Insurers of every ilk will no doubt face an onslaught of claims involving COVID-19 related losses. As the floodgates begin to open, insurers should examine their policies to determine where likely defense and coverage obligations lie, — whether exclusions contained in their policies operate to bar coverage, and if case law applies to potential COVID-19 coverage obligations. This article provides a broad overview of potential claim considerations that insurers should consider in the context of coverage provided under business owners policies (BOPs). BOPs are spectrum insurance policies that bundle coverages and generally include liability coverage, property insurance, income loss coverage due to business interruption, and more.
Many small businesses restaurants, catering halls, dance schools, gymnastics centers, fitness centers, childcare facilities, other leisure/entertainment venues, service providers and the like, will probably face breach of contract claims from vendors and proprietors due to failure to perform obligations under contracts that were entered into prior to the COVID-19 crisis. Those businesses will also be facing loss of business income due to lost sales/customers and/or mandatory shutdowns and quarantines. In these contexts, insurers will face a two-pronged assault on coverage: (1) providing a defense to third-party claims their insureds face; and (2) providing reimbursement for direct losses suffered by the insureds for lost income business interruption.
Notably, many articles addressing coverage potentialities, involving COVID-19, tend to focus on business interruption losses. This is an important consideration.
See Business Income Loss: COVID-19 and Direct Physical Losses:https://rebarkelly.com/business-income-loss-covid-19-and-direct-physical-losses/
See Civil Authority: Loss of Business Coveragehttps://rebarkelly.com/civil-authority-loss-of-business-coverage/
However, COVID-19 is not just a novel virus, it will also create novel insurance coverage issues. Accordingly, insurers should also be thinking about possible defense obligations to their insureds, who will likely face third-party liability claims as well as breach of contract claims in this context.
The first essential step, as always, is to read the policy, particularly to determine whether the policy contains exclusions implicating loss due to virus or bacteria. Additionally, to help guide coverage determinations, consideration should be given to applicable state law governing the interpretation and enforcement of insurance contracts.
1. May I Wash My Hands of Virus-Related Claims
Things are moving fast, and state governments are attempting to mitigate the losses of small business owners via legislation that would mandate coverage. For example, in New Jersey, a recent COVID-19 emergency legislation package contains Bill A-3844, which would require insurance companies to cover claims resulting from the interruption of operations of New Jersey small business owners, who were forced to close their doors, as a result of the governor’s state-of-emergency declaration, and other executive orders. This legislative attempt to dictate the scope of coverage, indicates that business owners will be expected to seek recourse from their insurers for COVID-19 related losses. Notably one article even advocates as much.[i] Additionally, what is believed to be the first declaratory judgment coverage action involving COVID-19 losses has been filed in Louisiana.[ii] Even so, insurers should focus on being prepared to apply current policy language to COVID-19 related claims, as this and current case law provides the most concrete guidance regarding potential coverage obligations.
A.Business Interruption & Lost Income
In BOPs loss of business income is usually provided for under the Special Property Coverage form which, depending on the form, may provide as follows, in pertinent part:
(1) 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 physical damage to property at the “scheduled premises”, including personal property in the open (or in a vehicle) within 1,000 feet of the “scheduled premises”, caused by or resulting from a Covered Cause of Loss.
See Insurance Services Office, Inc. – Special Property Coverage Form, SS 00 07 07 05, Copyright 2005.
Policies utilizing this coverage form may also contain form SS 40 93 07 05 – LIMITED FUNG, BACTERIA OR VIRUS COVERAGE endorsement, which modifies coverage generally, under the Special Property Coverage form and others, via the following general exclusion.
i. “Fungi”, Wet Rot, Dry Rot, Bacteria And Virus
We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss:
(1) Presence, growth, proliferation, spread or any activity of “fungi”, wet rot, dry rot, bacteria or virus.
(2) But if “fungi”, wet rot, dry rot, bacteria or virus results in a “specified cause of loss” to Covered Property, we will pay for the loss or damage caused by that “specified cause of loss”.
See Insurance Services Office, Inc. – Endorsement Form No. SS 40 93 07 05, Copyright 2005.
Additionally, as of 2006 ISO added a new exclusion to its arsenal that applies to business income or business interruption coverage, involving losses due to virus or bacteria that provides, in pertinent part: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” See Insurance Services Office, Inc. – Special Property Coverage Form, CP 01 4007 06, Copyright 2006. In issuing this new exclusion the ISO pronounced that it was explicitly “presenting an exclusion relating to contamination by disease-causing viruses or bacteria or other disease-causing microorganisms.” [i]
Despite these seemingly clear exclusions to coverage, note should be taken, however, that untested policy exclusions, if deemed ambiguous, may well be construed against an insurer.
► New York — In New York, “[p]olicy exclusions are to be strictly and narrowly construed and are not to be extended by interpretation or implication.” Pioneer Tower Owners Assn. v. State Farm Fire & Cas. Co., 12 N.Y.3.d 303, 307 (2009). If the language of the exclusion is doubtful or uncertain, any ambiguity will be construed in favor of the insured and against the insurer. Lee v. State Farm Fire & Cas. Co., 32 A.D.3d 902, 904, 822 N.Y.S.2d 559, 561 (N.Y App. Div. 2006); Lend Lease (US) Const. LMB Inc. v. Zurich Am. Ins. Co., 28 N.Y.3d 675, 682, 71 N.E.3d 556, 560 (2017). Therefore, “before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.” Dean v Tower Ins. Co. of N.Y., 19 N.Y.3d 704, 708, 955 N.Y.S.2d 817, 979 N.E.2d 1143 (2012). Even so, under New York law, the plain meaning of a specific, clear and unambiguous exclusion must be enforced. Id., Maroney v. New York Cent. Mut. Fire Ins. Co., 5 N.Y.3d 467, 474, 839 N.E.2d 886, 890 (2005).
► New Jersey — Exclusionary clauses “must be narrowly construed.” Villa v. Short, 195 N.J. 15, 23-24, (2008). Potential ambiguities are resolved in favor of the insured, and the policy is to be read in a manner that fulfills the insured’s reasonable expectations.” Selective Ins. Co. of Am. v. Hudson E. Pain Mgmt. Osteopathic Med., 210 N.J. 597, 605, 46 A.3d 1272, 1277 (2012). The insurer bears the burden to establish that an exclusion applies. Flomerfelt v. Cardiello, 202 N.J. 432, 442, 997 A.2d 991, 997 (2010). Nevertheless, if the exclusion is unambiguous, New Jersey Courts will not strain to provide a better policy than the one the policyholder purchased. Templo Fuente De Vida Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189, 200, 129 A.3d 1069, 1075 (2016). Accordingly, exclusions in insurance policies are presumptively valid and enforceable, “if they are ‘specific, plain, clear, prominent, and not contrary to public policy.” Princeton Ins. Co. v. Chunmuang, 151 N.J. 80, 95, 698 A.2d 9 (1997).
► Pennsylvania — Under Pennsylvania law policy exclusions are to be construed narrowly in favor of coverage. 631 Pa. 628, 640, 115 A.3d 844, 852 (2015); Gallagher v. GEICO Indem. Co., 201 A.3d 131, 142 (2019). Thus, “[e]xclusionary clauses generally are strictly construed against the insurer and in favor of the insured[.]” Swarner v. Mutual Ben. Group, 72 A.3d 641, 645 (Pa. Super. 2013); Eichelberger v. Warner, 290 Pa. Super. 269, 275, 434 A.2d 747, 750 (1981). When an insurer bases a denial of coverage on a policy exclusion, the burden is on the insurer to establish its application. Madison Constr. Co. v. Harleysville Mut. Ins. Co., 557 Pa. 595, 605, 735 A.2d 100, 106 (Pa. 1999). However, when the language of the policy is clear and unambiguous, it must be given effect. Donegal Mut. Ins. Co. v. Baumhammers, 595 Pa. 147, 154, 938 A.2d 286, 290 (2007).
B.Third Party Liability
Liability insurers should check their policies for form SS 50 57 04 05, which endorses the Business Liability Coverage form with an exclusion addressing virus related claims, that states:
EXCLUSION – FUNGI, BACTERIA AND VIRUSES
This insurance does not apply to:
1. Injury or damage arising out of or related to the presence of, suspected presence of, or exposure to:
a. Fungi, including but not limited to mold, mildew, and yeast;
c. Viruses; or
d. Dust, spores, odors, particulates or byproducts, including but not limited to mycotoxins and endotoxins, resulting from any of the organisms listed in a., b., or c. above; from any source whatsoever.
2. Any loss, cost or expense arising out of the testing for, monitoring of, cleaning up of, removal of, containment of, treatment of, detoxification of, neutralization of, remediation of, disposal of, or any other response to or assessment of, the effects of any of the items in 1.a., b., c. or d. above, from any source whatsoever.
However, this exclusion does not apply to “bodily injury” or “property damage” caused by the ingestion of food.
See Insurance Services Office, Inc. – Endorsement Form No., SS 50 57 04 05, Copyright 2005.
By identifying exclusions to coverage now, while there’s still only a handful of claims, insurers can avoid the panic that might set in when faced with the inevitable deluge of COVID-19 related claims. Preparation to bend or flatten the curve, will go a long way towards efficiently processing and handling claims, without potentially running afoul of some of the time sensitive requirements set by states for responding to same, which we do not address herein.
Despite the seemingly clear exclusions to coverage outlined in Sections A and B above, these exclusions may not necessarily vitiate a carriers duty to defend in the event that the underlying claim or suit also involves a potentially covered claim, as it is largely well established, that the duty to defend is broader than the duty to indemnify.
► New York — In New York an insurance company’s duty to defend “is exceedingly broad and an insurer will be called upon to provide a defense whenever the allegations of the complaint suggest a reasonable possibility of coverage.” Automobile Ins. Co. of Hartford v. Cook, 7 N.Y.3d 131, 137, 818 N.Y.S.2d 176, 850 N.E.2d 1152, (2006); Worth Constr. Co., Inc. v Admiral Ins. Co., 10 N.Y.3d 411, 415, 888 N.E.2d 1043 (2008). If the complaint’s allegations bring the claim “even potentially within the embrace of the policy, the insurer must defend its insured no matter how groundless, false or baseless the suit may be.” Village of Brewster v. Virginia Sur. Co., Inc., 70 A.D.3d 1239, 1241, 896 N.Y.S.2d 203, 206 (2010); B.P.A.C. Corp. v. One Beacon Ins. Group, 8 N.Y.3d 708, 714, 840 N.Y.S.2d 302, 305, 871 N.E.2d 1128, 1131 (2007).
► New Jersey — New Jersey follows the traditional duty to defend rule, that an insurer must provide an insured with a defense for a potentially covered claim, irrespective of the insurer’s ultimate liability to the plaintiff. Danek v. Hommer, 28 N.J. Super 68 (App. Div. 1953). “If an insurer believes that the evidence indicates that the claim is not covered, the insurer is not always required to provide a defense.” Polarome Int’l, Inc. v. Greenwich Ins. Co., 404 N.J. Super. 241, 274, 961 A.2d 29, 48 (App. Div. 2008). Where the underlying coverage question cannot be decided from the face of the complaint, the insurer is obligated to provide a defense until all potentially covered claims are resolved. Flomerfelt v. Cardiello, 202 N.J. 432, 447, 997 A.2d 991, 999 (2010). If there is a conflict of interest between an insurer and insured that would potentially prejudice defense of the claim, New Jersey permits an insurer to fulfill its defense obligations by reserving rights and disputing coverage, thereby translating its obligation into one for reimbursement if it is later adjudged that the claims were within the policy covenant to pay. Burd v. Sussex Mut. Ins., 56 N.J. 383, 393-95, 267 A.2d 7, 12 (1970). Nonetheless, neither the duty to defend nor the duty to indemnify “exists except with respect to occurrences for which the policy provides coverage.” Hartford Accident & Indem. Co. v. Aetna Life & Cas. Ins. Co., 98 N.J. 18, 22, 483 A.2d 402, 405 (1984). Although the duty to defend is broader than the duty to pay, the duty ‘is not broader in the sense that it extends to claims not covered by the covenant to pay. Wear v. Selective Ins. Co., 455 N.J. Super. 440, 456, 190 A.3d 519, 529 (App. Div. 2018).
► Pennsylvania — An insurers duty to defend is broader than the duty to indemnify. Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 330, 908 A.2d 888, 896 (2006). It is a distinct obligation, separate and apart from the insurer’s duty to provide coverage. Erie Ins. Exch. v. Transamerica Ins.Co., 516 Pa. 574, 583, 533 A.2d 1363, 1368 (1987). If a complaint against the insured pleads facts that are potentially within the scope of the policy’s coverage, the insurer has a duty to defend the action until all covered claims are removed from the action. American & Foreign Insurance Co. v. Jerry’s Sport Center, Inc., 606 Pa. 584, 608-09, 2 A.3d 526, 541-42 (2010). Accordingly, it is the potential, rather than the certainty, of a claim falling within the insurance policy that triggers the insurer’s duty to defend. Jerry’s Sport Center, Inc., 606 Pa. at 609, 2 A.3d at 541.
C.Breach of Contract Claims
Businesses covered under BOP and other liability policies who materially fail to fulfill their contractual obligations, due to COVID-19 contingencies, may be subject to breach of contract claims. Breach of contract is viewed as a business risk within the control of the insured and therefore, insurance policies typically do not cover such liabilities.
► New York — “The general rule is that a commercial general liability insurance policy does not afford coverage for breach of contract, but rather for bodily injury and property damage.” Mid–Hudson Castle v. P.J. Exteriors, 292 A.D.2d 355, 356, 738 N.Y.S.2d 96, 97-98 (N.Y. App. Div. 2002). In keeping with the general rule, under New York law commercial general liability policies do not provide coverage for breach of contract. J.W. Mays, Inc. v. Liberty Mut. Ins. Co., 153 A.D.3d 1386, 1387, 61 N.Y.S.3d 144, 146 (N.Y. App. Div. 2017). To hold otherwise would render an insurance carrier a surety for the performance of its insured’s work. Structural Bldg. Prods. Corp. v. Business Ins. Agency, 281 A.D.2d at 619, __, 722 N.Y.S.2d 559, __, 562 (N.Y. App. Div. 2002).
► New Jersey — Under New Jersey law claims for breach of contract and warranty do not assert claims for which coverage is provided. Weedo v. Stone–E–Brick, Inc., 81 N.J. 233, 405 A.2d 788 (1979); Grand Cove II Condo. Ass’n, Inc. v. Ginsberg, 291 N.J. Super. 58, 72, 676 A.2d 1123, 1130 (App. Div. 1996). In New Jersey, the contractual liability exclusion operates to preclude coverage for liability related solely to losses under contract. Selective Ins. Co. v. Hospicomm, Inc., No. A-0485-12T1, 2014 WL 4722776, at *3 (N.J. Super. Ct. App. Div. Sept. 24, 2014) (insurer had no obligation to defend on the contract counts of consolidated actions); PNY Techs., Inc. v. Twin City Fire Ins. Co., 607 F. App’x 155, 157 (3d Cir. 2015) (applying New Jersey law).
► Pennsylvania — Coverage claims solely seeking damages for breach of the contract, rather than damages caused by an accident, do not trigger coverage under liability policies. Kvaerner Metals Div. of Kvaerner U.S., Inc. v. Commercial Union Ins. Co., 589 Pa. 317, 326, 908 A.2d 888, 894 (2006). “Pennsylvania law does not recognize the applicability of a general liability policy to breach of contract and breach of warranty claims….” Pennsylvania Mfrs. ‘Ass’n Ins. Co. v. L.B. Smith, Inc., 831 A.2d 1178, 1181 (Pa. Super. Ct.2003); Nationwide Mut. Ins. Co. v. CPB Int’l Inc., 562 F.3d 591, 597–99 (3d Cir. 2009). Thus, under Pennsylvania law, there is no coverage under the language of a liability policy where the underlying complaint solely sets forth claims for breach of contract. Snyder Heating v. Pennsylvania Manufacturers’ Association Insurance Co., 715 A.2d 483, 487 (Pa. Super.1998).
So, in the context of stand-alone breach of contract claims, tendered for defense and indemnity by insured by insureds, carriers may take some comfort; albeit with many caveats that, in general, such claims do not trigger coverage under a liability policy.
Tried and Tested Methods are Best
The foregoing merely highlights that traditional methods for assessing coverage and defense obligations are still the bedrock of responding to claims. This is the first crucial step, without further legislative, court or ISO activity, that should guide coverage determinations. In sum, just like well-tested methodical and vigorous handwashing is back, as a means to prevent spread of the coronavirus, so too should insurers continue to practice copiously and extensively examining their policies terms, provisions, and exclusions to determine the scope of their obligations thereunder, even in the face of an unprecedented circumstance.
[i] See ISO Circular Regarding 2006 Virus Exclusion Endorsement —https://www.propertyinsurancecoveragelaw.com/files/2020/03/ISO-Circular-LI-CF-2006-175-Virus.pdf
|[i] Why Everyone Should Tender a COVID-19 Business Interruption Claim to Their Insurers” by Nicholas Reuhs, Ice Miller LLP — https://www.lexology.com/library/detail.aspx?g=49c91b2d-1c71-4122-88fc-a2a096f04ca4[ii] Cajun Conti, LLC, et al v. Certain Underwriters at Lloyd’s, et al, (Civil District Court of New Orleans) —https://www.insurancejournal.com/research/app/uploads/2020/03/Oceana-Petition-for-Dec-J-executed.pdf|
[iii] See ISO Circular Regarding 2006 Virus Exclusion Endorsement —https://www.propertyinsurancecoveragelaw.com/files/2020/03/ISO-Circular-LI-CF-2006-175-Virus.pdf