 2010 WL 4026375, at *3 (E.D. La. Oct. 12, 2010).

[16]     Arthur Andersen LLP v. Fed. Insurance Co., 416 N.J. Super. 334, 349, 3 A.3d 1279, 1288 (App. Div. 2010).

[17]     See e.g. City of Chicago v. Factory Mut. Ins. Co., No. 02 C 7023, 2004 WL 549447, at *4 (N.D. Ill. Mar. 18, 2004) (holding “upon careful interpretation of each clause of the Ingress/Egress policy within the context of the contract as a whole, it becomes clear that the provision insures against business interruptions due to the prevention of ingress to or egress from the City’s airports, provided that the prevention is the result of direct physical damage to property that is at or within 1,000 feet of the airport premises.”).

Coronavirus Expected to Bring Serious Delays and Complications to Construction Projects

Susan N. Eccles | Adams and Reese

The United States has been transfixed by the spread of coronavirus. To date, over 115,000 individuals in 115 countries and territories have been infected.

It is likely coronavirus will soon reach parts of the country that have yet to be affected. Louisiana’s governor, John Bel Edwards, noted that “it’s a matter of when and not if this will happen.”

What does the spread of coronavirus mean for general contractors, subcontractors, material vendors and sureties?

The message is clear – the virus could impact your project schedule.

As any scheduler knows, one slight schedule slip can be disastrous to a project resulting in delivery delays, the accrual of liquidated damages, increased costs and general conditions and labor cost surges.

Due to the size of the labor/materials impact, or the identity of the project owner, it may be necessary to shut down the job site and/or demobilize.

The time to prepare is now and discuss potential impacts with construction managers, contracting officers or owner representatives. Topics of discussion could include:

  • Discussing and documenting the owner’s plan for continuing work if government/owner personnel are unable to report to work
  • Whether the government/owner will permit telecommuting or remote work arrangements including off-site fabrication/construction
  • How the owner/government intends to respond to performance delays which results from COVID-19

Importance of understanding the contractual terms and provisions

It is imperative that the parties have an understanding of the contractual terms/provisions at play.

Provisions to be reviewed include Excusable Delay provisions, such as Federal Acquisition Regulation (FAR) 52.249-14, which excuses acts of default by the contractor for failure to perform in instances outside of the contractor’s control, specifically including, epidemics.

If your project is impacted as a result of coronavirus, it is vital that the contractor seek a time extension as a result of the delay and document the request in order to preserve potential claims or defenses to wrongful termination. Contractors should not wait until months/years later at project completion to resolve this time impact. It will only become more difficult and costly to determine.

Additionally, it is not unreasonable at this early phase of the virus’ spread to anticipate that your construction project may be impacted by a stop-work order. Once again, it is critical that all members of the project team have an understanding of the contractual provisions which govern in the event that work on the project is suspended.

While federal government construction projects are controlled by the adopted FAR/DFARS provisions, including FAR 52.242-14 (Suspension of Work) or 52.242-15 (Stop-Work Order), other projects may not have such robust provisions in place to deal with these potential impacts. All impacted parties should ensure that such orders are given in writing, and they should comply with the owner/government’s directives. Such suspension or stop-work order will likely necessitate the issuance of further orders downstream including to subcontractors and material suppliers.

Document all notification efforts and keep bonding and insurance companies apprised of the potential impacts to the project. Staying in touch with the entire project team is critical to mitigate losses and prepare for potential claims that may arise.

All parties are encouraged to document costs of compliance with the order, impact costs and schedule impacts. Submissions of requests for equitable adjustment, change order or modifications should be made once the cost/delays are determined.

It is important to comply with the contractual/statutory provisions impacting the request for equitable adjustment, change order or modification and be prepared to submit a formal claim, if required.

Utilization of new technologies

In the event that a project is impacted, but work does not cease, one should consider options such as new technologies to mitigate the impacts and get the project back on schedule.

Drones and other unmanned aircraft systems permit one worker to take the place of teams of personnel. Such drones can, and are actively employed on many construction projects for visual inspections, surveys, system delivery and thermal imaging. Drones should be considered an additional mitigation tool if and when labor shortages arise and could help to reduce job costs in the event that labor/service rates abruptly rise.

Insurance Coverage Questions Abound Amidst COVID-19 Outbreak

Douglas Christian | Ballard Spahr

Among the legal issues presented by the coronavirus outbreak is the extent to which insurance policies may provide relief for virus-related losses. Proactive businesses are reviewing the specific risks they face and looking for ways to manage those risks through their existing policies and additional coverage available in the insurance market.

Businesses face numerous risks, and potential insurance coverage for them, including:

  • Losses due to property damage and business interruption (property policy)
  • Third-party liability (commercial general liability, directors & officers, or errors & omissions policies)
  • Employment-related liability (employment practices and workers’ comp policies)
  • Supply chain and trade disruption (trade disruption, credit, and other policies)
  • Event cancellations (event cancellation policy)
  • Liability for medical costs (health insurance and other policies)

Our Insurance Group can help manage coronavirus risks by advising on: rights and obligations under insurance policies; possible enhancements to existing coverage; and proper presentment of a claim under the policy.

No Duty to Defend If No Fortuity and No Occurrence

Larry P. Schiffer | Insurance and Reinsurance Disputes Blog

So after just blogging about how tough it is to avoid the duty to defend, the Seventh Circuit issues an opinion concluding that where the underlying allegations lack fortuity and there is no occurrence, there is no obligation for the insurance company to defend.

In Lexington Insurance Co. v. Chicago Flameproof & Wood Specialties Corp., No. 19-1062 (7th Cir. Feb. 27, 2020), a lumber supplier was sued by a commercial contractor that ordered fire retardant and treated lumber (FRT lumber) required by the projects’ architects for several construction projects. The FRT lumber was required to meet the standards of the International Building Code (IBC). The allegations in the underlying suit are that the supplier purposely substituted uncertified lumber that did not meet the IBC standards, was not properly labeled, even though the purchase order was for a specific brand that met the IBC standards.

The supplier’s insurance company brought this action for a declaratory judgment that it had no duty to defend the underlying suits. The district court granted summary judgment to the insurance company holding that the insurance company had no duty to defend. The Seventh Circuit affirmed.

In affirming, the circuit court described the well-known provisions of a commercial general liability policy requiring the insurer to pay sums that the insured becomes legally obligated to pay as damages because of property damage caused by an occurrence, and defining an “occurrence” as “an accident.” The court held that the underlying complaints did not trigger the duty to defend because they did not allege an occurrence. Quoting from several Illinois cases, the court noted that if an injury is the rational and probable consequence of the act or the natural and ordinary consequence of the act, then the act is not an accident. In analyzing the underlying complaints, the court concluded that the allegations were inconsistent with shoddy workmanship or that the lumber shipped had a hidden defect resulting in damage that could not have been reasonably expected. Rather, said the court, the underlying complaints alleged that the supplier “deliberately shipped uncertified lumber despite knowing the consequences of doing so.”

The court essentially disregarded the negligent misrepresentation count in one of the complaints, stating that the label “negligent” is given little weight by courts and that courts focus on the actual allegations. Here, said the court, there was no unforeseen, sudden or unexpected event. There was no allegation that the supplier was negligent or failed to exercise reasonable care when it made its unilateral decision to ship uncertified lumber. Rather, the court found, the underlying complaints allege that the supplier did not exercise reasonable care by representing that it had the specific certified lumber requested by the contractor available for purchase, and by failing to notify the contractor that it supplied uncertified lumber. The court concluded that the alleged injury stemmed from the supplier’s unilateral decision to supply the uncertified lumber and its concealment of having done so.

Thus, the court affirmed the district court’s summary judgment in favor of the insurer finding that there was no duty to defend because the damage alleged was the natural and ordinary result of the supplier’s deliberate decision to supply, and conceal that it supplied, uncertified lumber.

In a footnote, the court mentioned that the supplier had not even addressed the insurance company’s argument that the policy’s business risk exclusions precluded coverage. Because the court determined that there was no “occurrence,” the court did not need to rely on the exclusion to resolve the appeal.