Are You Covered for Covid-19?

Client Alert March 19, 2020

ARE YOU COVERED FOR COVID-19?

Businesses have a lot to focus on in responding to COVID-19. It is easy to lose sight of the insurance implications of the current crisis. But there are a few things to keep in mind in managing the risks that COVID-19 poses.

THE RISKS

COVID-19 may give rise to various types of losses that are covered by some insurance policies. The following are some of the potentially insurable risks that are likely to prove particularly common in the coming months.

• Interrupted Business. As many businesses have already learned, COVID-19, the government response to COVID-19, and related supply chain issues can and will temporarily prevent many businesses from conducting some or all operations. This is particularly true of businesses whose core operations cannot be handled remotely. This is a category that includes many businesses across many different industries, from construction firms to personal fitness gyms; from dentist offices to restaurants; from clothing outlets to grocery stores. Depending on the nature of the business, closing down for even a short period of time can have serious financial consequences.

• Liability Claims. What about workers who stay at work? Or customers of businesses that don’t close? Could people who become infected sue your business because they contracted COVID-19? Liability claims have the additional problem of often resulting in litigation, another expense that must either be covered by insurance or borne directly by your business.

• Event Cancellations. Businesses operating sports, entertainment and conference venues across the country have had to cancel contracted events, and businesses who have contracted venues have cancelled events for various reasons. Obviously, there is an immediate loss to revenue associated with such cancellations, but there are also losses associated with breaching existing contracts, refunding pre-payments, and making prospective event attendees whole.

• Inability to Deliver. COVID-19 has forced, and will continue to force, many businesses to breach contracts with other individuals and businesses. In the best case, performance may only be delayed, but in the worst cases, performance may be rendered impossible. A breach may still be avoided if the contract contains applicable force majeure language, but the precise reason a business is unable to perform—for instance, whether the business voluntarily closes down, is forced to close down by a government order, or fails to meet its

Are You Covered for COVID-19?

Client Alert March 19, 2020

obligations because too few people showed up to work—may affect whether a force majeure clause applies. Breaches that cannot be avoided can obviously be expensive. Such breaches may themselves result in litigation, including litigation over whether force majeure or other protective doctrines apply.

• D&O or Securities Liability. This one may not be obvious, but fiduciary duty claims could be made against directors or officers of a company for failure to handle the circumstances created by COVID-19 correctly. Additionally, fiduciary duty or securities liability claims could result from statements directors and officers or the company itself makes (or fails to make) about the effects of COVID-19 or how it is being handled if it is later alleged that those statements were materially false.

THE COVERAGE

So are you covered for these risks? Maybe. But you need to review your insurance, ideally with the assistance of an attorney, to be sure. And it is better to know your insurance position before you incur losses so that you can mitigate risks properly and take all appropriate steps to put yourself in the best position to secure insurance coverage where available. For example, it is important to know what your insurance policies require in terms of the timing of notice, conditions, and exclusions. The policy governs, and most will require you to respond quickly, often within 30 days, or “as soon as practicable.”

Property insurance and other business policies may cover business interruptions in some circumstances. There are numerous factors to consider, however. Does the policy require direct physical loss? Does it require confirmation of actual communicable disease? And even if you have business interruption coverage, you may not be covered to the extent you believe you bargained for—some policies contain restrictions on coverage for certain causes, including causes relating to infectious diseases, and in this environment your business interruption may be attributable to various causes. If you have a $25 million policy with business interruption coverage, it can be troubling to be told by your insurer that your sub-limit for interruptions caused by a disease like COVID-19 is only $150,000. Additionally, coverage under some policies will turn on how the decision was made to temporarily suspend operations. Could the business shutting down be characterized as voluntary? Was it compelled by a government order?

Depending on who is making a liability claim, different types of insurance may apply. General liability insurance may protect you from COVID-19 claims made by people who think they contracted the disease by working for or patronizing your business, though you will need to check the conditions of the policy and review any exclusions. Worker’s Compensation may cover COVID- 19-related claims for employees who claim to have contracted COVID-19 because of their job duties, though this may depend heavily on individual circumstances.

Specialist insurance exists for event cancellations, and event agreements typically also make clear who bears what risk and in what circumstances. Certain types of insurance devices also exist for the inability to complete contracts. Performance bonds are one example. But absent special

Are You Covered for COVID-19?

Client Alert March 19, 2020

types of insurance, or coverage endorsements to general liability policies, it can be difficult to get a liability insurer to cover you for a claim relating to allegations that you breached a contract. However, to understand whether a failure to complete a contract is justified by force majeure or common law principles of impossibility or impracticability, or whether you are covered by insurance if the breach is not excused, you will need to carefully analyze the underlying facts and your coverage.

D&O insurance has many of the same issues and concerns as liability insurance—while claims implicating fiduciary duties, governance, or securities may fall within the scope of coverage, a careful reading of the conditions and exclusions is necessary to determine whether claims related to COVID-19 specifically are covered.

Ultimately, the primary takeaway is the same regardless of the potential loss or the nature of the coverage. You should review (1) your biggest risks associated with COVID-19 and (2) the terms of your present insurance coverage as they apply to those risks. You are most likely to assess both accurately with professional assistance.

If you have any questions about the information contained in this Client Alert, please contact the Thompson & Knight attorney with whom you regularly work or one of the attorneys listed below.

CONTACTS:

Greg Curry Shelley Glazer Bill Banowsky 214-969-1252 214-969-1236 214-969-1231 Greg.Curry@tklawcom [email protected] [email protected]

Megan Schmid John Atkins 713-653-8651 214-969-1477 [email protected] [email protected]

Are You Covered for COVID-19?