Insurance Upset: Covid-19 Forces a New Look at Policies

Insurance Upset: Covid-19 Forces a New Look at Policies


Insurance Upset: Businesses may be unable to rely on their insurance policies to reimburse costs incurred by the Covid-19 pandemic. Affected indemnities include business interruption, workers’ compensation, commercial general liability (CGL) and employment practices liability insurance (EPLI). Consequently, organizations need to review their policies and determine the best way to handle uncovered risks.

Moreover, businesses face many questions about insurance coverage for the costly damages incurred by the pandemic. What unexpected exclusions are becoming apparent? What litigation can we expect? How can businesses retool their policies to reflect the increased risk in the months?

Phillip-M.-Perry insurance upset
Phillip M. Perry

The risk of legal action is real. “There will be lawsuits alleging liability against businesses where customers, vendors or employees contract Covid-19,” says C. Thomas Kruse, partner/chair, Litigation Practice Group for Texas, Baker McKenzie. These risks will remain high as the effects of the pandemic continue.

In this article, attorneys and insurance consultants address the most important concerns in the areas of CGL, workers’ compensation and EPLI. (A sidebar below covers business interruption insurance.)

Insurance Upset: CGL Insurance

Businesses may be sued by customers, vendors or visitors who contract Covid-19 while visiting a facility. “The next step in lawsuits will be third parties on the premises who contract Covid, especially if businesses aren’t following guidelines from the Centers for Disease Control and Prevention (CDC) or state and local authorities,” says Kruse. Such guidelines include the availability of masks, hand sanitizer and related gear, as well as social distancing.

Suppose you’re sued and lose. Will your CGL policy cover damages? Such insurance is intended to cover bodily injury and property damage caused to third parties on an insured’s premises.

“Provided the policy doesn’t exclude coverage for virus exposure, it’s conceivable a CGL policy could provide bodily injury coverage for liability arising from the infection of a customer or vendor,” says Robert M. Travisano, an attorney in the litigation practice of Epstein Becker Green.

If that “conceivable” word raises alarms, you’re not alone. Uncertainty surrounds this topic. One problem is that in many policies coverage for a virus is carved out or requires a specific endorsement. Another is that legal liability is required to trigger coverage. A breach of care by the insured business must have caused the infection. What constitutes such negligent conduct is unsettled.

“There are numerous lawsuits as to what actions or inactions could lead to legal liability due to the coronavirus,” says Tony Sardis, president of the management consulting firm Withum. He points to the following possible scenarios:

  1. Remaining open following an order by a civil authority to close
  2. Failure to adhere to required health/prevention guidelines
  3. Allowing employees known to have the virus to continue working
  4. Not screening or refusing service to customers with the virus.
Proving Causation

Whatever the nature of the negligence, it must have actually caused the injury to the third party for insurance to kick in. That brings up another problem: The difficulty of proving causation.

“It’s extremely difficult to prove the virus was contracted at any one location and that it arose out of the insured’s operations,” adds Sardis. “The infected individual has to prove he or she only went to that location over the past 5–14 days (based upon today’s knowledge of transmission); and prove it was something the business should have known about and taken preventive measures.” Contract tracing or other means of establishing the spot of infection is extremely difficult.

Businesses can defend themselves from such lawsuits if they show they did, in fact, provide reasonable care to third parties. “These businesses will claim that if they comply with the applicable guidelines, such as the CDC protocols, they exercised ordinary care and should be immune from suits,” says Kruse.

Much of the law is currently unsettled. “Given the unique predicament we find ourselves in, there isn’t a loss of law surrounding the nature of the duty of care to a customer or vendor for coronavirus exposure,” says Travisano. “We can expect CDC guidelines will fill in the blanks for such duties until the law becomes more defined as lawsuits work their way through the pipeline.”

Workers’ Compensation

Workers’ compensation insurance reimburses employees for medical costs and lost wages stemming from employment-related injury or illness. Will such insurance cover personnel injured on the job by Covid-19? Yes. “If someone can show they were infected at the workplace, then workers’ compensation is their remedy,” says Bob Gregg, cochair, Employment Practice Law Group, Boardman and Clark LLC.

However, “if” suggests the sticking point. How would you prove causation? “The hardest part is the employee showing that Covid-19 was contracted while at work and not, for example, during the commute or going to the grocery store,” says Emily P. Harbison, a partner in Baker McKenzie. Workers’ compensation doesn’t cover routine community-spread illnesses like a cold or the flu because they usually cannot be directly tied to the workplace.

Conceivably, employees can contract the disease at work even if they cannot prove it. “States such as California are enacting legislation that provides a presumption that an employee was infected with Covid-19 at work and puts the burden on the employer to avoid workers’ compensation liability,” says Paul Evans, a partner in the Employment and Compensation Practice Group at Baker McKenzie. In some cases, state laws require the employee be diagnosed within a certain number of days of performing work outside of the home.

Key: Direct Linkage

In cases where direct linkage is found between the workplace and the infection, workers’ comp insurance goes into effect. Employer negligence, if any, is not normally a factor determining coverage.

“Generally speaking, workers’ compensation is a no-fault system,” notes Harbison. “It doesn’t matter whether the illness was caused by the negligent acts of the employee or the employer, the employee is still entitled to receive benefits as long as the illness occurred while performing the job.”

Intentional acts, on the other hand, are a different matter. If the employer commits a gross act that deliberately puts people at risk, such as hiding important health information, workers’ comp might not reimburse the employee.

“If it is determined the illness is not covered by workers’ compensation, then the employee can pursue tort causes of action against the employer,” adds Harbison. “There are two exceptions in Texas, for example, where a sick or injured employee can sue under common law negligence. The first is where an employee’s death is caused by the employer’s gross negligence. The second is where the injury or illness is due to an intentional act.”

Employment Practices Liability Insurance

When bringing work-at-home employees back to the workplace, or when rehiring furloughed employees, businesses need to avoid unintentional discrimination by any category protected by laws. These include age, race, sex, religion and national origin. The same discriminatory caution applies to decisions granting or withholding leave for reasons related to Covid-19.

Unintentional discrimination can occur for various reasons. Suppose a well-intentioned employer decides people at special risk of Covid-19 should remain home rather than return to work. That group includes older employees. Those individuals may have a cause of action against the employer—either because they aren’t paid an amount equivalent to younger people as a result of their failure to return to the workplace, or because they lack the opportunities for advancement that are only enjoyed by physical proximity to supervisors.

EPLI may cover the costs incurred by such discrimination. Such insurance covers employers against lawsuits brought by employees under Title VII of the Civil Rights Act of 1964 and other employment related statutes.

“Most EPLI policies include coverage for discrimination based on certain prohibited categories such as age, race and sex,” says Harbison.

One caveat: Many insurance policies won’t cover damages incurred by intentional acts that exhibit “wonton, willful, reckless or intentional disregard” for the law. That presents a problem in the case of lawsuits. “Discrimination claims are usually based on intentional conduct,” notes Harbison. “Such claims may not be covered by insurance.”

EPLI Exclusions

Most EPLI policies exclude coverage for violations of the wage and hour provisions of the Fair Labor Standards Act; decisions by the National Labor Relations Board; the costs of complying with accommodations mandated by the Americans with Disabilities Act; and claims arising out of facts or circumstances known by the employer prior to the effective date of the policy.

Also not covered by the typical EPLI policy are violations of the Worker Adjustment and Retraining Notification (WARN) Act or state laws requiring advance notice for mass closings.

EPLI policies also don’t provide coverage for violations of the Family and Medical Leave Act (FMLA) or of the provisions of the Occupational Safety and Health Administration (OSHA). Employers should take particular note of the latter exclusion.

“Resulting from Covid-19, thousands of OSHA claims have already been filed across the U.S. with employees alleging their working conditions are not safe due to a lack of precautions taken by their employer against the coronavirus,” says Sardis. These precautions typically include the establishment of handwashing stations; provision of enough room to maintain social distancing; and the supply of sanitizers and protective gear.

While these claims are unlikely to trigger coverage under the standard EPLI policy, such coverage would likely be triggered to the extent an employee is discriminated against, harassed, terminated or retaliated against for refusal to go to work due to poor safety conditions.

These guidelines offer some insight into the usual EPLI coverage, which varies widely among insurers. “I would advise all employers to document their reasoning behind hiring and firing decisions,” adds Sardis. “Employers should also consult with their EPLI carrier prior to any major staffing decisions to ensure proper steps are followed.”

Review and Renew

These interpretations are based off what is typically seen in standard policies. Many carriers enhance, reduce or eliminate common coverages. “Insurance policy terms and conditions vary greatly from carrier to carrier; even standardized coverage often has the meaning of key terms changed by endorsement,” says Sardis. “There’s no hard and fast rule as to whether any particular type of claim is covered.”

Given the fluid nature of the risks posed by the pandemic, employers need to take a fresh look at their insurance coverage. Rather than consider the information in this article as legal advice, readers should use it as a framework for discussions with qualified attorneys.

“Moving forward, business owners should consult with knowledgeable insurance professionals to understand what is and isn’t covered in their policies,” says Sardis. “Then they have to decide whether to retain uncovered risks within their organizations, transfer those risks to other insurance products, or manage them by another method, such as contractually.”

Business Interruption Insurance

Will your business interruption insurance reimburse profits lost from the Covid-19 pandemic?

“General principles of law would lead the average business owner to believe there is coverage,” says C. Thomas Kruse of Baker McKenzie. “Yet, the insurance industry released statements in March announcing the opposite position. Most notably, the American Property Casualty Insurance Association announced its members’ position that there was no business interruption coverage for Covid-19 losses.”

The pandemic put a spotlight on the exclusions buried in commercial insurance policies. “Over a decade ago, most U.S. insurers added exclusions to their commercial property policies to resolve this issue,” says Kruse. The policy section is often labeled “Exclusion for Loss Due to Virus or Bacteria.”

“For businesses whose policies are silent on the whole issue, this is an opportunity to argue the absence of the exclusion, despite its common presence in the market, evidences an agreement to cover an event caused by virus or bacteria,” says Kruse.

A second problem is the unseen nature of the damage. “In the context of Covid-19, insurers are taking the position they don’t cover virus-related closures; that’s because there’s no ostensible damage to property,” says Robert M. Travisano, Epstein Becker Green. “This very point is the subject of several pending lawsuits and is sure to be hotly debated over the next months and years as the economic impact of the pandemic unfolds.”

The Fine Print

Indeed, litigation is starting to pile up. “Lawsuits are being filed in states from California to Texas and Louisiana; probing the limits of denials of coverage,” says Kruse. One recent lawsuit asserted a denial by preliminary letter was tantamount to breach of a policy that even included a pandemic provision. The insurer relied on a lack of specific coverage for the Covid-19 strain.

So, what will the courts decide? “One key factor will be determining the true cause of losses suffered by insureds,” says Kruse. “Was it the contamination of the premises, rendering them unfit for business, or was it the government orders requiring shutdowns?”

When checking your own policy coverage, peruse the fine print. You must navigate a maze of exclusions and endorsements to determine coverage.

Some insureds may wish to increase coverage. “Businesses can purchase insurance that responds specifically to a viral outbreak,” says Travisano. “Such coverage largely came on the scene following the SARS outbreak in 2002–2004. However, given Covid-19’s virulence, it’s likely insurers will attempt to limit their risk. They will do so by offering virus and disease coverage that’s markedly more expensive or excludes Covid-19 outright.”