Mt. Franklin’s Perspective on COVID-19
Mt Franklin’s Perspective on COVID-19
Three Axioms of Insurance
Many consumers approach purchasing insurance as a commoditized activity. They reach out to a broker or two, look at a few options based on price and high level coverage outlines, and then make as intelligent of a decision as possible.
The COVID-19 event is a sobering reminder of 3 key axioms in purchasing insurance:
- Consumers are purchasing “contracts.” Insurance are legal styled documents with very precise wording that often
include many endorsements which modify coverage. Remember, at the end of the day, you are buying a contract.
- Most brokers are not attorneys and not qualified to provide legal advice. Good ones offer insight and will read through the contract provisions with you. They often bring years of experience in insurance – but they are not attorneys and not typically qualified to give legal advice on the specific wording in the contract you have purchased.
- Insurance contracts are not commodities. Contracts can vary greatly from carrier to carrier and the exact same claim
might trigger coverage with one carrier, but not another, depending on the wording.
When I discuss insurance with clients, I always discuss it in two big categories – 1st party and 3rd party, defined based on who a claim check is cut to. 1st party, often referred to as “Property” coverage reimburses the client for something they’ve lost. It could be a building, property, a stream of income, or frankly anything that reduces their net worth. The check is cut to the client to reimburse them for what they lost. 3rd party, often generally called liability insurance (though not entirely proper terminology to use), cuts the check to someone else. Based on what the client did, someone else is due money and the insurance pays that person instead of the policy holder.
Although there are clearly COVID-19 implications for both 1st and 3rd party coverage, most clients are focused on 1st party right now, and are not thinking of the liability lawsuits that will inevitably follow for “exposing” others to the virus.
Business Income (aka Interruption) Coverage
Clients are often encouraged by brokers to purchase business interruption (aka income) coverage. This is a 1st party coverage that is geared to plug interruptions in income streams to keep businesses going. On the surface, this sounds like a natural fit for COVID-19 related claims that have impacted many insureds. Remembering axiom #3 above, different carrier contracts will likely react differently to this type of claim. However, let’s explore the most common contract wording.
Underlying all of insurance claims is the concept of a “trigger.” The trigger is an event that elicits coverage. The trigger is evaluated before we even look at exclusions. As an extreme example: John Doe gets in a car accident and passes away while on his way to eat at your restaurant. That is certainly an “event” that occurred and impacted your income—but does that event trigger an insurance contract to do anything? Obviously not. It was an extreme example to prove a point. Just because “something” happens, doesn’t mean insurance policies respond.
In fact, I recently had a client contact me and say “I assumed that COVID-19 is a natural disaster and is therefore covered.” The existence of a natural disaster, even if COVID-19 is classified as a natural disaster, isn’t even enough to typically trigger a policy.
The most common wording to trigger Business Interruption is:
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…. The loss or damage must be caused by or result from a Covered Cause of Loss. [emphasis mine]
So, to trigger coverage, there must be direct physical loss of or damage to your building.
This is where Axiom #1 is relevant. You hold a contract that requires direct physical loss of or damage to your building and there is no specific definition for what direct physical loss means. It’s a contract. When you and your carrier disagree about the definition in a contract, it gets resolved in a Court of Law.
Courts have opined on this topic for many years, addressing cases specific to viruses, bacteria, and pollutants. Most cases have clearly indicated these do not rise to a level of direct physical loss. For the legal geeks out there, the most cited case is Columbiaknit, Inc. v. Affiliated FM Ins. Co., No. Civil No. 98-434-HU 1999, U.S. Dist. LEXIS 11873 (D. Or. Aug. 4, 1999), which has been further cited in two Federal Courts.
The clearest argument against paying out an insurance claim is that a virus can be cleaned from surfaces, which means there is no “direct physical loss of or damage” to the insurance holder’s business. And so, if there is no direct physical loss caused by the virus, then the insurance is never even triggered.
More importantly, we don’t know that a surface is necessarily even contaminated. We actually only have a “threat” of it being contaminated which is even a further step removed.
Even If Triggered…. Damages are Nil
Remember axiom #1: this is just a contract. It has no emotion. It has only provisions and calculations. It is objective. It has a definition for damage to your business and that definition is likely different than your own. Most importantly, it provides to cover your damages (loss of income) during your “period of restoration”. Even if one were to have a policy that was triggered, business income losses are calculated for the time it takes you to repair your building. How long does it take to bleach down all the walls? That will be the argument from the carrier, of course, taking into account the usual 72 hour deductible in waiting time (the amount of time most carriers require you to be deprived of income) before damages are calculated.
Civil Authority Provision
Many business income policies (remember axiom #3, all policies are different) have a civil authority provision to replace income in case your business is interrupted by civil authority. A quick conclusion might be that the municipalities issuing “stay at home” orders and “business closure” orders would trigger the civil authority provisions. Unfortunately, the civil authority provision is also rooted in the concept of direct physical loss.
The typical wording is:
“We will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises due to direct physical loss of or damage to property, other than at the described premises…” [emphasis mine]
A fire happens next door and damages the building, so your local municipality blocks off the street for two weeks while the damaged building is demolished. It requires the same trigger as before, it just requires the trigger on someone else’s property which affects yours.
Again, this is contract wording supported by Court opinions, most notably in a 2006 lawsuit between United Airlines and its insurance carrier after the airline had business income losses when the FAA shut down airspace after 9/11 (United Air Lines, Inc. v. Insurance Co. of the State of Pennsylvania, 439 F.3d 128 (2d Cir. 2006). Airspace was shut down. People couldn’t fly. Airlines lost money and said “civil authority shut down the airspace, so we lost money”. The Courts consistently upheld that the airspace closure wasn’t related to the repair of a specific piece of damaged property, and no claims payments were made.
Virus and Bacteria Exclusion
After the SARS epidemic in the early 2000s, carriers became wary of pandemics. Many adopted an exclusion first published in 2006 that is consistently added to most property policies: Exclusion of Loss Due to Virus or Bacteria. If there was any confusion about whether an insurance policy was “triggered”, this put rest any doubt. Even if a Court found there was direct physical loss, this exclusion denies coverage for that loss since it was a virus that caused it.
Most policies have this. Most customers haven’t reviewed their policies in enough detail (or remember) that this exclusion is on there. It is one of the many exclusions that all policies carry. Likely your brokers didn’t have much option with regards to this exclusion because it has been ubiquitous and mandatory with most carriers and policies since the mid 2000s.
But My Business Was Affected, What Should I Do?
Remedies of community wide societal impacts aren’t always solved by insurance contracts. Insurance is not, and should never be viewed, as a solution to every problem that could happen to a business. Even the 9/11 attack on the World Trade Center, which had insurance responses, was ultimately fully settled only with political solutions.
- First and foremost, file the claim. Don’t worry about the predictions that everyone is publishing that it will be rejected.
Don’t fight it up front. Just file the claim. This preserves your rights. This puts the onus on the carrier to take action to
deny it. Yes, it likely will be denied, but file it anyway. I predict that any future settlements or movement on this issue will require that a claim exists. Document your losses and file the claim.
- Watch the legal landscape. The first COVID-19 related court case was already filed in mid March 2020 (Cajun Conti,
LLC, et al. v. Certain Underwriters at Lloyd’s London, et al., Civil District Court for the Parish of Orleans, Louisiana) and
there are going to be many more. COVID is new, and despite us applying past logic to a novel event, Court cases often
revolve around minute details.
- Watch the political landscape. Ultimately, our worldwide pandemic is going to be solved by political influences – not
contractual ones. The advent of Congressional rescue funds, which as of this article have already begun, and public
assistance are taking the place of insurance funding. In fact, New Jersey has proposed a political solution by legislating that insurers pay COVID related claims as a matter of public policy, thereby voiding certain contractual wording (New Jersey Bill A-3844). Whether via direct payments, insurance regulation, public policy proposal, or alternate forms, the ultimate reimbursements will likely come from political manifestations.
The three key takeaways for small business owners are that:
- Insurance is never a solution to every possible issue a business could face. The “triggers”, exclusions, and legal
interpretations present a complex weave of business interruption coverage. Sometimes carriers explicitly exclude types of claims, but sometimes they are scenarios that just aren’t contemplated by insurance.
- Insurance contracts are not commodities. Read through and know what you are purchasing.
- File the claim.
In researching current legal interpretations and cases, I’m grateful for the work by Shannon O’Malley, referenced below. Her very detailed work on this matter is worth a read, though it is certainly at a more detailed legal level.
“Commercial Property Insurance Coverage and Coronavirus” by Shannon O’Malley, Zelle LLP.
To read this full document click here.
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