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COVID-19 forces new look at insurance policies

Businesses may not be able to rely on their insurance policies to reimburse costs incurred by the COVID-19 pandemic.

Businesses face many questions about insurance coverage for the costly damages incurred by the COVID-19 pandemic. What unexpected exclusions are only now becoming apparent? What litigation should be expected? And how can businesses retool their policies to reflect the increased risk in the months and years ahead?

The risk of legal action is very real. “There will no doubt be more lawsuits alleging liability against businesses where customers, vendors or employees contract COVID-19,” says C. Thomas Kruse, Partner & Chair of the Litigation Practice Group for Texas in the Houston office of Baker McKenzie (bakermckenzie.com). These risks are expected to remain high as the effects of the pandemic continue to be felt.

In this article, attorneys and insurance consultants address the most important concerns in the areas of Commercial General Liability (CGL), workers compensation, and Employment Practices Liability Insurance (EPLI). A sidebar covers business interruption insurance.

CGL insurance

A business may be sued by customers, vendors, or visitors who contract COVID-19 while visiting a facility. “The next step in lawsuits will likely be third parties on the premises who contract COVID-19, especially if the business has not followed all guidelines for protecting against the disease from the Centers for Disease Control and Prevention (CDC) or State and local authorities,” says Kruse. Such guidelines can include the availability of masks, maintaining social distancing, provision of hand sanitizer and related gear. “Indeed, such lawsuits are already starting to pop up around the country.”

Suppose you are sued and lose: Will your damages be covered by your Commercial General Liability (CGL) policy? Such insurance is intended to cover bodily injury and property damage caused to third parties on an insured’s premises. “Provided the particular policy does not exclude coverage for virus exposure, it is conceivable that a CGL policy could provide bodily injury coverage for liability arising from the infection of a customer or vendor,” says Robert M. Travisano, an attorney in the litigation practice of Epstein Becker Green (ebglaw.com).

If that “conceivable” word raises alarm bells in your mind, you are not alone. For more than one reason, uncertainty surrounds this topic. One problem is that in many policies coverage for a virus is either carved out or requires a specific endorsement. Another problem is that legal liability is required to trigger coverage. The infection must have arisen from some breach of care on the part of the insured business. And what constitutes such negligent conduct is still unsettled.

“There are numerous lawsuits boiling up as to what actions or inactions could possibly lead to legal liability due to the coronavirus,” says Tony Sardis, President of the management consulting firm Withum (withum.com). He points to the following possible scenarios:

  1. Remaining open following an order by a civil authority to close
  2. Failure to adhere to required health and prevention guidelines
  3. Allowing an employee who is known to be infected with the virus to continue working
  4. Not screening or refusing service to customers with the virus

Whatever the nature of the negligent conduct, it must be the actual cause of the injury to the third party for insurance to kick in. And that brings up yet another problem: The difficulty of proving causation.

“It may be extremely difficult to prove the virus was contracted at any one site or location and that it arose out of the insured’s operations,” says Sardis. “The infected individual would need to prove that he or she only went to that location over the past 5 to 14 days (based upon today’s knowledge of the infection transmission), prove it was something the business should have known about and should have taken some preventive measures.” Contract tracing or other means of establishing the spot of infection may be extremely difficult.

Businesses can defend themselves from such lawsuits if they can show that they did, in fact, provide a reasonable care to third parties. “These businesses will claim that if they comply with the applicable guidelines, such as the CDC protocols, they exercised ordinary care and should be immune from suit,” says Kruse.

As the above remarks suggest, much of the law is currently unsettled. “Given the unique predicament we now find ourselves in, there isn’t a whole lot of law surrounding the nature of the duty of care to a customer or vendor for coronavirus exposure,” says Travisano. “We can expect that CDC guidelines will fill in the blanks for such duties until the law becomes more defined as lawsuits work their way through the pipeline.”

Workers compensation

Workers’ compensation insurance reimburses employees for medical costs and lost wages stemming from employment-related injury or illness. Will such insurance cover personnel injured on the job by a COVID-19 infection? The answer is yes, at one level of analysis. “If someone can show they have been infected at the workplace, then Worker's Compensation is probably their remedy,” says Bob Gregg, Co-chair of the Employment Practice Law Group at Boardman and Clark LLC, Madison, WI (boardmanclark.com).

That word “if” suggests the sticking point. Just how would causation be proven? “The hardest part is the employee showing that COVID-19 was actually contracted while at work and not, for example, during the commute or going to the grocery store,” says Emily P. Harbison, a Partner in the Houston office of Baker McKenzie. Workers compensation does not cover routine community-spread illnesses like a cold or the flu because they usually cannot be directly tied to the workplace.

Conceivably employees can contract the disease at work even if it cannot be proven.  “Some states such as California are enacting legislation that provides a presumption that an employee was infected with COVID-19 at work and puts the burden on the employer to avoid workers' compensation liability,” says Paul Evans, a partner in the Employment and Compensation Practice Group in Baker & McKenzie's New York office. In some cases, state laws require that the employee be diagnosed within a certain number of days of performing work outside of the home.

In those cases where a direct linkage can be found between the workplace and the COVID-19 infection, workers compensation insurance would be in effect. Employer negligence, if any, would not normally be a factor determining coverage. “Generally speaking, workers compensation is a no-fault system,” says Harbison. “In other words, it doesn't matter whether the illness was caused by the negligent acts of the employee or the employer, the employee would still be entitled to receive benefits as long as the illness occurred while performing the job.”

Intentional acts, on the other hand, may be a different matter. If the employer commits a gross act that deliberately puts people at risk, such as hiding important health information, workers compensation might not reimburse the employee. “If it is determined that the illness is not covered by workers compensation, then the employee can pursue tort causes of action against the employer,” says Harbison. “There are two exceptions in Texas, for example, where a sick or injured employee can sue under common law negligence. The first is where an employee's death is caused the employer's gross negligence. The second is where the injury or illness is due to an intentional act.  Other states have different exceptions.”

Employment Practices Liability insurance (EPLI)

When bringing work-at-home employees back to the workplace, or when rehiring furloughed or fired employees, businesses need to avoid unintentional discrimination by any category protected by federal, state and local laws. These include age, race, sex, religion, and national origin. The same discriminatory caution applies to decisions granting or withholding leave for reasons related to the COVID-19 pandemic.

Unintentional discrimination can occur for a variety of reasons. Suppose a well-intentioned employer decides that people who are at special risk of serious effects from a COVID-19 infection should be told to remain home rather than return to work. That group includes older employees. Those individuals may have a cause of action against the employer—either because they are not paid an amount equivalent to younger people as a result of their failure to be brought back to the workplace, or because they lack the opportunities for advancement that can only be enjoyed by physical proximity to colleagues and supervisors.

The costs incurred by such discrimination may well be covered by Employment Practices Liability Insurance (EPLI). Such insurance is intended to cover employers against lawsuits brought by employees under Title VII of the Civil Rights Act of 1964 and other employment related statutes. “Most EPLI policies include coverage for discrimination based on certain prohibited categories such as age, race and sex,” says Harbison.

One caveat: Many insurance policies will not cover damages that are incurred by intentional acts that exhibit “wonton, willful, reckless, or intentional disregard” for the law. That can present a problem in the case of lawsuits. “Discrimination claims are usually based on intentional conduct,” notes Harbison. “And such claims may not be covered by insurance.”

Most EPLI policies exclude coverage for violations of the wage and hour provisions of the Fair Labor Standards Act, decisions by the National Labor Relations Board, the costs of complying with accommodations mandated by the Americans with Disabilities Act, and claims arising out of facts or circumstances that are known by the employer prior to the effective date of the policy. Also not covered by the typical EPLI policy are violations of The Worker Adjustment and Retraining Notification (WARN) Act or similar state laws which require advance notices for mass closings.

EPLI policies also do not provide coverage for violations of the Family and Medical Leave Act (FMLA) or of the provisions of the Occupational Safety and Health Administration (OSHA). Employers should take particular note of the latter exclusion. “Resulting from COVID-19, thousands of OSHA claims have already been filed across the United States with employees alleging their working conditions are not safe due to a lack of precautions taken by their employer against the coronavirus,” says Sardis. These precautions typically include the establishment of hand washing stations, provision of enough room to work and to maintain social distancing, and the supply of sanitizers and protective gear.

While claims such as these are unlikely to trigger coverage under the standard EPLI policy, such coverage would likely be triggered to the extent an employee is discriminated against, harassed, terminated or otherwise retaliated against for refusal to go to work as a result of poor safety conditions.

These guidelines offer some insight into the usual EPLI coverage, which can vary widely among insurers. “I would advise all employers to document their reasoning behind their hiring and firing decisions,” says Sardis. “Employers should also consult with their EPLI carrier prior to any major staffing decisions to ensure all proper steps are followed.”

Review and renew

The interpretations in this article are based off what is typically seen in standard policies. Many carriers enhance, reduce or even eliminate common coverages.  “Insurance policy terms and conditions vary greatly from carrier to carrier and even standardized coverage often has the meaning of key terms changed by endorsement,” says Sardis. “There is no hard and fast rule as to whether any particular type of claim will be covered.”

Given the fluid nature of the risks posed by the COVID-19 pandemic, employers need to take a fresh look at their insurance coverage. Rather than consider the information in this article as legal advice, readers should utilize its ideas as a framework for discussions with qualified attorneys.

“Moving forward, business owners should consult with knowledgeable insurance professionals to understand what is and what is not covered in their policies,” says Sardis. “Then they will have to decide whether to retain uncovered risks within their organizations, transfer those risks to other insurance products, or manage them by another method such as contractually.”

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