By Mark Leimkuhler, Joseph Ruby and Jack Gordon

Law360 (April 10, 2020, 12:56 PM EDT )

Mark Leimkuhler

Joseph Ruby

Jack Gordon

The pundits will debate whether government delays enabled the coronavirus to spread so widely. Perhaps experts and politicians failed to implement earlier, less onerous measures that could have slowed its spread and lessened its impact because the eventual scope seemed unimaginable to them. It was only after the pandemic was well underway that decision makers acted with great urgency — too late to avoid crisis and hardship.  

There is a similar lesson for insurers and reinsurers: the potential for an unprecedented avalanche of COVID-19 insurance claims is clear, and the industry can and should take steps now, without waiting for specific claims and losses, to blunt the impact of the wave of claims and lawsuits that has already begun and is rapidly expanding.

Coronavirus insurance claims will hit virtually every type of business coverage: commercial property and business interruption first and foremost, but also cyber coverage, directors and officers, errors and omissions and professional liability, pollution coverage, general liability, workers' comp and others. Some types of claims will arrive in large numbers later than others, but for all lines of coverage insurers are well advised to start now to evaluate their exposure under the specific policy wordings — form and manuscript — that they use.

In assessing their exposure, insurers should not overestimate the protections afforded by exclusions or limitations on coverage. As the industry learned the hard way during the asbestos and environmental coverage battles, what may look like solid barriers to coverage can be undermined by the economic and political pressures that often accompany a flood of claims.

State courts in the U.S., in particular, have a track record of responding to the economic needs of their particular jurisdictions, even if their rulings run against what insurance professionals may regard as the plain meaning of policy wording. In the immediate term, lawmakers in several states (New Jersey, Ohio and Massachusetts) are considering legislation to impose coverage obligations on existing policies for business interruption losses of small businesses resulting from the coronavirus. Insurers are pushing back on legislative efforts to alter policy terms, and if such measures are enacted into law they will no doubt face constitutional challenges.

The travel, vacation and hospitality industries are already making major business interruption claims under first-party policies; virtually all participants in that industry are experiencing massive and potentially catastrophic declines in revenue and have no choice but to look to every source of potential reimbursement — and insurers are an obvious target.

But almost every U.S. industry will have significant losses resulting from disruption brought about by the coronavirus. Policyholder counsel will be highly motivated to hit hard in their early cases and to win favorable decisions to serve as precedent for further cases. If insurers are to stanch the flow, they must be prepared to fight and win the early cases regardless of their size.

For example, a restaurant in New Orleans, two restaurants in California and two Native American tribes that operate casinos have filed lawsuits against Lloyd's underwriters and other insurers seeking declarations of coverage. These plaintiffs are hardly major players in the hospitality industry but court decisions in these cases could become precedents just as important as rulings in cases involving bigger companies like cruise lines, hotel chains or airlines.

Many insurers and reinsurers may rely on the Insurance Services Office form virus exclusion. The ISO form used in property policies bars coverage for "loss or damage caused by or resulting from any virus, bacterium or other micro-organism that induces or is capable of inducing physical distress, illness or disease."

Insurers might think that this language creates an impregnable bar to coverage for coronavirus losses, but they should expect and be prepared to address challenges from insureds in any jurisdictions and any cases where they may arise — since the earliest court decisions could be the most influential. But arguments over how the virus exclusion is construed could be mooted in some cases by legislation, if upheld — the proposed Massachusetts law, for instance, would expressly forbid insurers from enforcing the exclusion to deny certain business interruption claims.

Further, not all policies have this exclusion. The complaint filed by the New Orleans restaurant, for example, alleges that the London policy in question does not. Though courts have found that the absence of an exclusion does not imply coverage, policyholder counsel are already contending that an insurer that did not incorporate the virus exclusion must have intended to provide coverage for losses related to the coronavirus.

With or without a virus exclusion, business interruption coverage in property policies frequently requires that the loss results from property damage, often described as direct physical loss or damage to property. However, the property damage requirement is expressed differently in different policy forms, in ways that may be decisive to coverage.

Policyholders are asserting that the presence of coronavirus on surfaces in their property constitutes damage. The complaint filed by the California restaurants alleges that the government closure order explicitly states that it was issued based on evidence of physical damage to property.

Whether or not the presence of the virus is property damage, many policyholders will not be able to show through direct evidence that coronavirus was present on their specific properties and might argue via circumstantial evidence that the virus must have been present, or that the threat of such presence is sufficient. Prior cases involving arguably analogous situations have reached opposite conclusions and, depending on their outcomes, will likely be pressed into service by either policyholders or insurers.

But on this issue as well, insurers may also have to contend with policymakers looking to maximize coverage for their small business constituents — the proposed Massachusetts law would bar insurers from denying business interruption claims of small businesses based on the absence of physical damage to property.

With an unprecedented number of claimants and magnitude of losses likely, all insurers that have issued or reinsured property policies should be taking steps now to prepare for coronavirus-related claims, including legal analysis of property insurance provisions that are likely to be the focal point of coverage disputes.

But other lines of insurance will also see large numbers of claims. As office workers resume their tasks from home, insurers are likely to see increased claims on cyber policies due to weakened protections from hackers and a greater number of user errors. There will likely be claims on pollution and contamination liability policies, which are highly variable in their wording and may present novel issues in policy construction.

General liability policies may see demands for coverage for bodily injury claims arising from allegations that insureds did not take proper steps to protect customers on their premises from the coronavirus. Two passengers on the Diamond Princess cruise ship have sued Princess Lines for negligence in exposing them to it (though they are not sick).

And, of course, policies providing event cancellation and other specialized coverages will receive many new claims. Suits alleging securities law violations relating to the coronavirus have also already been filed. For each category, insurers should act now to identify and assess the key issues on which coverage may depend. Reinsurers should anticipate claims flowing through to them as well.

It is too early to discern the full extent of the impact of coronavirus on the insurance industry. But now is the time for insurers and reinsurers to anticipate the scope and nature of the claims, to evaluate the defenses to coverage that may exist, and to prepare the legal and factual bases to assert and prove those defenses.

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Mark Leimkuhler, Joseph Ruby and Jack Gordon are partners at Lewis Baach Kaufmann Middlemiss PLLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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