A Place for Insurance in a Global Pandemic: How Do Event Cancellation & Business Interruption Policies Apply to COVID-19?

It is an understatement to say that the foothold the 2019 Novel Coronavirus (COVID-19) has gained in the U.S. and resulting government mandates have developed at a rapid pace. Two weeks ago, companies were open for business, but were well advised to consider cancelling planned events and reviewing their contracts and insurance policies to determine coverage for potential losses. Given the travel advisories issued by the government and trepidation of individuals to travel or gather in the midst of the rising number of COVID-19 cases, cancellation of a major event may have been the prudent course. In a matter of days, we saw professional sports leagues postpone or cancel their seasons, and government (federal, state, and local) recommendations on limiting gatherings quickly scaled down to no more than 10 individuals. Schools and non-essential businesses have been closed in many states, restaurants and bars in many states have been ordered to close in-dining services and only offer drive-thru or delivery services. As of March 24th, it was reported that over 40% of the U.S. population was living under state or local government issued stay-at-home or shelter-in-place orders, requiring that individuals remain at home except for essential activities like grocery shopping or performing work duties in essential industries. It is now a given that businesses have been severely disrupted, and events must be cancelled or moved to an online format.

The economic impact of these measures will be profound on industry and individuals alike. The precise terms of an event cancellation or business interruption insurance policy will shape the circumstances under which a business will be covered for resulting losses. Accordingly, a careful analysis, and sometimes creative interpretation, of the key definitions, exclusions, and duties imposed upon the policyholder are required. While the federal government finalizes legislation aimed at stemming the losses that these measures will generate, businesses also should review their contracts and insurance policies with counsel to determine the role they may play in recovering some of the damage.

Event Cancellation – Contract Terms & Insurance

Whether or not government mandated restrictions on gathering size or imposition of business closure and “shelter in place” orders would constitute valid reasons for cancelling an event may be found in the language of the contract with the event venue or an applicable event cancellation insurance policy’s definitions or exclusions. Analysis of the event venue contract may reveal clauses that will excuse a failure to perform contractual duties under such circumstances, such as a force majeure clause that applies in the case of an extraordinary event or circumstance beyond the control of the parties. Potentially applicable contract defenses, such as impossibility and frustration of purpose, also should be explored, as they may provide an avenue for relief from duties to perform under the contract.

Additionally, an event cancellation insurance policy may define cancellation or curtailment in a manner that arguably applies to the current circumstances. For example, I have read policies that define “cancellation” as the “physical or legal inability to commence the insured event at the regularly scheduled date and time….” Similarly, “curtailment” has been defined as “the physical or legal inability to open or keep open the insured event for its original published duration, size or scope.” But, the definitions cannot be read in isolation. It also is key to review a policy’s exclusions, as some might exclude from coverage certain types of government action and the impact of pathogenic biological materials under certain circumstances.

A typical event cancellation policy also may limit coverage to losses that are the direct result of an unexpected cause beyond the policyholder’s control. Accordingly, there may be exclusions for pre-existing circumstances, which becomes important when analyzing at what point during the course of the pandemic the event was planned. Policies likely will impose duties on the insured to mitigate any losses, which might require the policyholder to make all efforts to reschedule an event or move the event, or portions thereof, to an electronic format. With respect to the rescheduling of any events due to COVID-19, what happens if a meeting is postponed from March until later in the year and the later event also needs to be cancelled because the current circumstances persist?  How is the requirement that a circumstance be unexpected impacted by duties to mitigate losses in that instance? Or what about an event that is scheduled for May 2020 where there is no current determination of how long government mandates will persist? These are just some of the questions that may arise in the unprecedented circumstances we are now facing.

Business Interruption Insurance

Business interruption insurance is another avenue to be explored for recovering losses sustained during the COVID-19 pandemic. Again, the precise language of a policy will be key to a determination of coverage. At least one business already has headed to court seeking a declaratory judgement that their insurance policy covers loss of business income due to government response to the COVID-19 global pandemic. What may be the first coronavirus insurance case was filed in Louisiana last week seeking a declaration that the civil authority provision of a restaurant’s business interruption policy applies to the government mandated reduction in capacity and restrictions on operations due to the coronavirus. Business interruption insurance generally requires physical damage to property, with the civil authority provisions often applicable when property damage is sustained to an establishment other than the policyholder’s property. Many policies exclude the impact of viruses from coverage. But, this case involves a policy that does not explicitly exclude losses due to viruses or global pandemics, and it raises questions regarding whether the coronavirus can be considered to cause physical damage to property by nature of clinging to a variety of surfaces for extended periods of time. Is property contaminated by the virus in a manner similar to the intrusion of lead or gaseous fumes, which the restaurant argues Louisiana courts have determined constitute direct physical loss?

Doubts have been raised regarding the viability of the plaintiff’s arguments based, in part, on a line of cases following the 9/11 terrorist attacks in which the courts held that losses due to government mandated shutdowns of airports and airspace were not covered, as they were imposed due to fear of future attacks not due to previously caused property damage. It was reported that the since the filing of the Louisiana lawsuit, the state has restricted the operation of its courts and the impact on this case is unknown. Given similar curtailments of court proceedings in other states, the ability to resolve pending insurance disputes may be affected.

Changes in the law driven by COVID-19 are occurring swiftly and companies should be prepared to make quick, well-informed decisions. Moore & Van Allen is prepared to assist in this effort.

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