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Would insurance policies cover losses related to coronavirus?

Casualty|Property|Workers Compensation
COVID 19 Coronavirus

February 20, 2020

Losses related to coronavirus could be covered under different insurance, but circumstances and policy language are paramount.

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About our COVID-19 coverage

In our ongoing coverage of the COVID-19 outbreak, experts from across Willis Towers Watson share insight into what you need to know to manage your business and employees and reduce your risk.

As health authorities work to contain the spreading coronavirus (COVID-19) and organizations bolster resilience plans, questions often arise about whether insurance would cover COVID-19 losses. The short answer is, “It depends.”

Generally speaking, many factors affect whether a loss would be covered under insurance, including the type of loss, the type of coverage and the terms and conditions of specific policies. Here we review how losses might be treated under a few lines of coverage.

Workers compensation: Losses must arise from the course of employment

Traditionally, to be covered under a workers compensation insurance policy, it must be determined that the loss to the employee rose out of the course of employment, which may be difficult to establish in the event of a virus outbreak. Employees traveling on business into infected areas or those stationed permanently or semi-permanently in high-risk areas would be the most likely to make convincing cases.

Companies may find themselves in a situation where some employees can work from home, but others are needed in the office. If quarantining becomes commonplace, do employees still commuting to work fall into the category of workers traveling into infected areas? Medical and lost-time claims arising from employees going to work in such conditions may more likely be compensable under a workers compensation program.

U.S. employers should consult state workers compensation laws. While these laws do not address COVID-19 per se, they often address the question of benefits afforded employees infected or injured while overseas. In the event of an outbreak within the U.S., it will be important to document immediately with the carrier any potential exposure or infection of an employee.

Employers may also want to consider an individual voluntary workers compensation policy specifically addressing such events as a flu outbreak. In terms of the financial impact of a pandemic, companies should also consider that their share of the expense for medical coverage for employees will rise with the need for medical treatment.

For many U.S.-based organizations, elements of their businesses extend outside of the U.S. That may entail having U.S. staff travel or work temporarily abroad, while others may have established business entities with full-time employees who may also travel and work aboard. Those scenarios introduce additional considerations when it comes to ensuring adequate protection from illnesses such as the coronavirus.

For example, state laws governing workers compensation coverage limit how a policy can apply coverage to employees outside the U.S. Additionally, coverage for work-related illness or injury for employees based outside the U.S. is largely a government-managed social security program with country-specific regulation. Global organizations should consider separate foreign voluntary workers compensation policies offering state-of-hire or country-of-hire benefits to address gaps in coverage that can develop as well as offer specific coverage for regional or endemic diseases.

Property: Is there a physical loss?

Generally, property policies cover physical loss or damage to insured property resulting from a covered peril (all risks). Without physical damage from a covered peril, income loss associated with people choosing not to travel and/or people choosing not to patronize a business (even if travel is restricted by a government authority) generally does not trigger property insurance coverage.

That said, some property policies include sub-limited coverage for income loss associated with disease, murder and suicide, which occurs at (or sometimes in the vicinity of) an insured location. These policies are often issued to soft occupancies, including (but not always limited to) hospitality, retail and entertainment.

Other occupancies’ policies may also have similar sub-limited coverage. In addition, some of these sub-limited policies require as a condition of coverage that a governmental authority shut down or limit access to the insured’s business.

The general intent of this sub-limited cover is to afford business interruption coverage if, for example, an outbreak of a disease and/or a murder at an insured location results in people choosing not to patronize a business. Previously, as in the case of SARs, bird flu and Zika, coverage for these situations was provided at times, but such coverage was determined by specific policy wording.

As to contingent business interruption, coverage requires covered direct physical damage to property of a customer or supplier. The coronavirus would not constitute physical damage to property, so the insured’s financial loss resulting from the inability to supply a customer or a supplier being able to supply the insured due to the effects of COVID-19 would generally not be covered. (Although we reiterate that the wording of each policy must be individually scrutinized.)

General liability: Causation could be a major hurdle for plaintiffs

Manufacturers of antiviral drugs may face product liability litigation, and entities that interact with the public (e.g., hospitals, schools, restaurants, airlines, cruise lines, supermarkets) may see litigation if customers believe they can link their illnesses with staff illnesses.

Workers compensation statutes may not shield employers from suits by their contract employees and will not shield them from suits brought by their customers. As it has in the past, proof of causation will be a major hurdle for these plaintiffs. Entities with clear and enforced pandemic policies (e.g., policies that seek to limit transmissions and keep sick workers home) will have additional defenses.

Casualty coverage for U.S.-based organizations is available in two separate markets based in the U.S. and international coverage territories. For organizations with exposures outside the U.S., similar considerations should be reflected in how coverage is arranged for both the U.S. general liability and international general liability policies, including both coverage and structure.

Supply chain issues and trade disruption insurance

Supply chain management is essentially about dependency — and with dependency comes vulnerability. A global disruption from a flu pandemic might affect the entire web of supply interdependencies: suppliers, their suppliers and their suppliers in turn.

Companies that limit supply chain exposure by broadening their range of suppliers will be less affected but not be immune to the impact of a large-scale supply chain disruption. Companies that have taken an opposite strategy and reduce the number of suppliers, even to a single source, are especially vulnerable. The potential for uninsured consequential loss of revenues caused by delays in the trade flow disrupted by a pandemic is enormous.

Loss or extra expense might be triggered by:

  • Emergency partial or total closure of ports and transportation centers due to order of a local or federal government
  • Quarantine
  • Confiscation or seizure of a product in transit
  • Embargo of potential contaminate

Trade disruption insurance (TDI) focuses on the consequential loss potential as a result of loss of earnings, extra expenses and contractual penalties incurred as a result of delays or disruptions in trade flows growing out of the events listed above. TDI differs from the standard business interruption coverage afforded by marine cargo or property forms by not requiring that there be a direct physical loss to goods or their conveyances. Such policies could provide some level of protection to companies with complex global supply chain interdependencies.

The insurance cycle and the pandemic cycle

The longer the period of outbreak, the more likely a pandemic would be active during an insurance buyer’s renewal time. It is important to position your risk strategically with underwriters and be aware of changing market conditions or exclusions that arise as a result of the any outbreak.

While insurance is designed to be as comprehensive as the market will bear, there are limitations of risk transfer through insurance, and this makes risk mitigation critical. Risk managers should stay aware of the global situation, monitor health advisories from world health organizations and, most importantly, maintain a dynamic business continuity model that addresses the concerns and wellbeing of the organization’s employees as well its physical and financial assets. These are powerful weapons against potentially catastrophic consequences.

Issues such as COVID-19 and other events emanating from external environments should encourage a thorough risk review at an enterprise level to evaluate the impact to an organization’s employees, physical assets, brand and balance sheet. Factors that will play a role will include an organization’s industry, the geography(ies) in which they operate, the business philosophies around risk mitigation, and pricing and coverage available from each respective insurance market.

We will continue to monitor the spread of coronavirus and provide additional guidance.

This alert does not capture all lines of coverage or all potential considerations. If you have any questions, please contact your insurance advisors.

Disclaimer:

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada, Inc.

Contacts:

Janine M. Collins
Corporate Risk and Broking
Willis Towers Watson


Henry Daar
National Property Claim Practice Leader

Jim Dorion
General Liability Claims

ARM, CBCP, CFPS, CBCA
Senior Risk Control Consultant

Director, Global Services & Solutions
Corporate Risk and Broking

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