Covid-19 Insurance Issues: Legal Guidance For The Real Estate and Construction Industries
Covid-19 Insurance Issues: Legal Guidance For The Real Estate and Construction Industries - Part 1
The impacts of the global coronavirus (or Covid-19) pandemic touch every American business and individual. Real estate and construction companies are multitasking intently to promote the safety of their employees while simultaneously seeking to manage losses from reduced customer and end user demand, decreased productivity, facilities closures and project delays. At the same time, they are concerned about exposure to third party claims for bodily injury, property damage and other risks.
The scope and size of the potential losses and damages are daunting. As a result, owners, developers, investors, contractors, landlords and tenants are urged to make a top priority of understanding possible coverage under their commercial property, builder’s risk, general liability, pollution liability and management liability insurance policies.
Insurance Questions Dominate Industry Discussions
The real estate and construction industries are scrambling to be both proactive and responsive to the stream of orders and recommendations coming from federal, state and local governments as well as health organizations. Unsurprisingly, insurance questions are dominating companies’ discussions.
Some insurance industry spokespeople have been quick to generalize in rejecting the prospect of coverage for Covid-19 losses. However, even though the issues can be complex, insureds should not assume they lack coverage. The correct focus is on the insured’s specific facts and policy terms, as well as the emerging scientific understanding of the virus.
Coverage for Business Interruption
Business interruption coverage is central to the current insurance dialogue about Covid-19. Commercial property policies generally include business interruption coverage for certain business income losses stemming from covered risks, as well as for extra expenses incurred to continue normal business operations. Builder’s risk policies typically include coverage for loss due to delay in completion of the project.
Many policies state that such business losses need to involve direct physical loss or damage to covered property. We expect insurers to argue that a drop-off in business, proactive facilities closures to reduce exposure risk or even the alleged presence of the virus itself does not qualify as “physical loss or damage”, and even if it did, some policies contain purported exclusions for communicable disease, virus and the like.
In contrast, insureds will argue that (1) the “all-risk” nature of commercial property insurance encompasses coverage for risks such as pandemics and (2) loss of functionality or loss of use of the insured property relating, for example, to government orders or the virus, constitutes covered physical loss or damage.
Coverage for Denial of Access to Covered Property
Insureds also should analyze compensation that may be afforded by policy coverage extensions. For example, there may be coverage for business interruption losses caused when access to the insured’s property is prevented due to an otherwise covered peril or due to government or military order (“Governmental Authority” coverage).
We are proactively analyzing such orders in California and other relevant jurisdictions. The orders to date vary between cities, counties and at the state level. Prudent insureds will evaluate the orders in light of their specific policy language to assess possible coverage.
Such coverage extensions vary between policies and generally are subject to sublimits that are lower than the general policy limit. They may or may not refer to “physical loss or damage”. Examples of such business interruption coverage include:
- Ingress/Egress coverage for losses due to impairment of operations when ingress to or egress from the insured property is prevented due to physical loss or damage to it or to other property within a specified distance away from it.
- Civil Authority coverage for losses incurred due to impairment of operations caused by a government order barring access to the insured property. Coverage may depend on whether the order arises from physical loss or damage to the property or to other property within a defined distance away from it.
- Prohibition of Access coverage for losses due to impairment of operations caused by prohibition of access by a civil authority as a direct result of a covered peril at or within a defined distance away from the insured property.
Other Potential Sources of Property Insurance Coverage
Insureds may also find that their insurance programs include coverage extensions specific to pandemics or other specified types of loss. These extensions or supplemental coverages may not require physical loss or damage but typically are subject to a sublimit.
Examples include:
- Communicable or notifiable disease coverage provisions affording business interruption coverage for losses sustained due to shutdowns associated with such diseases.
- Loss Prevention Expense coverage or Sue and Labor provisions, affording coverage for expenses incurred to protect insured property from physical loss or damage caused by a covered peril (in some policies, the loss or damage must be imminent).
- Event Cancellation coverage for losses stemming from the cancellation of special events resulting from physical loss or damage to property essential to that event.
Coverage for Third Party Claims
Companies also are urged to understand their coverage for suits by third parties such as tenants, contractors, subcontractors, visitors, vendors and employees among others. For example, these suits may allege damage to a third party’s property in the form of loss of use or claims of bodily injury tied to alleged exposure.
Commercial general liability (CGL) and excess or umbrella liability policies should address such third party suits. The insured should request its insurance carrier to appoint counsel to defend it against the suit as well as to pay indemnity money to settle the action or satisfy a judgment. However, we have encountered CGL policies with exclusions that purport to eliminate coverage for injury or damage due to virus or disease.
Other policies which may be relevant to third party claims arising from the Covid-19 include:
- Workers’ compensation and employer’s liability insurance for course of employment bodily injury claims by employees and their family.
- Employment practices liability insurance (EPLI) for wrongful termination, discrimination and other employment-related conduct.
- Contractors pollution liability (CPL) and pollution legal liability (PLL) insurance.
- Directors and officers (D&O) and other management liability insurance, potentially responsive to suits by shareholders, partners, LLC members and others against the insured directors, officers and company related to their planning for and response to the pandemic.
Part 2 of this Client Alert will focus on policy conditions and other technical requirements that are important to coverage.
The Firm’s Risk Management and Insurance Coverage Practice Group is applying its depth and expertise to address proactively our real estate and construction clients’ critical insurance issues associated with Covid-19. Members of the Group have long experience collaborating with our clients’ insurance brokers in pursuing coverage claims. The Group also works with our clients’ forensic accountants, schedule impact consultants and public adjusters to efficiently resolve complex commercial coverage issues and disputes.
The Group handles issues spanning multiple lines of coverage, including commercial property, builder’s risk, CGL, umbrella and excess liability, contractors pollution liability (CPL), pollution legal liability (PLL), professional liability, and management liability coverages such as directors & officers (D&O).
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If you have any questions please email Jeffrey Masters (jmasters@coxcsatle.com), John Musitano (jmusitano@coxcastle.com), or Patrick McGovern (pmcgovern@coxcastle.com).