Businesses need to evaluate insurance coverage and decide whether to file a claim for losses arising … [+]
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Contrary to what you may think, your company’s insurance policy may cover pandemic-related losses. Most commercial property insurance policies include what’s broadly referred to as “business interruption coverage.” Right now every business wants to evaluate its coverage to decide whether to file a claim related to losses arising from Covid-19, as developments and the law are quickly evolving.
Some policies may provide explicit coverage. In a high-profile example, the pandemic insurance policy of the Wimbledon tennis tournament in London is expected to pay out an estimated $141 million due to the coronavirus-related cancellation of the 2020 event. Back in 2003, at the time of the SARS outbreak, Wimbledon purchased pandemic insurance for 17 years at a cost of roughly $2 million per year.
Lack Of Specific Policy Coverage For Viruses Does Not Matter
Most companies do not have this type of explicit insurance coverage for pandemics, but that doesn’t necessarily rule out a claim. For example, Reuters reports a Paris commercial court recently decided that the major French insurance firm Axa must pay two months’ worth of coronavirus-related revenue losses to a restaurant. The ruling will be appealed to a higher court. The case is being closely followed by restaurants, nightclubs, and similar businesses in the US and the UK.
What To Know And Do: Insights From Insurance Lawyers
The controversies, complexities, and media coverage of the Paycheck Protection Program are a sideshow compared with the amounts of money involved in pandemic-related business insurance claims, and the significance of how insurance-coverage lawsuits and legislative efforts in Congress and states play out.
This article looks at key things to know and actions to take. It’s based on insights provided in a webinar held by the business advisory firm EisnerAmper. The sources of advice include veteran insurance lawyers Finley Harckham of Anderson Kill and R. Hugh Lumpkin of ReedSmith, along with CPA Hubert Klein of EisnerAmper. These experts have successfully represented policyholders in litigating, arbitrating, and settling hundreds of complex insurance-coverage claims.
12 Key Things To Know
1. Agents may discourage you from filing claims. Hugh Lumpkin, a 35-year veteran of legal battles over insurance coverage, is direct in stating that he has seen efforts by “brokers and insurance industry to quell claims.” Some agents are telling clients to not bother making a claim that will only be denied, he explained. They are also creating the fear that the claim will raise your insurance rates.
2. Property damage required for claims is not what you think it means. Property insurance can cover more than just physical damage to property. The key issue being litigated is whether there is “property damage” from Covid-19 contamination. After Hurricane Katrina, courts presumed damage and shifted requirements to the insurers to prove that any exclusions applied.
A question for courts in many states, such as Florida, is whether physical loss or damage includes the inability to use property safely. With numerous issues working through the courts, all cases need to be watched carefully.
Each state will have its own conclusions under its state law, with trial-court decisions appealed to higher courts. Given this legal uncertainty, Finley Harckham counsels that there is “no point in knocking yourself out of it [early] by not making a claim.”
3. No cookie-cutter policies. Don’t accept general rules about how policy wording is interpreted. Some policies may explicitly cover viruses or other contagious diseases, or disinfection costs. “The devil in the details,” Harckham emphasizes. One of his main takeaways is to “read policies carefully as outcome varies from policy holder to policy holder to see if have a decent chance at coverage.”
Hubert Klein also pointed out that even if it appears you have coverage, it could be subject to exclusion later in the policy. This means you need to read the fine print after the general coverage.
4. Case law in other situations could support claim. Cases in analogous circumstances have shown that direct property damage is not needed. For example, in a federal district court case, the open-air theater Oregon Shakespeare Festival did get paid on an insurance claim for business-income loss when nearby wildfire smoke and poor air quality caused it to shut down. Before the business could resume, the theater also had to be cleaned and its air filters replaced.
5. Focus for insurance coverage is also on what are called “civil authority” closures. These provisions are separate from business interruption coverage and have their own long lawsuit history in other disputes. They insure for business-income losses because of the actions of government authorities that restrict access to your property. These civil-authority actions for the coronavirus include stay-at-home orders, social-distancing recommendations, and complete closures of some businesses.
Once you have a civil-authority closure, it triggers your next round of analysis. Depending on the wording in your insurance policy, civil-authority orders to shut down could override any requirement in the policy to have physical damage. This also means you would not need to prove that you had Covid-19 on your premises.
6. Exclusions in insurance policy matter but may not automatically hurt your claim. You could have an exclusion for viruses or other contagious diseases that may have been illegally added in your state.
7. Duty to mitigate damages that is part of the insurance requirement may support your claim. Let’s say you had to shut down your restaurant, hair salon, or bowling alley by order of the state government. You did this to protect the general public and have a duty under the law to do so. Shutting down is doing what’s required to mitigate damages.
Mitigating loss does not require you to expose workers or gut your business by firing all your employees, Mr. Harckham explained. You do not need to put your employees at risk to mitigate loss for insurance coverage.
8. Physical damage from a communicable disease or contamination within a specified distance of your property will be straightforward to prove, if it’s a condition for insurance coverage. You can easily meet your burden if you’re near a nursing home, airport, or hospital. You can prove property damage and loss of property by showing that someone with the virus was on the premises, which courts may assume occurred. This would then force the burden of showing otherwise onto the insurance company.
9. The insurance industry and the related issues are in flux. Given this uncertainty, Mr. Lumpkin said his firm’s advice for making a claim is “What have you got to lose?” This sounds similar to the common advice about applying for a Paycheck Protection Program loan (see my numerous articles about PPP at bottom of this article).
10. State efforts unlikely to succeed. While there are various efforts in state legislatures to retroactively provide coverage, Mr. Harckham thinks we are “unlikely to see state laws put the entire onus on insurance companies.” You cannot retroactively change a contract, he continued, so “do not count” on state legislative solutions under existing policies.
However, legislatures could tell courts how to interpret things, Lumpkin pointed out. Also, some states do not permit broad insurance exclusions for viruses.
11. A federal government solution may be needed. This is the alternative to forcing insurance companies to comply with contract obligations that will be litigated for many years. Some type of federal government involvement may be the most logical way forward, as Covid-19 impacts every business, and insurance companies will go bankrupt if they’re forced to cover all potential demands for payment. It’s a “generic problem that seems necessary that government step in,” Mr. Lumpkin commented.
12. Do not assume a PPP loan reduces a potential insurance claim. A forgiven PPP loan could reduce the size of your insurance claim, as it is considered a mitigating factor. However, while businesses cannot double-dip to cover their losses, Mr. Lumpkin points out that under the collateral source rule, funds that an injured party has received from a source other than who is legally responsible for payment does not reduce what is recoverable from others. He does not think you can “automatically assume” the forgivable PPP loan will reduce any insurance payout for business loss.
Nine Actions To Take Now
1. Make a claim: that’s why you bought insurance. Lumpkin puts it bluntly: “Unless you ask someone to the dance, you will not get someone to go with you.” At least make a timely general claim to preserve your rights.
2. Follow the deadlines under your policy. Some policyholders may decide to file a claim and then sit back and see how the law develops. If this is your approach, comply with contractual timeframes for filing proof of loss and limitations during the period in which a coverage action must be filed, Mr. Harckham counsels. He also advises that to preserve the right to pursue a claim later, when the deadlines are approaching, you should request extensions of those time limits in writing from your insurer.
3. Get someone qualified to review your policy. Get an expert opinion on what is covered, what is excluded, and the limits in the policy for specific types of losses. Coverages are different in many policies.
4. Get a second opinion if initial reviews suggest insurance coverage is unlikely. You still want to file a claim and get the expertise you need, which includes brokers, accountants to quantify the loss, and legal expertise to lead you through the policy.
5. Prepare key items and docs to support your claim. These include financial records of business loss, along with documentation of someone getting ill or testing positive for Covid-19 after being on your business premises. As Mr. Lumpkin explained, there’s a saying among insurance lawyers that “before an insurer pays a large claim it needs a large amount of paper [documentation].”
Mr. Lumpkin also pointed out that you want to have experts review not only a copy of your current insurance policy but also those in the past from the same insurer. The process the insurance company used to add the virus-contamination exclusion in a later policy may not have followed the required notice steps. If the insurer “smuggled it” into the insurance policy on renewal, the exclusion may be invalid.
6. Start compiling information you need now. If government steps in to provide coverage because the insurance company will not or financially cannot, you want to have the documents ready.
7. You need to make a sworn proof of loss. Know the timeframe for providing this to your insurer under your policy, as highlighted above. Often you must file a notarized document within 90 days. It must detail the amount of your claim and the justification for it. Should you not comply with what is needed in time, and do not get an extension, you forfeit coverage.
8. Examine policy-extended business-interruption coverage. After the initial major interruption because of Covid-19, businesses are reopening and customers are slowly returning. You may have in your policy additional coverage for the time it takes to restore to previous pre-loss levels. If people are reluctant to return to your premises, even though allowed to do so by law, this may be covered by your policy.
9. Look for contingent business-interruption coverage in your policy that covers damage to your suppliers or attraction coverages for those nearby. This is separate from business-interruption coverage as a possible source to cover your losses.
See also my articles on Forbes.com about the Paycheck Protection Program:
Fixes To Paycheck Protection Program Fast-Tracked By Proposed Bill In Congress
Federal Charges Of PPP Loan Fraud Are Here To Remind You These Loans Are Not “Free Money”
Paycheck Protection Program News: SBA Provides Good-Faith Certification Safe Harbor To Support Loans
You Got Your Paycheck Protection Program Loan. Now What? Advice From Small-Business Lawyers