May 12, 2020
As COVID-19 presses state and local governments to continue their shutdown orders, some businesses are incurring extensive expenses and losses. Whether the business is open with limited capacity, allowing employees to work from home, or closed until the orders are lifted, businesses are asking if and how insurance can provide relief. This article provides information on the types of insurance agreements that may cover your business losses, how to recoup certain expenses, and how to protect against losses and risks.
A threshold matter to understanding your insurance coverage is to understand the insurance concepts. Every business’s insurance policy is different and the specific policy language is what matters for your claim. Do not rely on the internet or the media for your coverage determination. Furthermore, each state court’s interpretation of policy language may differ. For example, any requirement that you must have “physical loss” to property for a winning claim may be viewed differently by courts in light of the facts of your case and COVID-19.
The novel issues related to COVID-19 have led federal and state governments to pass new laws or amend existing ones. Insurance regulators in each state are rolling out guidance and modifications to existing insurance plans. In light of these new laws, insurance companies are trying to argue that policies are contracts and that they did not agree to insuring businesses with these new laws in mind. However, it is important to know that many policies contain “conformity to statute” provisions that state if a provision is inconsistent with state law, then the policy is amended to conform to state law. This argument and many more have already begun a battle in the courts (See Big Onion Tavern Group, LLC v. Society Insurance, Inc.; Oceana Grill v. Certain Underwriters at Lloyd’s, London).
With the influx of information from the various actors above, it is important that you understand how your specific policy covers your expenses and losses.
WHAT TYPE OF INSURANCE PROVIDES ME WITH COVERAGE FOR LOSSES DUE TO SHUTDOWN ORDERS?
There are many different types of insurance policies with general or specialized coverage. Whether a government shutdown order is covered by your insurance will require a personalized review of your policy. Below is a non-extensive list of various agreements that may be at issue for you.
- All Risk Coverage. This property insurance will cover losses arising from any fortuitous cause except those specifically excluded.
- Named Peril Coverage. In contrast to All Risk Coverage, this insurance only covers causes specifically listed in the policy.
- Business Interruption. Typically contained in your property coverage policy, this agreement protects your business when it is directly impacted by a hazard or peril that causes you to cease operations and suffer a loss. Depending on the policy, such insurance can cover loss revenue, employee wages, rent or lease payments, relocation costs, loan payments, taxes, and fixed costs.
- Civil Authority. This coverage reimburses lost profits and other economic losses when a government entity has issued a legal order resulting in the denial of access to the policyholder’s insured premises.
- Builder’s Risk. A type of property policy that is intended to cover buildings under construction, as well as the materials, supplies and equipment, and business interruption-related costs that are related to the cause of loss.
- Ordinary Payroll. This coverage for a policyholder who wishes to retain key hourly employees who are completely idled after an incident and unnecessary to continuing operations.
- Extended Period of Indemnity. This agreement adds coverage under a business interruption policy for loss of income suffered during a specified period of time (e.g., 30, 60, or 90 days) after the damaged property has been repaired.
- Others. Contingent Business Interruption, Contingent Extra Expense, Ingress/Egress, Extra Expense, Pollution/Contamination/Environmental, Crisis Management, and Event Cancellation Insurance.
Depending on your business’s industry, there may be additional insurance policies that are triggered by COVID-19. These policies include Directors & Officers (“D&O”), Errors & Omissions (“E&O”) or Professional Liability, Commercial General Liability, Workers Compensation, and Cyber Liability. Be sure to read your policy to see if any of the above coverages are included.
HOW DO I RECOUP EXPENSES FROM MY EMPLOYEES WORKING FROM HOME?
Some businesses are allowing their employees to work from home but, in doing so, these businesses may incur additional expenses. To recoup these expenses with an insurance claim, you should first review your policy. There may be a coverage triggered known as “Extra Expense.” Extra Expense insurance pays for a company’s non-ordinary expenses after a disruptive incident. For these types of claims, it is vital to identify, compile and maintain your extra expenses and the supporting documentation. This includes identifying personnel expenses, such as laptops for employees, additional server space, overtime of non-salaried employees, moving expenses for relocating equipment for employees, and security for monitoring your vacated offices.
You should consider setting up accounting systems to track additional costs incurred as a result of the incident. Note that some policies require pre-approval from the insurance carrier in order for these expenses to be reimbursed. Lastly, it is important to track expenses not only for claim purposes, but also for tax purposes.
HOW DO I PROTECT AGAINST LOSSES AND RISKS?
The change in your business’s operations may result in increased losses and risks. Whether your insurance covers these claims or not, you should be proactive in mitigating these potential losses and risks. Below are certain topics to be aware of and steps to be proactive.
- Remote Working Losses and Cyber Incidents. As employees shift to work-from-home, there is an increased risk of cyber incidents, spear-phishing, and malware. To begin, you should verify that your workers compensation policies apply to employees working from home and review whether you have cybercrime insurance in place. Ensure that your employees use only company-approved and vetted devices and applications in order to get maximum cyber protection. Employees should use a separate home network so that your company devices are not running on the same wi-fi as other household devices. Only approved users, not family and friends, should use employer-issued work computers. Employees must update software as these updates often include important changes to improve security.
- Potential Employee Becomes Ill from COVID-19. The rapid spread of COVID-19 in the U.S. means that there is a chance that an employee will contract the disease. To be proactive, ensure your business has proper reporting policies in place (e.g., reporting illnesses to “email@example.com”). Be aware of the Americans with Disabilities Act, the Age Discrimination in Employment Act and the Health Insurance Portability and Accountability Act. Notably, employers must treat employees equally and must keep an employee’s medical information confidential and only share with necessary individuals. Ensure your employees are informed of their paid leave rights under the Families First Coronavirus Response Act (additional guidance here). Because of the constantly changing requirements, consider having an appropriate person monitor these developments.
- Insurance Renewal. One of the most proactive methods of ensuring insurance coverage is to have a valid insurance policy in place because most liability policies limit coverage to “claims made” during the policy period. Review when your insurance is up for renewal. At the time of policy renewal, every business should be cautious about any new virus, pandemic and COVID-19 related exclusions. If you are considering changing carriers, be aware of the potential impact in different coverages as each policy is different.
- Tracking Expenses and Damages. Retaining documentation is paramount. By not tracking documentation related to expenses and damages, you may waive your rights to certain coverage. One of the most recently used methods of insurers to deny claims is to argue that the insured did not adequately track expenses properly from the start. For a business interruption claim, consider tracking and identifying lost profits and sales during the period of loss, tracking industry data and market demand, identifying direct and indirect cost savings, preserving financial records, and hiring a third-party claim consultant depending on the complexity of your claims (the fees for a claim consultant may be covered under your policy).
- Make the Claim! Although some brokers have cautioned against making claims, you should err on the side of caution and make the claim. Remember that timeliness is key.
WHAT OTHER RESOURCES MAY PROVIDE RELIEF FOR MY LOSSES?
There are various other resources to provide you with relief for your losses. Consider reviewing your contracts with your business partners for additional relief. For example, are you an “additional insured” on any other policies? Which contracts do you have that contain indemnification provisions or force majeure clauses? Additionally, the federal government has passed various relief acts that may pertain to your business. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act is an example of such an act. Follow your industry news because different levels of government are providing relief to different industries. Finally, as you navigate through your insurance policy and COVID-19 resources, remember to speak with your trusted advisors (accountants, attorneys, financial advisors, etc.) and engage early and often.
- Laws relating to insurance are potentially changing due to COVID-19.
- Each insurance policy is different – read yours!
- Watch out for insurance renewal and expiration issues.
- Track all expenses and/or losses caused by COVID-19.
- Timeliness is key. Do not wait to make the claim.
HMB Legal Counsel will continue to provide updates as the situation evolves. The ongoing issues related to the spread of the Coronavirus (COVID-19) have had and will continue to have a significant impact on individuals, families, businesses and markets. Visit our collection of resources providing guidance during these fast-changing circumstances. Please reach out to your lead team member to answer specific questions.