By Adam Durst

Law360 (March 31, 2020, 5:35 PM EDT) --

Adam Durst

As the number of businesses impacted by the COVID-19 pandemic continues to rise, the New York State Department of Financial Services recently issued a letter to all authorized property and casualty insurers in New York demanding that they provide certain information regarding the commercial property policies issued in New York and provide an explanation of the business interruption coverage provided by the policies.

The letter applies to business owners' policies, commercial multiple peril policies and specialized multiple peril policies, along with substantially similar insurance. The letter identifies specific areas of inquiry relating to business interruption, civil authority, contingent business interruption and supply chain coverages that the explanation of benefits should address — some of which are likely to be points of contention during coverage litigation that is likely to arise from COVID-19-related losses.

The COVID-19 pandemic has had a devastating impact on businesses throughout the country, including in New York. Recently, New York Gov. Andrew Cuomo issued an executive order directing nonessential business to reduce in-person employees 100%. The business losses stemming therefrom are likely to be significant, and the DFS wants insureds to be prepared by understanding the coverages provided by commercial property policies issued in New York.

To that end, the DFS is requiring insurers to report the volume of business interruption, civil authority, contingent business interruption and supply chain coverages that the insurer has written and that has not lapsed as of March 10. The letter directs that this information be expressed in amounts of direct premium, policy types and numbers of policies written of each type.

In addition, the DFS has demanded that insurers prepare a clear and concise explanation of benefits relating to coverage each policy offers in regard to COVID-19, both "presently and as the situation could develop to change the policyholder's status (i.e., is there any potential for coverage as a result of COVID-19)."

The explanation was to be provided to both insureds and the DFS by no later than March 18. This eight-day turnaround for the explanation likely placed a tremendous burden on insurers, particularly given the level of information to be included in the explanation.

The DFS letter indicates that the explanation of benefits shall include all relevant information, including but not limited to the following:

• What type of commercial property insurance or otherwise related insurance policy does the insured hold?

• Does the insured's policy provide business interruption coverage? If so, provide the covered perils under such policy. Indicate whether the policy contains a requirement for physical damage or loss and explain whether contamination related to a pandemic may constitute physical damage or loss. Describe what type of damage or loss is sufficient for coverage under the policy.

• Does the insured's policy provide civil authority coverage? If so, describe what type of damage or loss is sufficient for coverage under the policy and also describe any relevant limitations under the policy. Explain whether a civil authority prohibiting or impairing the policyholder's access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.

• Does the insured's policy provide contingent business interruption coverage? If so, describe what type of damage or loss is sufficient for coverage under the policy. Provide the covered perils under such policy. In addition, indicate whether the policy contains a requirement for physical damage or loss and explain whether contamination related to a pandemic may constitute physical damage or loss.

• Does the insured's policy provide supply chain coverage? If so, is such coverage limited to named products or services from a named supplier or company? Indicate whether the policy contains a requirement for physical damage or loss and explain whether contamination related to a pandemic may constitute physical damage or loss.

For each instance of coverage described above, provide the applicable waiting period under the insured's policy. In addition, indicate whether the amount of time coverage remains in effect once becomes active for a given incident.

Analyzing the DFS Demand: A Lens on Coming Coronavirus Claims and Coverage Litigation

Under each type of coverage, it appears the DFS' primary inquiry is whether the relevant coverage contains a requirement of physical damage or loss, and whether contamination related to a pandemic may satisfy that requirement. To be sure, this inquiry is sure to be a key issue as insurers receive claims arising from COVID-19-related losses, and the DFS is requiring insurers to lay out their position on this issue generally, without reference to the specific facts of a particular claim.

The identification of whether the relevant coverage contains a physical damage or loss requirement for coverage to be triggered will likely be a relatively simple and benign endeavor. Most policies providing business interruption coverage are triggered when the policyholder sustains direct physical loss of or damage to insured property due to a covered cause of loss.

Similarly, contingent business interruption coverage, which covers revenue-related losses resulting from an interruption of business at the premises of an insured's customer or supplier, is often triggered only when the customer or supplier sustains the type of loss that would be covered were it to occur to the named insured's own property (i.e., a physical loss).

Likewise, civil authority coverage, which is triggered when governmental authorities limit access to the location of an insured's business, is often only implicated when the limitation is because of direct physical damage by a covered cause at another location, even where the insured's property did not sustain direct physical damage.

Like these other coverages, supply chain insurance protects against the disruption of the operations of third-party suppliers on whom the insured's business relies, typically as a result of physical loss or damage, although some policies limit coverage to damage to the products or materials themselves. Therefore, absent policy language to the contrary, most standard policies providing these coverages will contain a physical damage or loss requirement.

While the identification of a physical damage or loss requirement may be simple, whether contamination related to a pandemic may constitute physical damage or loss is likely to be a topic of dispute, since some jurisdictions interpret the physical loss provision to require a distinct and demonstrable physical alteration to the property, while others do not.[1]

Whether contamination from COVID-19 constitutes physical damage or loss is likely to be the focus of subsequent coverage litigation — as has already shown to be the case in the first COVID-19related coverage lawsuit recently commenced in Louisiana.[2] For this reason, it is imperative that insurers be careful in drafting their explanations of coverage, as insureds will seek to use these explanations against insurers in subsequent coverage litigation in an effort to expose any potential inconsistencies, and in some cases, attempt to alter the terms of the insurer's policies.

As it relates to civil authority coverage, the DFS also asks insurers to explain another topic that is likely to be disputed in the courts, i.e., whether a civil authority prohibiting or impairing the policyholder's access to its covered property in connection with COVID-19 is sufficient for coverage under the policy.

Many of the business losses associated with COVID-19 are likely to arise from government orders requiring the reduction in workforce. However, these orders are not necessarily in direct response to the contamination of property (particularly property close to the insured's location), but are instead precautionary measures designed to reduce the spread of the virus.

Civil authority coverage, however, generally does not provide coverage for prophylactic measures. Once again, insurers must act carefully when drafting their responses so as not provide coverage that was not intended by the parties to the insurance policy.

Notably absent from the explicit issues to be addressed in the explanation of benefits is the application of insurance policy exclusions applicable to the COVID-19 pandemic. Nevertheless, given the DFS' directive that the explanation address all relevant information, we anticipate insurers will address the potentially applicable exclusions in the explanations of benefits.

Among the exclusions that may be addressed are virus or bacteria exclusions, which generally exclude coverage for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.

These exclusion are standard in most policies issued after 2006, and we expect their application to COVID-19 claims will be at the center of presuit and litigated disputes. Exclusions precluding coverage for loss or damage due to contamination or pollution are likely also to receive attention by insurers, either in their explanation of benefits or as they handle claims arising from the pandemic.

Conclusion: Case-by-Case Inquiries Essential for Assessing Coverage

In all, losses stemming from the COVID-19 pandemic are likely to be diverse, rendering a case-by-case inquiry essential to assessing the availability of coverage. The DFS' request for a preemptive explanation of benefits in the absence of a claim is an endeavor insurers should not take lightly, given the coverage disputes likely to ensue.

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Adam R. Durst is an associate at Goldberg Segalla LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Compare MRI Healthcare Center of Glendale Inc. v. State Farm , 115 Cal. Rptr 3d 27 (Ct. App. 2010) and Great Northern Ins. Co. v. Benjamin Franklin Federal Sav. & Loan Ass'n , 793 F.Supp. 259 (D.Or.1990), aff'd, 953 F.2d 1387 (9th Cir.1992) with Schlamm Stone & Dolan, LLP v. Seneca Insurance Co. , No. 603009/2002, 2005 WL 600021 (N.Y. Sup. Ct. Mar. 4, 2005); Matzner v. Seaco Ins. Co., 9 Mass. L. Rptr. 41, 1998 WL 566658 (Mass. Super. Aug. 12, 1998) and TRAVCO Ins. Co. v. Ward , 715 F.Supp.2d 699 (E.D. Va. 2010).

[2] See Cajun Conti LLC et al. v. Certain Underwriters at Lloyd's London et al., case number unavailable, in the Civil District Court for the Parish of Orleans, State of Louisiana.

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