Insurance Coverage for Coronavirus Losses

Webinar Summary –

Attorneys from Lathrop GPM outlined types of relevant business insurance that cover franchise businesses, as well as coverage issues that might come into play as businesses seek to claim against losses incurred by the COVID-19 pandemic. The panelists outlined the typical provisions of business insurance, as well as possible exclusions to coverage. The panelists underscored the need to make your claim, document losses, and seek qualified counsel on business insurance.

Key Bullets –

• Make your claim now
• Document your losses
• Seek qualified representation
• Don’t take no for an answer until you’ve gotten a coverage opinion from qualified counsel!

Full Bullets –

• Insurance 101
• Types of Coverage
  • Third Party Coverage
    • Coverage for claims brought by third parties
    • CGL, D&O (management liability), Employer Liability
    • Can apply to Franchisor and Franchisee
  • First Party Coverage
    • Coverage for policyholders’ loss
    • Examples: property/business interruption (in this circumstance, business has been interrupted)
    • Can apply to both franchisor and franchisee

• Third Party: Commercial General Liability
  • Claims alleging bodily injury or property damage arising out of an occurrence
    • Customer claims for bodily injury due to exposure to virus
    • Failure to implement guidelines to prevent exposure
    • Product liability (like air filtration)
  • Claims for personal or advertising injury
    • Wrongful eviction or imprisonment
    • Constitutional claims involving quarantine
  • Coverage issues:
    • Is there bodily injury? Threat of injury?
    • Is there an “occurrence”? Claims are triggered by an occurrence, which could be an accident or exposure to harmful conditions -- has that occurred here?
    • Defense vs. indemnity - commercial general liability policies have a duty to defend. There is a duty on the part of the insurer to take up defense of the case. Obligation to defend vs. obligation to indemnify. Defense = does the claim fall within the scope of coverage?
      • If claims arise out of coronavirus, the defense of those claims will be picked up
    • Does size of entity materially result in different language, in terms of riders/other items, or are they similar? Typically, the size of the organization wouldn’t make a difference, but the industry/business of the organization might make a difference e.g. certain exclusions that apply restaurants versus not to healthcare industry
• Directors and Officers insurance:
  • Claims alleging directors or officers breached their fiduciary duties
    • Shareholder claims
    • Inadequate preparation or response
    • Inaccurate financial statements
    • Failure to properly account for risk
    • Failure to procure coverage for disease
  • Coverage issues
    • Bodily injury exclusions
    • Capacity issues – was the allegedly wrongful conduct committed in their capacity as a D&O or in their individual capacity?
  • Preparation and response to outbreak could be material to D&O claims down the road; do everything you can for customers/franchisees, and to mitigate your own liability down the road
  • You may want to put your stake in the ground now; note circumstances of claims against the policy now to better prepare for future
• Workers’ Comp/Employer Liability
  • Employee injury in scope of employment
  • Not work-related condition; employee was at no greater risk than the general public
  • Proof of exposure at place of employment or associated travel
  • Employer Liability claim
    • Additional damages
    • Claims for loss of consortium

• First Party Coverage: Property & Business Interruption
  • Property damage
    • Direct physical loss
  • Business Income and Extra Expense
    • Loss of income and extra expense due to suspension of operations
  • Civil Authority
    • Loss of business income and extra expense due to order restricting access to insured locations
    • Must be some direct physical loss to property
  • Contingent Business Interruption
    • Loss of business income and extra expense due to interruption of supply chain
    • Business is impaired because you can’t obtain what you need to operate
  • Leader Property
    • Loss of business income due to damage to a nearby property that attracts business to covered location
    • E.g. Disneyland closes near your location and business is affected
• Whether you can claim depends on the particulars of the policy, and on the facts/information of the current situation (much is still developing). Don’t take no for an answer unless you’ve gotten an opinion from a coverage lawyer. Get counsel from an attorney you trust and one who knows insurance coverage to evaluate your particular policy.
• First Party Coverage: Coverage Issues
  • Direct Physical loss or damage to property; all business interruption requires direct physical loss in the first instance
  • Courts are split on the subject of a virus – some have held that tangible physical alteration is required, others have held that it is not required, and some have said that pollution and contamination are included in that definition
    • Is physical alteration required?
    • Does physical loss include loss of use?
    • Burden of proof is on policy holder
  • Pollution exclusions
    • Is the virus a contaminant? Contaminants are not defined to include viruses – most policies are more vague than that
    • Coverage offered via separate policies for separate premium, sometimes with business interruption coverage
  • Virus exclusions
    • Added roughly 15 years ago in response to Avian flu
    • Legislatures may have to intervene on these issues – NJ, OH, MA have introduced bills that require insurers to cover Biz interruption claims arising of Covid-19 regardless of policy exclusions
    • Industry is getting back to legislatures with counter-proposal
    • If you have a virus exclusion, still make your claim – the only way you can be sure to not get virus recovery is by not making your claim
    • Make the claim promptly, reasonably practicable
  • If your claim is accepted: Document your claim- submit summary of your losses - you may be required to sit for a deposition; help from professional, whether accountant or some other consultant to put together your proof of loss
  • Make sure you understand the statute of limitations under your policy
  • Total suspension of operations
    • Do operations have to stop completely?
    • Mitigation of damages vs. slowdown
• Key Takeaways:

1. Make your claim now
2. Document your losses
3. Seek qualified representation
4. Don’t take no for an answer until you’ve gotten a coverage opinion from qualified counsel!

Normal for business interruption insurance to not include virus coverage? Not absolutely; read your policy thoroughly and seek qualified representation

D&O policies are there for management liability; Errors and Omissions policies cover professional services provided by company or franchisor

            Connect with your broker

If there is a virus exclusion, but the government is shutting the business down, will the policy cover? You will still have to show a physical loss or damage due to the cause

If your claim is denied, you should get coverage advice from an attorney at that point.

If sales are low, should the business close to qualify for BI insurance? Do we have to shut our doors or not? Does shutting down improve your position on a claim?

            It depends, does the policy require a total suspension/shutdown, or only a slowdown?

            Make the claim, document your losses, because we don’t know how direct losses will be counted in these claims