While every business is concerned with the safety of its workers and customers as coronavirus continues to spread in China and internationally, the hospitality industry in particular needs to take prudent measures to mitigate potential financial losses stemming from COVID-19 outbreaks within its facilities or its supplier operations, including a thorough review of the coverage provided by existing insurance policies.
For U.S. and multinational businesses, COVID-19 could implicate many different lines of commercial property and casualty coverage. Here, we focus on property damage and business interruption, directors and officers, and general liability claims as they may affect hospitality and other industries.
Typically purchased as a component of a business’s property insurance, business interruption coverage is designed to reimburse businesses for lost profits due to unexpected interruptions to their operations. In most property policies, business interruption coverage is triggered when the policyholder suffers direct physical damage to insured property and that damage leads to a business interruption. In the hospitality industry, one guest suspected to have contracted COVID-19 can shut down an entire property for weeks or months, making business interruption coverage especially important.
A key question will be whether COVID-19 causes “physical damage” as that term is used in property policies. Physical damage can in many cases include viral contamination that renders a facility unusable or uninhabitable. Moreover, some policies written for policyholders in the hospitality industry provide coverage for loss from infectious diseases — without other physical damage.
In February, the insurance industry responded to COVID-19 with limited optional coverage for certain COVID-19-related losses. Specifically, policyholders may be able to purchase COVID-19 “civil authority” coverage, a typical supplemental coverage triggered if a governmental entity issues orders restricting access to a policyholder’s property. The COVID-19-specific coverage could prove helpful to policyholders as it may not require proof that the virus is physically present in the temporarily shuttered property.
A key question for policyholders will be whether the new coverage is sub-limited. Supplemental coverages like this are frequently sub-limited, and sometimes the sub-limits are quite low.
“Contingent” business interruption coverage, which could be of particular importance to COVID-19, applies if a policyholder’s supplier suffers a COVID-19 loss that affects its ability to supply the policyholder. Whereas the 2014 Ebola outbreak was largely limited to West Africa, China has suffered the greatest impact from COVID-19, leading to the shutdown of dozens of factories that supply American companies. Given the wide array of U.S. businesses that depend on these Chinese suppliers, including some in the hospitality industry, contingent business interruption coverage could prove especially important in this outbreak. It is unclear whether the COVID-19-specific coverage described above would apply to contingent locations — a key question since the Chinese government has ordered the shutdown of many facilities in mainland China.
Directors and officers liability insurance
It is possible that individuals other than those personally sickened, such as shareholders in companies adversely affected by an outbreak, could bring claims against companies or their executives based on allegations that management’s acts or omissions led to a stock price drop causing financial losses. Directors and officers (D&O) policies should respond to such claims.
While D&O policies typically contain exclusions for claims alleging bodily injury, a shareholder action based on a company’s management of COVID-19 fallout would arise not from bodily injury but from the shareholders’ economic losses. Accordingly, policyholders should have strong arguments around typical D&O bodily injury exclusions.
Commercial general liability
Commercial general liability insurance is designed to cover against claims alleging that the policyholder’s conduct caused bodily injury to the claimant, such as sickness or disease resulting from exposure to harmful conditions. Many businesses in the hospitality industry are unfortunately already familiar with the potentially significant financial impacts of contagious viral and bacterial conditions like legionnaire’s disease and E. coli. Policies may at first exclude viral or bacterial outbreaks, but then provide exceptions to the exclusions that bring certain conditions back into coverage.
Individuals contracting COVID-19 at hotels, on cruise ships, etc., could yield a string of bodily injury lawsuits requiring businesses to shell out millions in legal fees and potential settlements. Policyholders in hospitality and other consumer-facing industries would be well advised to review the scope of general liability coverage for virus-related bodily injury.
It may turn out that the business impact of COVID-19 is limited for many industries, so there is no reason for corporate policyholders to panic. Nonetheless, if there are ultimately losses of the type discussed herein, insurance coverage could limit the financial burden. Policyholders should review their policies, speak with their insurance brokers, and contact an insurance professional if questions arise concerning the scope of coverage for potential COVID-19-related losses.