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Insurance Coverage is Uncertain in Evolving COVID-19 Crisis

Questions, never mind answers, are just emerging

Wednesday, April 8, 2020

Working in the oil and gas industry in the South and Southeast, Dan Schwarzenbach is accustomed to intricate legal and insurance questions.

Many revolve around Mother Nature—for instance, how Sunland Construction is covered in the event it leaves a job site because of impending bad weather like a hurricane. However, they also include obscure questions like, “What happens if an underwater trench digger hits a stump and breaks in the swamp?”

But even Schwarzenbach, the company’s general counsel and corporate secretary who’s also a chartered property casualty underwriter, says the COVID-19 pandemic feels different, more unpredictable.

“Get your property, business interruption, and your event cancellation insurance policies out and see if things are crystal clear,” he cautions. “Policies are very complex, [and] there are many different policy forms, coverages and endorsements that continually change, especially after disasters.”

What’s a loss?

The thing to look for, he says, is the “trigger” of coverage. That’s what opens the policy to its benefits like business interruption and extra expense coverage. For property policies, that event is usually direct physical loss to the property, Schwarzenbach says.

Perhaps the biggest question is whether an employee testing positive for COVID-19 at a work site would be considered property damage, he says.

Perhaps the biggest question is whether an employee testing positive for COVID-19 at a work site would be considered property damage.

“Can you assume that the working area is probably contaminated with the virus if an employee tests positive,” Schwarzenbach asks? “If so, and if a business has to shut down and incurs additional expenses for sanitizing its workplaces or disposing of inventory, will that be covered?”

The answer may be in individual policies—or not, he adds.

Plenty to consider

“Although the impacts to businesses are similar to natural disasters, you can’t use the same logic as weather-related events here,” Schwarzenbach says. “Part of my challenge today is looking for what is different.”

For general counsels and risk managers, other questions abound, including:

  • What if, in the absence of a COVID-19 workplace exposure and meeting the direct physical loss requirement, businesses have losses because of a government required closure?
  • What happens if the businesses that are exempt from closures are adversely affected with decreased traffic, sales and cancellations?

“In reality, these insurance questions could become the most difficult ones, [but] desperate companies need [them] addressed quickly by the insurance industry because the business livelihood is at stake,” Schwarzenbach says.

In the absence of a clear industry response, the individual states that regulate the insurers registered in their state are going to jump in if possible, he adds. In most cases, he expects the insurers will (rightly) respond that it would have been impossible to collect premiums on the potential exposure that COVID-19 presents.

Coming back

Over the years, Sunland has been through multiple significant weather-related disasters and disruptions.

“Certainly, down here, and for me personally, we were all affected by hurricanes like Harvey and Katrina,” Schwarzenbach says. “It’s prepared us with the kind of thinking and perseverance we need to approach challenges because we know how to organize, plan for business impacts, and get things done.”

He’s also concerned about whether workplace and business interactions will change forever. Will employees and visitors be asked to fill out questionnaires and have their temperature taken before entering an office or facility? Will people be largely be working at home and professional visits and social opportunities just be scrapped in favor of video conferencing?

“In the legal area, force majeure [unforeseeable circumstances], changed conditions, and doctrine of impossibility of performance may come into play, but insurance side is a new world,” Schwarzenbach says. “It is possible that insurance industry answers we receive today may change next week or next month as our thinking evolves. But everyone should pull out those policies and work with their brokers and counsel to understand what’s in them now.”

For the latest stories on how the legal community is responding to COVID-19, please follow Vanguard’s dedicated LinkedIn page. The stories are hosted on Vanguard’s blog

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