An Insurance Policy for the End of the World

By: Rivers Ridout

As COVID-19 continues to threaten industries around the world, businesses are attempting to stay afloat by seeking coverage from their insurance providers. This blog focuses on the perspective of those businesses while outlining the avenues for relief that businesses can utilize during such trying times. It also discusses insights provided by lecturers in the University of Miami School of Law’s summer class about the impact of COVID-19 on the sports and entertainment industries.

It is no secret that COVID-19 has resulted in greater financial damage than physical damage to property. When it comes to property insurance policies, most require direct, physical damage to trigger coverage. In distinguishing whether or not coverage is appropriate, the presence of apparent physical damage can be quite obvious. In the era of COVID-19, however, many courts have struggled to decide what qualifies as “physical” or “apparent” damage. Insurance companies hope that courts adopt a narrow approach, while at-risk businesses prefer one a bit broader.

According to lecturer Alycen Moss, Co-Chair of the Property Insurance Group at Cozen O’Connor, several courts have ordered coverage where there was no apparent physical damage, but the business lost its “essential functionality” or was deemed “temporarily unfit for occupancy.” For example, in Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 WL 6675934 (D.N.J. Nov. 25, 2014), where an accidental release of ammonia into a facility caused the facility to shut down for one week, the court ruled that although there was technically no physical damage to the property, the damage rendered the facility temporarily unfit for occupancy. Similarly, some businesses have received coverage when their “essential functionality” could no longer be performed. The court in Wakefern Food Corp. v. Liberty Mut. Fire Ins. Co., 968 A.2d 724 (N.J. Super. Ct. App. Div. 2009) considered whether a supermarket’s insurance policy included damage resulting from an interruption of electrical power. The court held that because the interruption was the result of physical damage to electrical equipment away from the property, the supermarket’s policy did in fact cover any losses suffered even if there was no apparent damage to the property itself.

While businesses hope for broad interpretations of what “physical damage” means, insurance companies attempt to make business interruption policies as specific and inclusive as possible. This is because courts rarely adopt a broad interpretation of the insurance policies. For example, in Westport Insurance Corp. v. VN Hotel Group, LLC, 761 F. Supp. 2d 1337 (M.D. Fla. 2010), the court held that damage from bacteria was coverable because the policy did not expressly list bacteria as a pollutant under the pollution exclusion section of the agreement. Insurance providers fear that if the specific reason for the insured’s damages is not expressly excluded from coverage under an insurance policy, the courts will order coverage. Due to this concern, providers have begun expressly including viruses and pathogens in the excluded-from-coverage sections of their policies in the wake of COVID-19. As businesses seek to obtain coverage for viruses and pandemics, insurance providers are working to ensure they are not paying millions for things they never intended to cover. Generally, any ambiguities within a policy are ruled in favor of the policy holder, not the drafter. Lecturer Richard C. Giller of Pillsbury Winthrop Shaw Pittman LLP explained that when a court cannot decipher precisely what an insurer intended in a policy, the policy will be construed in the light most favorable to the policy holder.

COVID-19 has resulted in businesses looking to their property insurers to recuperate lost income. In addition to property insurance, businesses have relied on event cancellation insurance to mitigate the financial toll of COVID-19. For example, the All England Lawn Tennis Association, which organizes the Wimbledon tennis tournament, is looking to recover an astounding $141 million after taking out pandemic insurance 17 years ago. By paying $2 million in pandemic insurance every year for the last 17 years, over $34 million in total, Wimbledon will likely receive almost half of its losses after being forced to cancel the tournament for the first time since WWII.

If COVID-19 struck a few years ago, the NCAA may have found themselves in a similar position to the All England Lawn Tennis Association with March Madness. After the TSARS outbreak of the early 2000s, the NCAA purchased event cancellation insurance that would cover roughly one-third of the tournament’s annual revenue. That, combined with $500 million accumulated in a risk management fund, gave the NCAA a false sense of security. After years of depleting that risk management fund to cover class-action lawsuits and with an insurance policy that only covers a portion of the revenue presumed to be lost from the cancelled tournament, the NCAA will lose millions at the hand of COVID-19.

It is obvious that most businesses effected by COVID-19 will attempt to purchase some form of a pandemic insurance moving forward. The real question is whether it will be available at a price that makes commercial sense. Purchasing an event cancellation policy like Wimbledon’s will likely be easier said than done after this year as insurance providers try to shield themselves by increasing prices for similar policies. Regardless of the price, it probably makes the most sense for businesses to pursue coverage, as COVID-19 may remain a financial threat for the foreseeable future.

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