The Value of Knowledge
The proverbial phrase, “What you don’t know can’t hurt you,” has been discredited as an idiom – especially in times such as these – as has its corollary, “Ignorance is bliss.” To the contrary, what you don’t know can, and often does, hurt you and others. Stated differently, a lack of knowledge does not minimize the likelihood of an occurrence – it often increases it. But what is the value of knowledge, and what is the benefit of ignorance?
As for knowledge, according to the Centers for Disease Control, there are at least seven known strains of coronavirus to date, with the possibility of an eighth. Severe Acute Respiratory Syndrome CoV2 (SARS CoV2) is a new strain of coronavirus discovered in 2019 that causes coronavirus disease (COVID-19). The virus infects the upper respiratory tract and can lead to the onset of pneumonia, which is the primary mechanism that leads to death for a small percentage of infected individuals. Additionally the virus can enter the blood system and also potentially relocate to other areas like the heart and digestive tract.
Prior to its spread across China three months ago, few Americans had ever heard of the coronavirus or COVID-19. Our lives progressed with daily mundanity, unimpeded by societal or governmental intervention – perhaps blissfully. However, on March 11, the World Health Organization declared the COVID-19 outbreak a global pandemic.
Lightning Strikes, as Do Viruses
It has been said that lightning doesn’t strike the same place twice. Yet, researchers have determined that charged atmospheric particles often do not completely discharge upon a lightning strike, with the stored charge returning to the atmosphere to initiate further discharges, often in the same locations, and often in rapid succession. Like lightning, viruses attack, retreat, mutate and return, and they have infiltrated our shores for centuries – matched only by our resolve to control and eradicate them.
Prior to last week, the last pandemic declared by the World Health Organization was the “swine flu” (H1N1) in 2009. These WHO pandemic declarations are distinct in many ways. SARS CoV2 is a virus, COVID-19 is not the flu, and the H1N1 pandemic did not result in widespread national disruptions, work stoppages and closures in the United States.
Official actions to combat the spread of COVID-19 include the March 12 Declarations of Local Disaster For Public Health Emergency for the City of Houston and Harris County as well as for Dallas County, followed by President Trump’s declaration March 13 of a National Emergency (retroactive to March 1). On March 13, Texas Governor Greg Abbott declared a State of Disaster in all Texas counties, and The City of Dallas declared a local disaster for public health emergency.
The disruption of daily life and the economy that has ensued is unprecedented in American society – and will continue for weeks and months to come. The inevitable alteration of American business, civil society and culture will be more lasting.
Acts of God, Force Majeure, Contracts, and Insurance Coverages
In life, an act of God is an occurrence uncontrollable and inexplicable by man yet accepted as providence – like lightning or a virus. In contracts (according to the Restatement Second of Contracts), an act of God is an implied defense to nonperformance of a contract based upon impossibility or impracticability – like a lightning strike or a virus pandemic.
Similar to an act of God, force majeure is an act or occurrence that is outside or beyond the control of the parties and allows relief for nonperformance. The act or occurrence can be one uncontrollable or inexplicable by man but can also be an occurrence based upon the acts of man – like a declaration of a disaster area based upon fires from a lightning strike or an emergency declaration based upon disease from a virus pandemic.
Contracts
Many businesses enter into contracts with equal bargaining power, and should include Act of God and force majeureprovisions in those executed agreements. However, if you have ever entered into a lease or a mortgage, purchased a cellphone or subscribed to a cellphone service, leased or purchased a vehicle, uploaded data or downloaded an app, subscribed to cable television or entered into a contract for an event, you have been a party to a contract of adhesion. That is a contract with lots of boilerplate language, where a consumer does not have the same bargaining power as the drafter of the contract and has little opportunity or leverage to negotiate the contractual terms, but the consumer signs the contract anyway based upon the necessity of the contractual goods or services offered.
Another such contract of adhesion is a contract of insurance, with various types of insurance policies designed to protect the policyholder. Several types of insurances and policies are relevant regarding the COVID-19 outbreak pandemic, as well as the ability of consumers and businesses to respond to it.
Commercial Property Insurance
Most businesses purchase commercial property insurance to protect a business’s property, buildings and contents due to a covered loss. Commercial property insurance may also provide coverage for business interruption, which may cover loss of income or increased expenses.
Before most property insurance policies are triggered, the loss must result from a covered occurrence, and there must be a direct physical loss of or damage to the insured property. Although not necessarily direct physical damage, contamination can result in direct physical loss, thereby potentially triggering coverage for the loss. The “direct physical loss” requirement is, by nature, a fact-specific inquiry, and courts lack uniformity in the application of the law.
The virus SARS CoV2 and the disease COVID-19 may be considered a “pollutant” or “contaminant,” which may subject them to a pollution exclusion or insurance limitation for contaminants, but the specific policy language would determine this. If the policy language is ambiguous, a determination could be made by the courts as to the categorization of SARS CoV2 and COVID-19 as well as the applicability of any insurance coverage for damages caused by SARS CoV2 or COVID-19, or the response to it.
For insurance purposes, property damage caused by an Act of God – like lightning – are covered occurrences. COVID-19 may be characterized as an Act of God; however, a COVID-19 epidemic and the resultant response evolve gradually – which is both an epidemiological event and an act of man. Voluntary quarantines or isolation may not trigger coverage as a “direct physical loss,” but damages and losses resulting from civil authority – such as a federal, state, county or local government forcing closures or restricting the ability to perform a contract or prohibiting access to insured property – may invoke contractual protection or trigger insurance coverage as a force majeure. Policyholders must notify insurers of force majeure and comply with all notification requirements consistent with an “as soon as practicable” standard.
Business Interruption
Due to COVID-19 and the response, business interruption, loss of workers, increased cost of production, delivery delays and decline in demand for goods and services are now inevitable. Businesses should review their insurance policies and coverages (and consult legal counsel) to determine reporting requirement for business interruption claims, including documentation of loss of income or increased expenses, as well as procedures for timely filing and pursuing an insurance claim.
Contingent Business Interruption
Thus far, China has suffered the greatest impact of COVID-19 – the same China that is a major trading partner of the U.S. and whose suppliers provide components critical to U.S. goods and services. With other countries now being hit by COVID-19, supply chain disruptions are inevitable as well – and increased costs of production and decline in demand for goods and services are likely. Accordingly, contingent business interruption coverage may also be available through existing commercial property insurance for supply-chain disruptions causing business interruption.
“Inhabitability”
Quarantines and isolation of people and properties have now become commonplace. If a property becomes uninhabitable due to COVID-19 or the threat of COVID-19, a determination must be made as to the length of the “inhabitability” and whether the “inhabitability” was caused by the contamination. Lessees should review any real estate or lease agreements for potential remedies (including rent abatements) as well as mitigation requirements. In addition, insurers have endorsements for particular communicable diseases and are developing an endorsement for COVID-19. For example, in February, the insurance industry responded to COVID-19 with limited optional coverage for certain COVID-19-related losses, including COVID-19 “civil authority” coverage, which may not require proof that the virus is physically present in the temporarily uninhabitable property.
Workers’ Compensation
If a property becomes uninhabitable due to employees exposed to or infected with COVID-19, a determination must be made (for property insurance purposes, as well as for workers’ compensation purposes) as to whether the employees were operating within the course and scope of their employment at the time of the COVID-19 exposure or infection. Consistent with the “work relatedness” test, proving course and scope may be easier in the healthcare industry, public safety sector (EMT’s, police and firefighters) and “high-risk” sectors (entertainment, manufacturing, transportation and retail). For example, hospitality industry policies (hotels, cruise ships and amusement parks) often contain specific endorsements for losses resulting from “communicable or infectious diseases” and often do not require a “direct physical loss.” In addition, a determination should also be made as to whether noninfected employees are eligible to receive workers’ compensation benefits due to the “inhabitability” of their workplace.
Employees may have a cause of action for negligent practices of an employer in maintaining a safe work environment or failing to take proper precautions to safeguard against COVID-19. Accordingly, employers should review their workers’ compensation and liability policies to familiarize themselves with their coverage.
Directors and Officers Insurance
The Dow and S&P have fluctuated greatly in the past few days and weeks, and investors have lost significant portions of their portfolio values. Shareholders could allege that the acts or omissions of directors or officers contributed to financial loss (for example, a drop in share price) or exposed the company to liability. Accordingly, businesses should review current and renewable D&O insurance language and coverages.
Commercial General Liability Insurance
Businesses also purchase commercial general liability insurance to protect against damage by or to third parties and liability arising therefrom. Customers may have a cause of action against businesses for acts or omissions regarding COVID-19, which could implicate a business’s CGL policy protection against bodily injury claims by customers. A CGL’s “Coverage A” typically covers claims of negligence resulting in bodily injury; however, the coverage typically requires an “accidental” occurrence, which is a requirement not consistent with an intentional act. A CGL’s “Coverage B” typically covers claims of detention and false imprisonment, which may be applicable in certain COVID-19 quarantine or isolation claims. As with commercial property insurance, the CGL policy may exclude “pollutants” or “contaminants,” which may subject COVID-19 to a pollution exclusion or insurance limitation for contaminants, but the specific policy language would determine this.
Cancellation Insurance
Along with social distancing, cancellations have become the norm – including travel, sporting events, concerts, festivals, parties, luncheons, banquets and play dates. Cancellation insurance is thought to provide coverage for such disruptions and cancellations, and the lack of such coverage can quickly become headlines (such as with the cancellation of South by Southwest); however, cancellation insurance coverage traditionally excludes losses resulting from communicable diseases leading to quarantine or restrictions.
Furthermore, many insurers began specifically excluding coverage for COVID-19 in mid-January. However, it is arguable that many cancellations were not due to a communicable disease but due the “civil authority” response to COVID-19 which made performance impossible or impracticable, and precluded mitigation through rescheduling or otherwise. Accordingly, coverage may be afforded, but policyholders should review their policies for any applicable language or coverages.
As we endure the COVID-19 epidemic and become an increasingly virtual society, we must realize that cancellations, workplace disruptions, business interruptions and civil authority will be more prevalent. In all the instances and scenarios articulated above that may implicate contractual rights or obligations or insurance liabilities or coverages, please consult with a legal professional to obtain guidance for you and your business.
Paul K. Stafford has been a business and insurance litigator for approximately 25 years (paul.stafford@tklaw.com), and has served as an adjunct professor of Insurance Law at Texas Tech School of Law since 2002 (paul.stafford@ttu.edu).