Insurance and COVID-19

Jun 17, 2020

Michael Pepe, partner at Saxe Doernberger & Vita, P.C., Trumbull, Conn.

TRUMBULL, CT – The fine print on countless construction contracts is getting a fresh scrubbing in light of the global pandemic. For example, do insurance provisions found in builders’ risk coverage (and other forms of property coverage) apply to coronavirus? According to Michael V. Pepe, partner at Saxe Doernberger & Vita, P.C., Trumbull, Conn., the question is suddenly a hot topic.

“Everybody is looking for business interruption coverage, and the issue is whether or not the coronavirus is actually causing physical damage to property,” explains Pepe, who presented at last year’s Construction Super Conference on the topic of Insurance Requirements for Today’s Construction Contracts. “The carriers are saying it’s not, because you wash the virus off and it’s fine.”

Third Thursday sat down with Pepe to get a better idea about the various insurance questions arising now, as well as what may come in the future.

Third Thursday: What are policyholders saying in response to the “wash it off” argument?
Michael V. Pepe: The policyholders are saying, ‘Well, if you can’t use the property for what it was intended for because the virus is physically present, then it is physically damaged. Disinfecting the property is extra work and expense. And in the meantime, loss of use may also qualify as damage. There’s a loss of function there.’

Third Thursday: Is there anything contractors can put into their contracts that can provide coverage for coronavirus going forward?
Pepe: One of the differences, especially when considering the coronavirus, is that you cannot directly alter the coverage through your contracts with other parties on a project. In my presentation last year, I talked about areas where other types of insurance, like liability insurance, can be triggered by the contractual requirements because the policy ties back to what is in the contract.

So if a contract requires you to name an owner as an additional insured, the policy may have language that adds anyone as an additional insured‘where required by contract.’ In that case, you have to make sure your contract has the appropriate language to trigger that policy provision. With business interruption and other types of property insurance, the key provisions must actually be in the policy that you buy. So reviewing the actual policy is important.

Third Thursday: What other types of insurance may be affected by coronavirus?
Pepe: Builders Risk, Commercial Property, and Pollution policies are the most directly implicated in seeking coverage for shutdowns and remediation costs.  In the event claims are made by employees or other third parties, there may be implications for worker’s compensation and  liability policies, and even Directors & Officers coverage.  We’ve been discussing subcontractor default insurance, and whether it may implicated in some of these coronavirus losses.

It’s going to depend on a number of factors, and specifically, the contract. You need a default to trigger the subcontractor default insurance, and to determine whether there is a default will very likely depend on what the force majeure provisions in the contract say.

Every situation is different, but there’s a difference in my mind between a contractor who does not show up to the job during a coronavirus shutdown, and a contractor who does not show up, or send adequate manpower, when the project is not shut down. But whether it is a default depends on what their subcontract says. That is one example where contractors can address issues going forward with clearer force majeure provisions.

Third Thursday: What is a potentially sticky situation in which subcontractor default insurance would not be triggered?
Pepe: Someone may go to the policy and say, ‘Alright, my job is open and my subcontractor is not showing up, so they are in default of the subcontract. Therefore, I’m invoking my subcontractor default insurance.’ Well, if the subcontractor cannot show up and meet the project demands because labor is unavailable, and the contract has an ‘act of God’ provision that applies to the labor shortage, the subcontractor may be excused from performing. In that case, you won’t have a default, and you are not going to trigger the insurance.

Third Thursday: What other types of issues are emerging from the virus situation?
Pepe: I mostly work on the insurance coverage, and I represent policyholders. I think what’s happening is owners and contractors are using this as an opportunity to take a hard look at their insurance policies. We always advocate that policyholders do that, and they shouldn’t wait for the time of a crisis or a pandemic to go and do a full-on review of their policies. But we’ve had several clients who have come to us with this specific issue in mind. They are asking us to look at every one of their policies and tell them if it covers losses related to coronavirus. Obviously it’s not cost effective to do that for every issue all the time, but having counsel review your policies at the time of renewal, or every couple years, can be helpful, so that at least when these things come up you are aware of some potential issues.

Third Thursday: Historically speaking, how well have viruses been accounted for within construction insurance?

Pepe: The exclusions that may apply are either going to be pollution exclusions or virus exclusions; they typically aren’t pandemic exclusions. Specific virus exclusions started to come around in 2006 after SARS. Broad definitions of pollution are also an issue where pollution can include a virus. There are other words like contaminant, or microorganism, that require close scrutiny. There are also biochemical agent exclusions which are meant to deal with things like anthrax, so basically chemical warfare. Some of those are written broadly enough that carriers may be relying on it to deny coverage.

Third Thursday: How has your particular practice and work load been affected by the virus crisis up to this point?
Pepe: Fortunately for us, we’ve had an increase in work. We’ve had a lot of our existing clients coming to us to look at these issues. Our clients tend to be very proactive on risk management issues and some of them were coming to us very early on before the shutdowns even happened. They wanted to know: What coverage do we have, and how should we position our response to line them up for coverage where possible? As the shutdowns started, we had more clients coming to us with more questions, such as: Do I have a claim? How good is my claim?

We’ve seen an uptick in business. Our litigation files may have slowed down a little bit while courts have been shut down, but federal court seems to be moving now. For us, the non-litigation work really picked up on the policy and contract reviews. Third Thursday: How well was your firm prepared to deal with the lockdowns?
Pepe: It’s a testament to our leadership and our staff that our firm was well positioned for this. We were already set up in the cloud. We were already set up to work remotely because we do travel to represent our clients and speak at conferences all over the country. We’ve had a pretty easy transition switching seamlessly to a work-from-home model, All of our offices are reopening, but most of our 40 attorneys are still working safely and productively from home.