COVID-19: Property Insurance Considerations
Given the far-reaching business impacts of measures taken by governments and organizations to control the spread of COVID-19 – which was declared a pandemic by the World Health Organization on March 11, 2020 – many companies are looking to their property and other insurance policies for potential resilience and recovery options for ongoing losses. The pandemic is an unprecedented situation that will raise many issues for insureds and insurers. Organizations should work closely with their brokers, counsel, and other advisors to work through them.
Managing a Global Pandemic
The pace and scope of government actions globally is changing daily, if not hourly. In efforts to mitigate the spread of the virus, governments have shut down large areas of their countries, enacted quarantine zones, and curtailed travel. These measures, starting in China and then cascading elsewhere, have brought a suspension of business activities that is rippling through the global economy.
As the virus spreads in the US, some cities and states have shut down or restricted many public activities. Schools, malls, sporting and entertainment venues, restaurants, and more are closed in many places, some due to government action, others due to corporate decisions. In certain instances with increased risk of community spread, people in defined geographic areas have been quarantined and movement within such areas limited. These forced shutdowns and restrictions on movement have led to a pronounced reduction in economic activity, with businesses feeling the financial impact.
Many organizations are now trying to understand how their property insurance policies might respond to ongoing financial loss. The nature of COVID-19 and the president’s recent declaration of a national emergency in the US make it important for companies to understand potential property insurance coverage issues. The specific terms and conditions of an organization’s policies will ultimately determine coverage.
Likely Property Insurer Responses
Under traditional property policies, insured physical loss or damage is necessary to trigger a response under the policy. If COVID-19 manifests at an insured’s premises with people becoming ill, insurers could contend that such effects are not physical loss or damage. Similarly, insurers can be expected to argue that possible contamination, proximity to other contaminated premises, or fear on the part of the public is not physical loss or damage. Policyholders and their counsel may test the positions taken by insurers as to what constitutes physical loss or damage, especially in light of the magnitude of the policyholders’ potential losses.
Many property policies include coverage for business interruption loss, other time element coverages, and extensions such as interruption by civil authority, ingress/egress, attraction or leader property, and contingent business interruption/extra expense. However, insurers are likely to view those coverages as being triggered only by insured physical loss or damage following a covered cause of loss, and thus meaning that no coverage will be available where the virus is present or suspected to be present. Even if physical loss or damage is established, many property forms contain “contamination” exclusions that insurers may seek to invoke.
Certain property forms may respond to losses related to coronavirus if they contain one of the following extensions:
- Decontamination costs. This extension commonly addresses the enforcement of either a law or ordinance or by the action of a government authority due to the actual presence of the contaminants following insured physical loss or damage to insured property by a covered cause of loss. A sublimit may apply.
- Communicable disease clean-up. This extension can provide coverage for reasonable and necessary costs for the cleanup, removal, and disposal of covered property due to the actual presence (not the suspected presence) of a communicable disease on premises. The coverage trigger with respect to this extension is the limited or prohibited access to the insured’s premises by the order of an authorized governmental agency pertaining to the communicable disease. This coverage is often subject to an annual aggregate sublimit, which may combine clean-up costs with other categories of loss.
- Interruption by communicable disease. This extension, similar to the one described above, extends the business interruption or time element coverage provided within the policy resulting from an order of an authorized governmental agency pertaining to the communicable disease occurring at the insured’s premises. The conditions and limitations on coverage described under “communicable disease clean-up” above also commonly apply.
Business Interruption by Civil Authority
Many organizations want to know whether coverage is available through “interruption by civil authority” or similar extensions in their policies due to the closures of certain areas and venues that serve the public and the restrictions on movement resulting from actions by public authorities.
As discussed above, under many property policies, in order for coverage — including any business interruption or other time element coverage —to be triggered, there must be insured physical loss or damage to property of the type insured under the policy due to a covered cause of loss such as fire, explosion, windstorm, or other specified events. This condition also commonly applies to the interruption by civil authority extension.
According to insurers, a pronouncement by a civil authority, as the policy defines it, is often insufficient to qualify as a covered cause of loss and insurers will likely not respond to a business interruption or time element loss as a result. Insurers’ positions are likely to be the same in relation to recent actions by the Federal Aviation Administration (FAA) restricting certain flights, which may lead to financial loss tied to the delayed or absent supply of critical business goods.
With regard to construction risks, the COVID-19 outbreak may result in a delay in the construction process, and therefore a delay in the issuance of a handover certificate. In such instances, any delay in start-up coverage should be reviewed. This coverage typically responds to physical loss or damage to the contract works resulting in delay in completion and consequent delay in the commencement of the commercial operation of the business. Like many standard property policies, the coverage trigger is often physical loss or damage by a cause of loss that is not excluded and occurs prior to the delay. Some builders risk policies may contain an extension for infectious diseases manifesting at or within a specific distance of the construction site resulting in its closure. A sublimit is likely to apply to that extension, and typically such coverage is subject to a waiting period — sometimes in excess of 30 days.
At both the federal and state level, regulatory and legislative bodies are considering measures that may affect insurers’ obligations relating to coverage for COVID-19. For example, the New York State Department of Financial Services has instructed all property and casualty insurers on risks in New York to communicate with policyholders about coverage available under their policies for financial loss due to COVID-19. Marsh is monitoring these developments and assessing potential impacts on policyholders’ claims.
Organizations that are potentially suffering losses should follow existing guidance — including collecting appropriate documentation, presenting claims to insurers in a prompt and timely manner, and following the terms and conditions of their policies.
Marsh’s experienced claim personnel are available to help policyholders collect relevant information concerning losses, notify losses to insurers, and advance arguments in favor of coverage.