Some states introduce legislation around insurance coverage exclusions for virus-related business interruption losses
The below information is current as of the publication date listed. Because COVID-19 response measures on all fronts are continually evolving, clients should stay alert to new developments and consult with counsel on any critical questions.
Businesses throughout the country continue to experience revenue reduction and business disruptions related to mandated shutdowns and slowdowns resulting from the COVID-19 pandemic. Many are looking into their options to recoup economic losses attributed under business interruption or income loss provisions contained in commercial property loss policies. However, exclusions may apply for virus-related business interruption losses and some states are introducing legislation for insurance coverage reform.
Since 2006, many commercial liability policies contain Insurance Services Office (ISO) Form CP 01 40 07 06 titled Exclusion for Loss Due to Virus or Bacteria. The exclusion language states, “we will not pay for loss or damage caused by or resulting from any virus, bacterium or other micro- organism that induces or is capable of inducing physical distress, illness or disease.” The language of this exclusion was prompted largely in response to the SARS epidemic in 2003.
States introduce legislation for reform
Legislators and executives in several states have recognized the substantial impact that the COVID-19 pandemic will have on the viability of small and independent businesses. In New Jersey, Bill A-3844 was recently introduced which would reform business interruption coverage clauses for existing policies to include losses stemming from global virus transmissions or pandemics. The legislation would apply to insureds in New Jersey with fewer than 100 full-time employees, and further restrict the extent of coverage to policy coverage limits.
While legislative efforts to reform private contracts will likely be challenged on constitutional and other grounds, businesses should monitor their respective state legislative and regulatory initiatives. No legislation on this topic has yet been introduced in Pennsylvania. Pending final language in the New Jersey bill, Pennsylvania businesses holding policies issued by a New Jersey insurance company should continue to monitor the proposed legislation to determine whether the provisions may apply regardless of location.
Other potential sources of recovery
Contingent business interruption insurance may be another source of recovery for businesses that depend upon critical vendors who are unable to provide needed materials and supplies which then adversely impact revenues. Whether coverage under such a policy is available is dependent upon the policy language, but an analysis of existing coverages should be undertaken to assess whether potential recovery can be sought.
Coverage provisions contained in Commercial General Liability policies may have application to claims by employees that business failed to implement, enforce or warn of COVID-19 exposure. Coverage may be predicated upon proof of a causal relationship (both temporal and locational) between the injury or disease and the employment related exposure. Coverage is often also conditioned on the employment activity not being in violation of law or ordinance and without actual or implied knowledge of the officers of the company or employer.
Similarly, Director and Officer (D&O) liability policies may afford coverage if a claim asserts that a director or officer of a company failed in their fiduciary duties. Given the expected impact on the economy, it is anticipated that insurers will face an expansive list of grounds for economic loss claims.
Seek legal counsel
In these uncertain times, businesses should consider a proactive approach to pursing recoveries. Those that carry risk insurance and face the prospect of decreased revenue and the inability to recover from those losses should seek legal counsel. An experienced insurance law attorney can assist with interpreting the language to determine if you or your business could be entitled to coverage for losses associated with government mandated shutdowns and limited access to your premises to conduct business.
Saxton & Stump attorneys Craig Black and Matt Rappleye are available to further discuss your business insurance policies and how our Insurance Law group can help you conduct a business risk evaluation and partner with you to develop a proactive approach to recovering losses due to COVID-19.
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