How will your insurance help cover COVID-19 related losses?

By Jeff Forbes

Control system integrators (SIs) face a series of risks from the new global pandemic. The disease threatens global supply chains and the safety of employees and customers, while likely causing deteriorating economic conditions. Integrators may be forced to shut down physical offices, cancel travel to major customers and deal with significant drops in revenue.

Faced with these risks, integrators may wonder how insurance might cover their losses. Unfortunately, insurance is not generally designed to respond to the types of risks that are caused by major force majeure events such as war or epidemics.

Business interruption

Many businesses carry business interruption insurance as part of their property policy. This coverage is meant to compensate a business for lost revenue due to the inability to access a physical location such a retail store or office. For business interruption insurance to apply, however, most policies require physical damage to the named location. In the absence of physical damage to a location, business interruption insurance will not apply.

Even so-called civil authority coverage, meant to compensate businesses for when government declares a geographic area unsafe, normally requires direct physical damage to property, though in this area policy wording may be critical. Some policies already contain virus exclusions that would apply to COVID-19; other carriers may seek to add these exclusions in the coming months.

Other risk management options available to cover revenue losses from a global pandemic, such as catastrophe bonds or parametric insurance (insurance triggered by defined events such as earthquakes), are generally unavailable to most small- to medium-sized businesses and have prohibitive costs associated with them.

Some policies might contain contingent business interruption coverage. This type of coverage can help mitigate losses caused by damage to your supply chain if a key vendor or customer suffers a loss.

However, contingent business interruption coverage only applies if the vendor or customer suffers a loss that would be covered if it happened on your own premises. As such, it is unlikely contingent business interruption coverage will apply to COVID-19 losses.

Many companies will have to swallow losses that occur as a result of delays in receiving goods as a result of this virus, especially those being produced in China.

Workers’ compensation

Likewise, workers’ compensation insurance is unlikely to cover injuries to employees caused by COVID-19 for SIs. Workers’ compensation and employers’ liability insurance only covers “occupational” disease. This means that the particular type of work being performed by the employee has to make them more likely to acquire the disease than a standard member of the public.

Otherwise, contracting the disease will not be considered “work-related” even if it happens on the job. Simply working in an office space or building with an infected person will not make contracting the disease work-related.

It seems likely that workers’ compensation will cover exposure to COVID-19 for healthcare workers who came into contact with infected people as part of their job. It is unlikely that most other industries receive coverage for these types of losses.

However, it is possible that certain SIs that work closely with the medical industry might have the type of exposure that would qualify.

Still, in the event an employee tests positive and has potentially exposed other employees, notify your insurance broker immediately.

Negligence
General liability policies are meant to respond to lawsuits accusing businesses of negligence. In the event your company sees employees’ families or customers infected, it is possible injured parties could file a lawsuit against you for failing to take appropriate action to prevent the spread of the disease.

Negligence lawsuits generally have four elements:

• the existence of a duty on the part of the company,
• a violation of that duty,
• causation (meaning that the violation of the duty caused the injuries complained of) and
• damages

Both violation of duty and causation would be difficult elements to prove in most situations resulting from a global pandemic. A plaintiff would normally be expected to prove that the defendant could have easily taken preventive actions and that those preventive actions would have avoided spreading the infection. 

However, what about a scenario where a company learns that an employee has been exposed to COVID-19 and still sends that employee to a customer site, leading to the infection of several employees of the customer, who then pass the infection onto others? Such a case might easily lead to a suit.

In that case, general liability policies do not have specific virus or communicable diseases exclusions. Some states do hold that the pollution exclusion allows insurance companies to deny general liability claims caused by communicable disease. This is likely to be a jurisdictional issue if it arises, and companies will need to be proactive if they receive notice of a potential claim.

Complications can also arise from how general liability policies define an occurrence or an accident. These words are normally defined to include continuous or repeated exposure to the same harmful conditions – a definition that would seem to apply to infectious disease exposure.

However, some policies might have stricter definitions that would exclude this type of exposure and the facts of the case would matter greatly in this determination.

Management liability

Similar to negligence lawsuits, COVID-19 could easily lead to employment practices lawsuits.

Preventative measures aimed at containing the disease could be misinterpreted as discrimination or harassment based on national origin or disability. Some employees might fear retaliation for choosing to work at home. Others might fear discrimination due to age, pregnancy or as parents when it comes to work-at-home options.

Where feasible, companies should consult with attorneys before implementing changes to work-at-home policies or similar employment practices. If you have purchased employment practices liability insurance for your company, make sure you notify your broker of any potential issues that arise as new policies are implemented to make sure coverage is preserved.

COVID-19 might also cause lawsuits alleging breach of duty by directors and officers of the company. A company’s directors and officers have a duty of care to exercise prudence and sound business judgment in running their company. Potential lawsuits might allege that the directors and officers failed to prepare sufficiently for this type of crisis or did not act promptly enough to minimize business disruption once the scale of the pandemic became apparent.

Allegations might center on the failure to diversify supply chains or invest more in remote work technology. Directors’ and officers’ insurance can help respond to this type of lawsuit if your company has chosen to purchase this coverage.

Finally, companies that have retirement plans for their employees might face fiduciary lawsuits. Under the Employee Retirement Income Security Act, all employers are fiduciaries for the retirement benefits of their employees. This means they have an obligation to act in the best interests of the employees in managing retirement plans and must act with a sufficient level of care.

As retirement plan values are dropping precipitously across the country due to economic shocks caused by COVID-19 and the reaction to it by Wall Street, it is expected that the number of lawsuits alleging a breach of fiduciary duty for failing to protect retirement plan assets will increase.

Government actions

With the widescale economic losses that COVID-19 has already started to cause, it is expected that the various levels of government in the U.S. will intervene in some ways to protect American companies and citizens. This may take the form of trying to force insurance companies to cover some types of loss that would normally be excluded.

Various state governments might attempt to ban insurers from applying certain existing policy exclusions or instituting new ones. It is impossible at this early date to know what forms this type of intervention might take, but it is worth paying attention to as it might result in otherwise excluded losses becoming insurable.

Indeed, the State of New Jersey, as just one example, has already considered legislation to address business interruption insurance issues. A draft law would require that any commercial property insurance policy for a business with less than 100 employees and that was in effect on March 9, 2020, would have to provide business interruption coverage for all claims resulting from the coronavirus pandemic. This law would apply even if the policy had specific virus exclusions that precluded such coverage.

While the constitutionality of such a law would be in question, that legislators are even considering such drastic action shows serious concern amongst politicians about the amount of uninsured losses this virus might cause.

That serious concern is almost certain to manifest in laws that will extend insurance coverage in at least some states, though to whom and how far that coverage extends will be an open question.

New York is already requiring property and casualty insurers in the state to send a “clear and concise explanation of benefits” meant to clarify what their policies will and will not cover as it relates to COVID-19.

Conclusion

Ultimately, the exact details of any claim and the specific language of your insurance policy will determine whether insurance coverage exists for a loss suffered due to this pandemic. Any issues that arise need to be discussed with your broker or agent to make sure your company can respond quickly and appropriately and to avoid losing the potential for recompense.

Still, it is worth remembering that the insurance industry has had to respond to pandemics before and has fought many of these coverage battles previously.

The coming months will be a trying time for many SIs. Manufacturers might close plants to non-essential personnel. Wider economic conditions may lead many companies to reduce capital expenditures as a way of weathering the expected recession.

Many new projects and sales opportunities will be put on hold. Supply chains have already been significantly disrupted, making it difficult for some projects to be completed by contractually mandated deadlines.

Customers will require even tighter safety and insurance requirements as managing risk becomes paramount.

At the same time, employees will be put under immense strain financially and personally. Parents of young children will be faced with difficult childcare decisions. Travel will be greatly impacted. Employee retention and employee wellness will be difficult to maintain without significant flexibility.

Only by addressing these issues proactively can integrators hope to weather this approaching storm. Speak with your insurance agents, attorneys, colleagues and other stakeholders to handle issues in advance where possible.

Waiting to deal with a problem after it has already arisen is often too late in this type of crisis.