As COVID-19 spreads, its impact on the construction industry could be severe. Faced with deadlines to complete pending projects, city and state orders for residents and non-essential workers to “shelter in place,” and substantial supply chain disruptions, will your insurance policies provide any coverage for the extra expenses and losses you are about to incur? This alert considers some of the key insurance issues that developers, owners and contractors may face.
But here is the bottom line: Notify the insurance company of a claim without delay under any potentially applicable insurance policy and have coverage counsel review the contractor’s specific policy. It is the language in the policy, including endorsements, that will control the issue.
What insurance policies should I look to as potentially covering these losses?
There are a few policies in the construction context that are most likely to provide insurance coverage for a shutdown of a construction project based on COVID-19.
Most property and builders risk policies require a “loss,” which is often defined as “physical” damage, that is the result of a certain cause of loss, to trigger coverage. Typically, the covered cause of loss is a named peril, or a physical event, like Sept. 11 or Hurricane Sandy, but it could also arise from other types of events as well. These policies cover buildings, contents and business interruption-related losses related to that cause of loss. Other property and builders risk policies are called “all risk” policies, but do not let the name fool you, because in those policies there could very well be an applicable exclusion to coverage.
1. Builders Risk Policies
Builders risk policies are a type of property policy intended to cover buildings under construction, as well as the materials, supplies and equipment and business interruption-related costs related to the cause of loss.
A typical coverage grant under a builders risk policy states: “We will pay for direct physical loss of or damage to covered property at the premises described in the declarations caused by or resulting from any covered cause of loss.” Builders risk policies can also provide coverage for business interruption-related costs, but the key will be whether a COVID-19-related claim amounts to a physical loss. As many have already pointed out, there is a body of law discussing whether the presence of bacteria, odors or microorganisms constitutes “property damage.” There are also endorsements incorporated into such policies that may exclude many of those claims.
Every set of facts will be different, and every policy will contain its own variations on language and endorsements that can significantly change or broaden coverage. This is a time to dig into the facts and the law. What if a project was shut down because of COVID-19 and leaving the job mid-work led to damage to sealant on the envelope of the building that caused damage to the building? Could that be sufficient to trigger coverage for that damage and certain related business interruption-related costs? To answer that question, you should have a coverage attorney take a close look at the specific policy at issue.
Finally, coverage for extra expense, business interruption and time element damages can have its own sublimits under a policy, which should also be taken into account.
2. Pollution Liability Policies
Pollution liability policies may provide coverage for first-party and third-party claims arising from bodily injury, property damage, defense, cleanup and related defense costs as a result of a sudden, accidental or gradual release of a pollutant. Many such policies also include first-party business interruption coverage.
Pollution covered by these policies may include viruses, often under the definition of “mold.” If so, these pollution policies may cover business interruption costs. They could also cover the cost of decontamination of a project site if someone at the project site tested positive for COVID-19 and cleanup costs for the construction site must be incurred.
3. CGL Policies
Commercial General Liability (CGL) policies insure against claims made against your business. While the initial wave of coverage disputes is likely to involve first-party policies, at some point, the different parties’ CGL policies may come into play. For example, what if, after construction is allowed to resume, you find that one of your subcontractors did not properly close up shop and its work damaged someone else’s work on the project? A lawsuit ensues. CGL policies may be another avenue to recover certain costs to fix damage caused by shutting down construction projects.
To be clear, most CGL policies issued after the SARS outbreak of 2003 include an exclusion for any property damage or loss caused directly or indirectly by “[a]ny virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness or disease.”
Even with such an exclusion present, however, a review of a specific policy is always worth the time, as endorsements to the policy can change or add coverage and are specific to each policy.
Can I expect the government to intervene and remove some of these pandemic exclusions?
Probably not. Virus exclusions are common in some policies (although not typically pollution policies). In 2006, Insurance Services Office, Inc. (ISO), the organization that writes and revises most standard insurance forms, recommended adding an exclusion for loss caused by disease-causing viruses or bacteria because of the possibility of future pandemics.
Because COVID-19 has become a full-fledged pandemic, certain state legislatures have considered bills to force insurers to pay COVID-19 business interruption claims. New Jersey, for example, considered a bill that would force insurers to pay COVID-19 business interruption claims that would have otherwise been expressly excluded by the ISO’s “virus” exclusion. That bill appears to be on hold indefinitely, following a backlash from the insurance industry and questions over the bill’s constitutionality.
Action is also being considered at the federal level to address insurance and COVID-19.
Does it matter that I had to shut down the construction project because it is in a city that has been ordered to “shelter in place”?
Yes. This may be sufficient to trigger business interruption or pollution coverage as noted above. Also, certain policies contain what is referred to as “civil authority” coverage, which insures against the business loss that results from an order of a civil authority restricting access to an insured’s premises. There is typically a 24-hour or 48-hour waiting period before coverage is triggered. Importantly, however, coverage is almost always limited in duration, with coverage existing only for the losses incurred during the first few days or weeks.
Civil authority coverage may also have its own separate sublimit, in dollars, and its own exclusions, including for viruses or pandemics, aside from the short duration of coverage.
Civil authority coverage, and related types of coverage, will certainly be at play as a result of COVID-19 and should be reviewed for potential sources of money that could offset some of the extra costs.
If someone on the jobsite tested positive for COVID-19, would insurance cover any decontamination work that needed to be performed?
Possibly. Some property and environmental policies may cover decontamination and other similar expenses. These policies can include additional coverages that may apply, such as for decontamination, communicable disease cleanup, crisis management and emergency vacating expenses.
Do I have an obligation to minimize any losses?
Generally speaking, yes. It is important for both property and builders risk policy coverage to obey restrictions put in place and to follow proper and prudent protocols to secure buildings and sites during a shutdown.
What should I do now to maximize the potential for insurance coverage if my construction project is shut down by COVID-19?
The most important step to preserve the ability to pursue a claim in the future is to give notice of the claim to the insurance company. This can be done in a number of ways, including through a broker or the coverage counsel. The contractor will be asked to provide further details down the road but, for now, the contractor can simply provide notice of the fact that the construction project was shut down. The company should also keep careful track of any expenses related to the possible claim, and preserve any photos, receipts and other documentation of loss.
Once the contractor has notified the insurance company, a coverage lawyer can assist in presenting the claim to the insurance company based on the contractor’s specific policies and situation.
Reprinted and edited with permission from Venable Insights, March 23, 2020.
