Analysts at Keefe, Bruyette & Woods (KBW) have warned re/insurers that some courts are likely to decide that commercial policies will include business interruption (BI) coverage stemming from the coronavirus (COVID-19), even if it is explicitly excluded.
Based on its discussions, KBW believes that most P&C insurers consider themselves to have relatively little exposure to COVID-19 related BI claims, which typically require covered physical damage to trigger coverage.
However, after speaking to several attorneys, the firm is urging re/insurers to consider the risk that the pandemic could meet the physical damage criteria in some courts.
For example, one potential argument that could be made on behalf of claimants states that the presence of the virus constitutes covered physical damage.
The attorneys told KBW that there is significant case law on both sides of whether non-structural damage qualifies as ‘physical loss or damage’ to trigger BI coverage.
These include decisions finding coverage for cancelled performances due to smoke in a theatre, air-borne asbestos fibres, and toxic gases from defective drywall.
Burden of proof for contamination is also considered achievable, as confirmed coronavirus cases for employees could prove that the virus was present in a building, potentially qualifying the business for communicable disease coverage.
Other BI coverage triggers could include extensions that provide BI coverage when civil orders prohibit access to a location because it has suffered covered physical damage, or when covered physical damage prevents access.
KBW further reported that contamination exclusion may be less widespread than expected, as many larger accounts frequently manuscript property policies with significant variations in language.
In addition, analysts warned that contamination exclusions may be less effective than expected, and noted that the burden of proving an exclusion’s relevance will fall primarily on insurers.
Hence, if there are any creative ways of credibly interpreting contamination exclusion language as somehow not applying, then the exclusion could not work.
But the attorneys acknowledged that these recent efforts to automatically construe BI coverage despite explicit exclusions may not succeed.
They explained that policy interpretation is likely to vary significantly by jurisdiction, while insurers may be able to argue about both the duration of the remediation period of a policy, and that damages are limited to potential revenues assuming sustained social distancing without various shut-down orders.
