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COVID-19: What Business Owners and Risk Managers Need to Know

Pennsylvania House Bill 2372 was introduced on April 3, 2020 and would require insurance companies to cover business interruption losses stemming from COVID-19. This bill would only apply to businesses with fewer than 100 employees and also would not apply to businesses who have laid off employees. This bill is in the very early stages and McConkey will be monitoring this closely.

One of the first questions businesses started to ask when they realized the extent COVID-19 was going to impact our country was, “Do we have any coverage for that?”. Insurance policies are legal documents and ultimately the legal system will determine the extent coverage applies. What insurance companies intend to cover and what the courts determine insurance companies need to cover are not always in alignment. There have already been a number of lawsuits filed and legislation introduced in several other states that would require insurance companies to pay for claims related to the COVID-19 outbreak. While the expectation is that there won’t be coverage for the majority of losses related to this pandemic, below is a summary of what the courts will consider when determining if coverage applies.

Property and Business Income
The absence of direct physical damage may result in most of the claims being denied. For instance, being denied access to an insured facility may not be covered because there is not physical damage to covered property. Losses due to a decrease in economic activity caused by “social distancing” rather than an actual contamination of covered property will likely lead to a quick denial of coverage by insurance carriers. Most Property policies are written on a Special form or “All risk” policy form. Coverage is triggered by all causes of loss that aren’t specifically excluded. Virus or bacteria exclusions became widespread nearly 20 years ago on property policies because of past outbreaks. Because of these broad exclusions, insurers may have the basis of a denial to businesses even if an outbreak was traced back to their facility.

Business Income forms typically specify the suspension or interruption in business must be caused by direct physical damage to covered property by a covered cause of loss. A loss of income due to a decline of economic activity for other reasons is not intended to be a covered claim. Extra Expense coverage typically follows Business Income coverage so if a cause of loss isn’t covered for Business Income then there generally won’t be Extra Expense Coverage.

For Construction companies, a loss of income due to a jobsite being shut down is not expected to be a covered Business Income claim. However, if there was an outbreak at a specific jobsite then that scenario would help make a stronger argument that there should be coverage under a Builders Risk policy.

Workers’ Compensation
Workers’ Compensation provides coverage for injuries or occupational diseases sustained in the course and scope of employment. Typically, a virus or illness would not be a covered workers’ compensation claim. However, insurance carriers are more likely to accept the claim if the employee can make a connection between their employment and exposure to COVID-19 during the scope of their employment.

General Liability
General Liability policies cover “bodily injury” and “property damage” claims that are brought against them by third parties. It is possible that a third party could claim they sustained injury or damage due to a company exposing them to the COVID-19 virus. If a company did not take measures to prevent the spread of the virus and someone contracted the virus or their property was damaged as a result of it then that could trigger coverage. Standard General Liability policies contain a “Pollution” exclusion, so these claims could be excluded if a court determines the virus is a “pollutant”. Additionally, some General Liability policies also contain exclusions that apply to communicable diseases, viruses, or bacteria. An insurer’s duty to defend is broader than their duty to indemnify, so there could be a scenario where a business has coverage for defense costs even though there is an exclusion that is determined to apply. Ultimately, the burden of proof would be on the third party to prove causation, damages, and legal liability for there to be a covered claim under a General Liability policy.

Pollution Liability
Pollution policies are intended to cover the gap created by the “pollution exclusion” in the General Liability policy. Some Pollution policies specifically cover “virus” within their definition of “pollutants”. Pollution policies are not standardized like General Liability policies, so the extent that coverage applies could vary greatly between policies. For the coverage to apply, the virus will need to be present at the insured’s location or jobsite to trigger coverage. If there is coverage under this policy, it could provide coverage for some cleanup or remediation costs and could extend to cover some Business Income or Extra Expense loss.

Professional Liability
Similar to Pollution Liability, some businesses carry Professional Liability coverage to close a gap created by a specific “Professional Liability” exclusion on a General Liability policy. This is typical for service companies or architects and engineers for their design liability. A construction company’s professional liability insurance policy provides coverage for errors and omissions in their “professional services” related to their construction operations. This coverage can extend to construction management and general contracting activities. There is potential for there to be coverage for liability to the owner if a contractor is determined to have breached their professional duty in the management of their project. As with other policies, the extent of coverage will likely be determined by the courts.

Employment Practices Liability
Employment Practices Liability covers employers from a wide range of employee lawsuits alleging wrongful workplace acts. If an employee claims wrongful termination related to a shutdown of operations or other discrimination, an employment practices policy may provide coverage in that action.

Data Breach/Cyber Liability
With many companies quickly transitioning to remote work, cybercrimes have the potential to increase. All businesses need to review their cybersecurity policies and increase communication with employees around cybersecurity best practices.

Directors & Officers
There could also be coverage under Directors & Officers policies because these policies are written to cover a multitude of wrongful acts in the management of a company. Much like there were some Data Breach claims covered under these policies, there could be coverage for failing to properly protect the company during or plan for this pandemic.

As with all legal documents, insurance policies are subject to interpretation by all parties involved. Claims that may not have been contemplated in the past could be covered or excluded based on a court ruling.  New coverages and exclusions are often created after a significant event.  Some insurance carriers have already begun to include specific COVID-19 exclusions on polices that are renewing in the midst of the pandemic.  It is imperative to discuss these issues and review your policies with your insurance professionals. McConkey will continue to monitor the developments of House Bill 2372 and will advise our clients on how they could benefit from this bill if it is passed.

Tim Ziegler, CRIS

Author Tim Ziegler, CRIS

Vice President/Principal
tziegler@ekmcconkey.com
717-505-3153

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