Insurance Issues For Contractors Arising From The Outbreak Of COVID 19
With the COVID-19 outbreak resulting in the shutdown or delay of construction projects throughout this country, contractors must immediately evaluate whether any existing insurance policies potentially provide coverage for the resultant losses. In addition to a contractor's own policies, therefore, it is essential to request that the project owner provide copies of all applicable insurance policies, including Builder's Risk, business interruption, and any other policies. Coverage for any potential claims under these various policies will turn on the unique facts of each claim, the specific language in the applicable policies, and the law under which those policies are interpreted.
It is crucial to identify all policies that may provide coverage as soon as possible because most will include some form of "other insurance" clause, which is designed to vary or limit the insurer's liability when additional insurance coverage can be established to cover the same loss.
Making a claim on one policy and overlooking others can result in a denial of coverage by all. However, even when providing the appropriate notice to all potential insurers, it may be necessary for a court to interpret the respective other insurance clauses to determine if, and how, the insurance companies will share in coverage. This can become very problematic and time-consuming, as the different insurers battle over who is responsible for coverage and to what degree or limit.
There are three primary forms of other insurance clauses: (a) Pro rata clauses provide that multiple policies contribute to a loss on a shared basis, such as by limits of the respective policies or by equal shares; (b) excess clauses render a policy excess to other insurance; and (c) escape clauses render a policy inapplicable if other insurance exists. Typically, if other insurance clauses are in conflict, the court will deem them to be mutually repugnant and require the insurance companies to share in coverage, based on rules that vary by jurisdiction.
Insurance policies provide coverage for either "open perils" or "named perils." "Open perils" include any event that causes the covered damages, unless it's specifically excluded from the policy. This would probably include damages resulting from a pandemic. However, it should be noted that many policies specifically exclude coverage for losses caused by quarantinable disease, or by "contaminants" defined with sufficient breadth to include viruses such as COVID-19. "Named perils," by contrast, only include specific list of events that are covered, such as fire, lightning, hail, explosions, hurricanes, theft, vandalism, and several others, but do not typically extend to viral or contaminant causes such as COVID.
Almost every commercial policyholder carries business income loss insurance, but these policies are almost always triggered by some variation of "direct physical loss or damage to" insured property. Fortunately for policyholders, courts have found things like bacteria, and dangerous gasses can constitute direct physical loss – meaning that courts may find that a property that is contaminated with the COVID virus has suffered "physical damage." That said, insurers will most likely push back on factual grounds (how long did direct physical loss exist if the coronavirus can only survive on a surface for 24 hours?) and through exclusions for delay, loss of market, loss of use, or indirect or remote loss or damage.
Business income loss policies generally also provide "civil authority coverage." This coverage kicks in when access to a business has been "prohibited" by a government directive due to a "direct physical loss or damage" event occurring somewhere other than on the insured property itself. Access to this coverage will turn on whether access has truly been "prohibited" as the result of the various COVID-19 governmental decrees—and then dealing with the same "direct physical loss or damage" issues described above.
Business interruption insurance generally covers lost revenue, fixed costs such as rent and utility, expenses from operating from a temporary location resulting from a disruption in a business's operations, and reasonable expenses beyond fixed costs that allow the business to continue to operate. The coverage extends until the end of the business interruption period, as determined by the insurance policy. Whether coverage is provided for such losses requires the policyholder to comprehensively analyze the consequences of COVID-19, beyond just lost production time.
Typically, business interruption clauses require "physical loss or damage" resulting from an "occurrence" (potentially COVID-19) in order to trigger coverage. However, many policies also contain endorsements or riders that expand the scope of business interruption coverage or the definition of "occurrence." Additionally, some policies provide related, supplemental coverages. For example, some cover "supply chain" or "contingent business" interruption. So, even where it appears that the policy itself does not provide business interruption coverage resulting from COVID-19, the insurance policy must be analyzed to determine whether coverage has been "triggered," as not all policies have the same triggering events.
Additionally, many policies afford coverage for losses associated with delays or disruptions in trade or supply chains arising out of specified events such as emergencies resulting in closure of ports and transportation hubs, quarantines, seizures during transit, embargoes, and other related risks. COVID-19 has already spawned supply chain disruptions in certain industries, and large groups of people now find themselves under government-sanctioned quarantines or face other restrictions on travel and commerce. This situation will get worse before it gets better, as China is the United States' largest supplier of imported goods and supplies that are used in developments around the country. Already, there are increasing reports of Chinese suppliers invoking Force Majeure provisions in their contracts to excuse performance or defend against breach of contract claims for failure to timely deliver the contracted goods. As COVID-19 spreads across the globe, including here at home in the United States, there will inevitably be similar supply chain disruptions and governmental actions impacting the supply of labor, goods and materials used in construction projects. These issues will cascade into most if not all our domestic construction projects.
Finally, another coverage issue that deserves special attention is that some policies include a "separation of insureds" or "severability of interests" clause, which clarifies that the coverage applies "separately" to each insured. Thus, a policy containing such a clause will cover a claim made by one insured against another insured. These clauses have also been interpreted by the courts as applying only to the conduct of the particular insured who is seeking coverage under the policy. This can mean that the exclusionary provisions in the policy that address acts or omissions of "the insured" must be read as applying only to the insured who is looking for coverage under the policy. In other words, "the insured" does not mean "any insured." Alternatively, a clause that excludes coverage for "any" insured may be treated differently from one that excludes coverage for "the" insured. Additionally, policy provisions using the word "you" may not preclude coverage when the policy includes more than one named insured. All this requires a very precise reading of the policy.
The bottom line is that coverage for CODID-19 related insurance claims will turn on the unique facts of each claim, the specific language in the applicable policies, and the law under which those policies are interpreted. As such, each claim must be legally evaluated on a case-by-case basis.
Contact The Firm
The best way to get guidance on your specific legal issue is to contact a lawyer.