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Property and Casualty

COVID-19 Report

close up of a coronavirus molecule

Property and Casualty

COVID-19 Report

Coverage Updates | View All

Directors and Officers (D&O)

April 01, 2020

There are two commercial D&O client types: public and private. The D&O policies based on company structure are quite different in the approach and scope of coverage. The public company D&O policy is written primarily to protect the directors, officers and corporate entity against shareholder securities claims. The private company policy is best described as a comprehensive package policy that typically provides employment practices, fiduciary liability and fidelity coverage in addition to D&O liability.

The two policies share a bodily injury exclusion built into the base forms and the absence of an affirmative pandemic exclusion.

COVID-19 and the Public Company

If a public company fails to prepare for pandemic threat, or fails to adequately disclose critical financial information and/or offers “misleading statements” regarding COVID-19, and suffers financial loss, one can expect D&O litigation. To date, there are two separate securities class actions that have been filed directly as a result of COVID-19.

  • On March 12, 2020, an Inovio Pharmaceuticals shareholder filed a securities class action lawsuit against the company and its CEO based upon the CEO’s misleading statements related to the company’s development of a COVID-19 vaccine.
  • On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit against Norwegian Cruise Line Holdings, Ltd. alleging that the company was employing misleading sales tactics related to the outbreak.

Although we anticipate some securities class action activity as a result of COVID-19, it is difficult to conceive that plaintiffs’ attorneys will commence an action against one company whose stock price has dropped when the universe of publicly traded companies have also experienced a share price reduction. Nonetheless, the general consensus is there will be more shareholder lawsuit activity. In this same regard, publicly traded companies may also experience a wave of shareholder derivative lawsuits focused on a) alleged misleading statements about the financial condition of the company, or b) management’s failure to effectively manage the crisis. Early indications suggest that such legal actions are a strong possibility. Plaintiff law firms and shareholders are closely monitoring the way in which a company’s management team communicates its path forward during these unprecedented times. One theory of liability could be that a company’s directors and officers failed to exercise reasonable business judgment in forging a plan to thwart pandemics or failing to task management with executing strategies to address such uncertainty.

In addition to the traditional securities class actions, given issues surrounding cybersecurity vulnerabilities with a now predominantly remote workforce, directors and officers may be susceptible to claims of breaches of fiduciary duties arising out of their failure to adequately protect a company’s network (recall that cyber risk has become a D&O risk as well) thereby making the company fair game for a host of different types of cyberattacks. Further, while lawsuits are expected, regulatory bodies such as the Securities & Exchange Commission are closely watching to see if public companies are in compliance with disclosure guidelines and practicing transparency as to earnings projections, financial information and material changes, while communicating with shareholders to keep them continuously aware of the company’s financial and operational condition. This heightens the risk of investigations and enforcement actions by the SEC and other government agencies.

There are many questions that a public company board must now confront: What does the day after tomorrow look like? How do we restore shareholder value post COVID-19? What do we know now that we didn’t know then and how do we effectively manage forward? What are our contingency plans should there be another incident in the future?

COVID-19 and the Private Company

The impact of COVID-19 on Wall Street is clear, but perhaps more devastating is the impact it is having, and will have, on Main Street. There is a vast array of exposures a private company faces that have now been magnified by this global pandemic. Similar to a public company, private companies bear the same burden of action and inaction in this time of crisis. Boards of directors of private companies are vulnerable to shareholder derivative lawsuits and other claims by stakeholders for breaches of fiduciary duties resulting from their failure to act or failure to disclose vital information to their shareholders. Private companies are also concerned with cybersecurity and the risks accompanying failures in proper planning for remote working, which could lead to claims against senior leadership and the board of directors.

Boards of directors for private companies need to continuously evaluate whether their response plans for this pandemic risk are working, and if not, make changes based on the information available to date. Any and all contingency plans have to be assessed so that stakeholders and regulators cannot claim that all options were not considered. Communication with employees, investors and clients must be frequent and meaningful because the company’s dialogue with those financially invested groups will be scrutinized for accuracy and timeliness.

A company’s failure to communicate its financial condition, strategies and challenges resulting from COVID-19 may well lead to regulatory investigations and enforcement actions, including alleged violations of health and safety laws, consumer protection laws and employment law (discussed below). Further, private companies may experience an increase in commercial litigation or claims from customers, vendors/suppliers, and competitors. Although current commentary regarding claims and exposures for private companies is speculative, the current environment is such that these companies need to be sufficiently prepared for significant claims activity and/or litigation from the fall-out of the coronavirus.

Similar to public companies, boards of directors and C-suite leaders of private companies are also confronted with questions such as the length of time it will take for their business to get back to “normal." They may be asked to provide estimated future projections of the financial status of the company. Regardless of what is asked of them, private companies need to be prepared with reasonable responses and a plan for mitigating losses and controlling risk.

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Environmental

April 01, 2020

The insurance market has historically been adaptable, providing new coverage options or stepping in when market changes encourage adjustment. The emergence and evolution of environmental liability coverage is a prime example.

Environmental insurance policies typically provide two key elements of coverage: “remediation expenses” (first- and/or third-party) and “legal liability to others” arising from pollution conditions. Policy structure can vary. However, in most instances limits are eroded by costs, fees and expenses.

The COVID-19 crisis has placed environmental liability coverage under scrutiny. With respect to the coverage grant of remediation expenses policies, the most immediate need for coverage is for disinfection expenses.

It may be helpful that some insurers have expanded their offering to include communicable disease coverage, also known as airborne illnesses coverage, which includes disinfection costs and expenses. By broadening the definition of loss, insurers are compelled to indemnify for disinfectant expenses and provide an affirmative defense. It is very important to note that there are condition precedents to which the insureds are bound that could potentially provide insurers grounds for denial.

Furthermore, environmental insurers may offer supplemental business interruption and extra expense coverage subject to a waiting period, which is customarily much less than standard property policies (for instance, 7 days instead of 30 days).

For example, let’s assume a hospitality group has a hotel asset exposed to COVID-19 and this group has coverage for disinfection. Also assume that this exposure would result in mass cancellations and lost revenue, which may be compensable by filing a claim under the business interruption coverage extension. Some of the things to consider when it comes to business interruption coverage are as follows:

  • Insureds must prove (validate) all business interruption losses.
  • Claims remain open until the insured has resumed normal operations, and revenue returns to the level before the loss occurred.
  • Forensic accountants may be needed in order to maximize recovery.
  • Payments made for business interruption and associated expenses will erode the policy aggregate.
  • Insureds should consider their projected 12-month EBITDA when determining how much of their overall policy limit could be used to fund future business interruption losses.


Using the hotel example above, when seeking maximum recovery under an environmental insurance policy, insureds should consider the following:

  • What jurisdiction do they operate in or in which jurisdiction(s) is the asset located? Do these jurisdictions align with the choice of law provisions in the policy? Some jurisdictions are more favorable to insureds as opposed to insurers.
  • Does the insured self-perform all cleaning/operation and maintenance, or do they hire third-party contractors? Do the contracts include standard hold harmless and indemnification requirements? Are there any limitations in the contracts that could mitigate recovery, such as contractual limitations tied to the contract scope?
  • Are you taking all prudent steps based upon knowledge of the topic at hand or getting qualified advice from a professional team?

COVID-19 is challenging for everyone and we expect that this pandemic will have major implications for the insurance industry. COVID-19 is part of a much larger picture — the world continues to change, and emerging challenges will likely become more frequent and more complicated.

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Trade Credit

April 01, 2020

The COVID-19 crisis will materially impact company liquidity. Protracted default claims will increase and corporate insolvencies will grow. While companies deal with the economic and social impact of this pandemic, customers’ non-payment of receivables is an additional strain that can put their own solvency at risk.

Trade credit insurance mitigates this risk, while at the same time increasing operating line financing and giving policyholders the confidence to expand sales. In summary, it protects policyholders against foreign or domestic customer non-payment of accounts receivable and allows banks to increase lending against a more secure receivable asset.

To give you a sense of how fragile company balance sheets are, per The Economist, a quarter of large non-bank American firms hold less than three months of operating costs in their cash reserves. Even if this crisis lasts a few months, over the next couple of years we will be dealing with the fallout of marginal companies that do not have the financial strength to weather this storm. Although America’s Federal Reserve and the European Central Bank are buying bank assets so banks have liquidity for additional lending, bank support of companies will still be determined on a case-by-case basis. Banks will not be throwing good money after bad if they do not feel a company is able to survive.

To understand the magnitude of the economic impact on business, we can look to China as somewhat of a guide, assuming China may have COVID-19 under control. China’s National Bureau of Statistics’ latest economic measures for the world’s second-largest economy plunged in the January/February period compared to December:

  • Value-added industrial production fell 13.5%
  • Fixed asset investment fell 24.5% in the same period
  • Private sector investment fell 26.4%
  • Manufacturing investment was down 31.5%
  • Retail sales shrank 20.5%
  • Auto sales fell 37.0% in value terms

An economic downfall of this magnitude typically leads to an increase in non-payment of receivables and an uptick in trade credit insurance losses.

Due to the anticipated negative economic results, current users of trade credit insurance will see underwriters taking action to manage buyer risk by reducing coverage on those higher risk buyers in industries most impacted by the economic contraction. In an effort to maintain or reinstate buyer coverage, NFP is pursuing and analyzing additional financial and banking information from buyers and their lenders to provide comfort to underwriters. NFP is working closely with clients to ensure they follow the policy requirements, including past due reporting and buyer slow-pay auto-cancellation triggers. For any exceptions or buyer payment issues, NFP is coordinating claim filing extensions for approval by underwriters.

The increase in non-payment of accounts receivables will lead to an increase in trade credit losses. Is your businesses prepared? Can your business sustain the projected defaults of accounts receivables? NFP is available to conduct a complimentary review and help you answer these questions.

“The scramble for cash: companies need liquidity to survive,” The Economist, 20 March 2020, https://espresso.economist.com/f50f73e7e7cab902f8053efa57918bd3

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Property & Casualty

April 01, 2020

Understanding the fluid environment amidst the turmoil of COVID-19, business closures and lost sales naturally give rise to questions around business insurance and coverage, including property damage, business interruption, dependent property, general liability and workers’ compensation.

Commercial Property:

There is a high degree of variability across commercial property policies. Property policies can be individually negotiated based on the unique needs of the client. Generally, however, a standard property unendorsed policy would probably not cover losses resulting from the spread of the COVID-19. However, courts are considering novel arguments by coverage counsel, such as an assertion that non-physical impairment to property should now be interpreted as traditional property damage.

Business Interruption Coverage:

Business interruption coverage normally flows from property policies with a physical damage trigger. Commercial property policies will often include business interruption coverage to pay out lost income and extra expenses incurred from a covered loss to the insured property. In the case of COVID-19, without the physical damage trigger, the business interruption coverage probably does not extend to disease outbreaks. Having said that, some property policies contain business interruption wording associated with infectious disease with a sub-limit.

Communicable Disease Response Coverage:

Coverage may be afforded as a sub-limit and/or annual aggregate if a location owned, leased or rented by the insured has the actual, not suspected, presence of communicable disease and access to such location is limited, restricted or prohibited by: 1) an order of an authorized governmental agency regulating the actual not suspected presence of communicable disease; or 2) a decision of an officer of the insured as a result of the actual not suspected presence of communicable disease. Typically the policy would cover the reasonable and necessary costs incurred by the insured at such a location for cleanup, removal and disposal of the actual presence of disease.

Crisis Management Coverage:

Provides coverage for interruption or interference with business of the insured as a consequence of infectious or contagious disease contracted or manifested by any person while on the premises of the named insured. Coverage maybe afforded as a sub-limit or on a per occurrence/annual aggregate basis.

Contingent Business Interruption Coverage:

Many property policies include contingent business interruption coverage. However, the same physical damage trigger applies to contingent business interruption coverage, which pays out lost income resulting from a covered loss to an insured’s customer or supplier.

Key Takeaways:

  • Property coverages will probably not extend to lost income or expenses from a disease outbreak, since they typically require physical property damage.
  • It’s not likely that COVID-19 will permit a one-size-fits-all determination when it comes to a direct physical loss. It’s more likely that each claim will be evaluated on its own individual fact pattern and circumstances.
  • Communicable Disease Response Coverage may be afforded as a sub-limit and/or annual aggregate if a location owned, leased or rented by the insured has the actual, not suspected, presence of communicable disease and access to such location is limited, restricted or prohibited.
  • Courts are considering novel arguments by coverage counsel, such as an assertion that non-physical impairment to property should now be interpreted as traditional property damage.

Workers’ Compensation:

Workers’ compensation coverage presents a more nuanced coverage discussion due to differences based on state, worker’s role and industry. Workers’ compensation insurance responds when an employee is injured during the course and scope of their employment. For COVID-19, most workers would not be exposed in the course of their employment under a strict interpretation of their job role, unless they were working in the health care/medical field and would be exposed to the disease through the course of their job. Workers’ compensation may be available for COVID-19 in other circumstances, to the extent exposure occurred in the course of employment, but any coverage available would be dependent on the facts and circumstances involved.

Casualty:

For casualty based claims, the primary factor is negligence in a company’s handling of customers or invited people on their premises. For most organizations, the coverage would not respond for a customer or invited person who contracted COVID-19 unless it was shown that the business acted negligently in some capacity that caused the person to contract the virus. Health care and hospitality industries are likely to be most vulnerable to third-party claims.

There are additional insurance policies that should be evaluated/considered to determine coverage for COVID-19. These include the following:

  • Directors & Officers Liability (D&O)
  • Employment Practices Liability (EPL)
  • Environmental (contamination/remediation)
  • Business Travel Accident
  • Foreign Voluntary Compensation
  • International Insurance
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Event Cancellation

April 01, 2020

The event cancellation/contingency market is suffering enormous losses as a result of major events around the globe being canceled due to COVID-19. Total losses are currently estimated to be between $5B and $10B.

Coverage purchased prior to the pandemic will likely include coverage for communicable disease. After cancelling most events for April and May, organizations are now cancelling events in June and July, including the 2020 Olympics, which are postponed until 2021. Carrier responses to requests for quotations are delayed due to the volume of claims being processed by the market at this time.

Quotes for coverage on events scheduled for this fall and later are coming in, with exclusions for communicable disease, on accounts where it was normally offered and purchased.

Carriers will need to re-evaluate how they underwrite communicable disease going forward. A recent coverage quote offered a small sublimit for communicable disease (excluding the coronavirus) but at a prohibitive rate. It is advisable for clients to insure their events as soon as possible as the market conditions will likely continue to worsen. Underwriters will take a closer look at all of the perils being offered under a broad event cancellation policy. Insureds can expect higher rates and stricter terms in the near future.

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Employment Practices Liability (EPL)

April 01, 2020

The employment landscape is changing dramatically on a daily basis as a result of COVID-19. Today, more than 179 million people in the United States have been urged to stay at home and that number may change tomorrow. A fair portion of these people are working remotely.

As employers seek to transition to remote operations and take employment actions to adjust their workforces during this unprecedented pandemic, they are facing many relatively novel issues for the first time. Currently, the most pressing employment issues include:

  • Reductions in force (RIFS) or lay-offs (permanent termination of employment)
  • Furloughs (temporary unpaid leaves from employment)
  • Reductions in pay and/or work hours
  • Forced PTO (paid time off)
  • Persons who qualify as “essential” workers
  • Maintaining a safe work environment
  • Federal and state “leave laws”
  • Discrimination based on race/ethnic background/age/disability, including retaliation and hostile work environment, any or all of which results in wrongful termination
  • The ability to impose requirements and restrictions and/or discipline employees

All of the aforementioned issues are tied to federal and state laws that are evolving by the minute with executive orders issued on a state-by-state basis. Those companies contemplating RIFS should familiarize themselves with the Worker Adjustment and Retraining Notification Act (WARN), which governs plant closings and massive layoffs and provides that all employees (of companies with 100 or more employees) receive 60 days advance notice of a closing/layoff.

There are three exceptions to WARN: unforeseeable business circumstances, faltering company and natural disasters. Certain states have their own mini-WARN Acts as well. We encourage clients to consult with labor and employment counsel with respect to WARN. Notably, while RIFS are generally eligible for coverage pursuant to most EPL insurance policies, violations of WARN are typically excluded from coverage, except for claims of retaliation against employees for attempting to assert their rights under WARN.

While RIFS and layoffs may be a last resort, reductions in pay or work hours are also being considered by many companies. These actions, along with staggered hours, employees working remotely and self-quarantining, may implicate the Fair Labor Standards Act (FLSA, aka the federal wage and hour law), which regulates minimum wage, overtime, equal pay, recordkeeping and related matters. Generally, EPL insurance policies either have exclusions for violations of the FLSA or limited coverage (a sublimit of coverage for defense costs only, as an example). Given that the likelihood of these types of claims resulting from COVID-19 is high, employers should examine their EPL insurance policies for potential coverage.

Another “top of mind” area for employers in light of COVID-19 is leaves of absence from work, whether it be under the Family and Medical Leave Act (FMLA), the new Families First Coronavirus Response Act (FFCRA), which is effective April 2, 2020, and extends the FMLA to allow employees to take leave for reasons related to COVID-19, such as childcare or care for the sick (this does not include those employees working remotely), or the new state-by-state quarantine leave laws. Leaves of absence may be paid or unpaid. Typically, claims for retaliation in asserting one’s FMLA rights (and local leave laws) are covered by EPL insurance policies, while other more substantive claims involving FMLA and similar laws are not. Again, employers must examine their specific insurance policies.

Aside from leaves of absence, and the state of Washington taking the lead in this area, there are employees who are still working outside the home as they are deemed to be “essential” workers in “essential” businesses. Although many companies seek to qualify as “essential” businesses so as to keep operations going and avoid employment actions, the plaintiffs’ employment bar is scrutinizing those who are deemed “essential” workers. Employees may believe they are not “essential” (consider a file clerk at a hospital) and may refuse to come to work, thereby running the risk of being terminated for failure to appear at work. Notwithstanding the federal Occupational Safety and Health Act (OSHA), which requires that employers provide a safe work environment free of hazards causing death or serious illness, employees may still be fearful under these pandemic conditions, regardless of whether they put their jobs in jeopardy in favor of protecting their health. It is absolutely foreseeable that employees may raise claims of retaliation for asserting their rights under OSHA. While claims alleging OSHA violations are generally excluded from coverage on EPL insurance policies, claims by employees of retaliation (or even whistleblowing about unsafe conditions) for asserting these rights will typically fall within the scope of EPL coverage.

While we anticipate new claims related to the aforementioned issues and laws, employers must recognize that typical discrimination claims will also arise. Certainly, RIFS and furloughs may necessarily have a disparate impact on a certain segment of the population who cannot work remotely, which may prompt legal action. We also expect more lawsuits alleging discrimination based on race, ethnic background, age, disability and any other human characteristic included as a protected class under federal, state and local anti-discrimination laws. Generally, EPL insurance policies are designed to provide coverage for wrongful termination claims based on discriminatory actions/practices expected to result from COVID-19.

We urge our clients to consult with their employment counsel regarding the laws mentioned here. We also recommend that those who have purchased EPL insurance avail themselves of the services that come with the purchase of that insurance policy, including a broad range of loss prevention, online classes, training tools and mitigation resources, as well as a toll-free hotline to access complimentary employment law advice from nationally recognized law firms.

Those clients who have not yet purchased EPL insurance should seriously consider the coverage in view of this worldwide pandemic. NFP is here to stand with our clients as we navigate employment claims and related insurance issues expected to arise from COVID-19.

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Insurer Solvency | View All

Financial Impact to Property & Casualty Insurers

A global pandemic like COVID-19 could further stress balance sheets, not only for our clients, but for insurers worldwide.

The reality is there will be a sharp rise in payouts of claims for certain lines of coverage simultaneously, at a time where the industry is experiencing both ultra-loss interest rates and big investment losses. Falling yields require insurers to set aside more capital for future loss payments, putting some pressure on the insurer solvency ratios. Two of the world’s largest reinsurers, Munich Re and Swiss Re (who support most every insurance company in the world as a “backstop” for large losses) are reporting large losses in their cancellation covers as well as a rise in claims in life insurance policies as the death toll climbs.

The other side of this equation is that 1) insurers and reinsurers are extremely well capitalized and 2) direct insured losses from the COVID-19 outbreak are expected to be relatively low overall. The “wild card” is if insurers are forced to respond favorably due to regulatory changes at the state or federal level, and/or courts reinterpret the policies to consider COVID-19 a form of physical damage, thereby triggering business interruption coverage (both relatively remote scenarios). The magnitude of losses absorbed by the industry would be many order larger and threaten the solvency of some insurers and reinsurers. This is a moving target right now as to the financial impact to the insurance industry, over and above the losses currently being absorbed, as well as the pressure of ultra-low interest rates and a sharp downturn of the financial markets. Specific commentary from the credit rating agencies include:

  • Moody’s stated in a March 2, 2020, report that insurers are exposed both to the coronavirus outbreak through a potential spike in claims, as well as “second order” effects such as financial market volatility and lower bond yields, (which may) have a bigger impact on the insurers’ capital and volatility (Global Insurers to Feel Coronavirus Impact Through Financial Markets Volatility)
  • Ratings firm AM Best said it is developing stress testing that it will conduct on its rated insurance companies’ balance sheets to gauge the impact of the COVID-19 virus fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.
  • Fitch Ratings (March 20, 2020) has revised its outlook for the underlying fundamentals of the US property/casualty insurance sector to negative from stable (sector outlook). The sector outlook revision is due to increased concerns over COVID-19 and related impacts on near term performance and the credit quality of insurers. Claims experience from these events is not anticipated to significantly increase loss ratios in the near term but as the duration and severity of the crisis increase, due to uncertainty regarding future sources of underwriting losses.
  • S&P Global Markets Intelligence (March 16, 2020) said negative impacts from the coronavirus outbreak are expected to hit the US in the second and third quarters, but the economy should recover going into 2021. Insurers are expected to be resilient in the face of a downturn, especially because, in part, there were not as many systemic imbalances as there were during the financial crisis in 2008.
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Loss Emergence | View All

Representative Claims Arising Out of COVID-19

Insurance industry losses are beginning to hit the balance sheets of major property and casualty (P&C) insurers, and may potentially affect life insurers. As much as there is greater difficulty in pursuing a property/business interruption claim with the lack of physical loss or damage required in property forms,* the impact of the virus on other specialty lines could be sizeable (and there may be sublimits to property forms that afford some limited coverage for contamination arising out of infectious disease/pandemic risk):

  • Allegations of exposure to the virus by hotel guests, passengers on cruise lines, etc., whereby the owner/operator “knowingly” subjected their clientele to COVID-19 or failed to adequately protect them, may manifest into sizeable general/excess liability losses. Several suits have been filed against major real estate/hospitality venues.
  • Emergence of shareholder derivative suits involving “mismanagement” of companies affected by the crisis, failure to inform shareholders as to the risks to the balance sheet, or allegations of failure to disclosure the impact of the virus on the respective business as to when certain facts were known.
  • Special events cancellation covers employed with major sporting events, concerts, etc., that have required effective cancellation across the globe, represent sizeable losses. New loss estimates disclosed by Swiss Re suggest that potential industry-wide event cancellation losses as a result of the coronavirus could stretch to as much as $6.3B. 
  • Pollution legal liability coverages also appear to be an avenue for insurance recoverables, depending on the terms of the contract and how contamination is treated in regards to infectious disease and/or pandemic risk.

Life insurers do reinsure out, to some degree, pandemic risk, given rising death rates are not expected in the expected mortality tables, and therefore the pricing of the product. It is premature and difficult to determine the impact of the virus on profitability (and solvency) of the life insurance industry at this point in time.

COVID-19 is generating a significant number of claims across a broad spectrum of policies. Below are representative examples of the sources of claims generated from the pandemic and key features of the respective lines of insurance.

Directors & Officers (D&O) Liability – Shareholder Derivative Lawsuits

Both public and private companies are exposed to these lawsuits (brought by shareholders on behalf of the company) as a result of mismanagement of the company or failure to act during the pandemic crisis as well as failure to disclose the financial impact of the crisis on their operations among other disclosures. Shareholder derivative claims are typically eligible for coverage under D&O liability coverage, barring the applicability of any exclusions. Although COVID-19 on its face may support the applicability of the bodily injury exclusion, a narrowly tailored bodily injury exclusion (“for claims alleging bodily injury…” versus the much broader “for claims arising out of bodily injury…”) will likely allow for coverage.

Cyber Liability – Fake Emails

There has been a sharp increase in the the number of emails purporting to be from the Centers for Disease Control and Prevention (CDC) and related health care organizations that seemingly offer information related to COVID-19. Cyber criminals place links and/or attachments in these emails, which when opened, infect the computers with malware. The malware gives these fraudsters the ability to steal personal information, company information (if an employee is on a company requisitioned laptop) and/or can lock the computer and demand a payment. These types of claims may likely be eligible for coverage (provided that an employee is working and using a company computer) from a cyber liability insurance policy.

Cyber Liability – Phishing Emails

Cyber criminals are sending many company email addresses phishing emails advising employees that if they verify their personal information they will receive an economic stimulus benefit from the government. In reality, these phishing emails are designed to obtain private information, and some may release viruses that make entire systems vulnerable to cyberattacks. These types of claims generally should be eligible for coverage on a cyber liability insurance policy.

Employment Practices Liability (EPL) – Wrongful Termination

Claims of wrongful termination as a result of discrimination based on race (for example, an Asian employee claims he was wrongfully terminated as a result of prejudice against him, because COVID-19 originated in China) or disability (an employee diagnosed with COVID-19 claims she was wrongfully terminated as a result of discrimination based on disability, in this case contacting the coronavirus; the coronavirus has not been deemed a disability under federal and state laws) generally would be eligible for coverage under traditional EPL insurance policies. Employers would be provided coverage for defense costs and indemnification (settlement/judgment).

Property – Business Interruption/Civil Authority

Businesses that have large customer gatherings (bars, restaurants) that were closed due to civil authority shutdown orders may potentially have coverage under business interruption. While property policies do contain civil authority shutdown exclusions, there are policies that do not contain such exclusions. The key element is if the business interruption coverage is triggered by civil authority shutdown order, did the virus cause a covered cause of loss and damage the physical property? Similar arguments for civil authority have been made for claims resulting from natural disasters.

Workers’ Compensation/Employers Liability

Whether or not COVID-19 can be considered “compensable” and an occupational disease will vary between professions and jurisdictions. Every state has its own jurisdictional requirements for what they consider an occupational illness or disease. As a general rule, the illness or disease must be “occupational,” meaning that it arose out of, and was in the course and scope of, the employment; and the illness or disease must arise out of, or be caused by, conditions particular to the work. The risk is inherent to the employment itself. For doctors, nurses, EMT and others working in the health care industry, COVID-19 will likely be considered an occupational disease because of the increased exposure and most, if not all, cases would be considered “compensable.” Many states will use a two-prong test to determine whether or not an illness is an occupational disease:

  • Did it arise out of and was in the course and scope of the employment?
  • Did it arise out of or was it caused by conditions particular to the work?

The determination must be made as to whether the worker was any more susceptible to the virus because of their employment than they would have been in everyday life. Specific jurisdictional requirements will also come into play.

A potential claim could occur when a covered employee (doctor, nurse, and aide) contracts the virus as a result of conditions in the workplace and the employee brings home the exposure to the family. This type of situation is unlikely to be covered under the GL policy due to the employer’s liability exclusion, but should be covered under the employers liability portion of the WC policy.

General Liability

A potential claim scenario from a GL standpoint will emerge when a business invitee alleges that he/she was exposed to and/or contracted COVID-19 as a result of "conditions" at the insured’s premises and/or as the result of the insured’s negligence in maintaining its premises to ensure it is safe for its invitees. Under the typical CGL coverage form, there could be coverage for such a claim. The most common CGL coverage form (CGL 00 01 04 13) contains an exclusion for BI, PD and P&AI claims arising from “Pollution.” Pollution is a defined term in the CGL coverage form and COVID-19 should not (nor does any other virus) fall in the CGL policy definition of “Pollution.” Keep in mind that while there may be coverage that does not equate to the insured being legally liable. It is not uncommon for a CGL policy to also have various endorsements, some of which may change the definition of “Pollution” so as to include certain bacteria and/or viruses. It is also not uncommon for a policy to have various endorsements/exclusions that expand what the policy removes from coverage. In this regard, there are “Virus” and/or “Bacteria” (or combinations thereof) endorsements/exclusions that may be a part of any individual policy. 

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Industry Perspective | View All

Reps and Warranties Insurance

Below are considerations of coverage for potential losses resulting from COVID-19 under representations and warranties insurance (RWI) policies:

  • RWI is effectively “tail” insurance coverage, whereby a breach of a sale and purchase agreement (SPA) representation or the pre-closing tax indemnity (collectively representations) is discovered by the insured and notified to the insurer after the signing or closing of a corporate merger or acquisition, but where the breach relates to an event or issue that occurred prior to the signing or closing. RWI does not cover post-closing operational risks or events that first occur after policy inception.
  • SPA representations are statements made by the seller or the target company itself, and relate to the condition of the business or asset being sold as of the date of the signing and closing of the acquisition. Examples of such representations include the accuracy of the financial statements or filed tax returns, the seller’s ownership of the shares or assets being sold, or the target company’s historical compliance with laws.
  • The buyer is almost always the insured party under an RWI policy, and the policy indemnifies (or pays on behalf of for third-party claims) the buyer for losses resulting from sellers’ or the target company’s breaches of the SPA representations.
  • More than 50% of US M&A transactions above $25M in value overall, and substantially more than 50% of private equity sponsored deals, used RWI in 2019.
  • For private equity investment into certain industries, where coronavirus-related distress is already present and will grow considerably during Q2 of 2020, we are likely to see more insured buyers attempting to pursue claims under RWI policies for underperforming or nonperforming businesses in those sectors. These sectors include B2B and B2C, which were more than 25% of value and nearly 40% of volume of private equity deals in 2019. Representations on (re)insurance company transactions, which were also up in volume and value in 2019, are also potential targets of RWI policy claims.

RWI Coverage Considerations:

Does COVID-19 generally create exposure and potential losses under RWI policies?

Because RWI policies provide coverage for breaches of SPA representations, and those representations relate to historical periods of the target business or assets, most of the representations would simply not be implicated by COVID-19 exposure.

Representations likely to be explored for coverage could be compliance with law (including worker health and safety rules, like OSHA), material contract representations regarding contingencies (though contract counterparty credit or performance risk is generally excluded in any event), representations regarding material suppliers and customers, and representations going to adequacy of underlying insurance (including coverage for business interruption losses).

A separate set of representations more likely to be explored for coverage is for not-yet-audited financial statements (or management accounts) and related “no undisclosed liabilities” representations regarding Q1 2020. It seems likely that buyers would have stronger arguments for coverage under management account representations for January or February of 2020, once the impact on revenues (or necessity for reserving) became more apparent. We believe insurers will be very focused on the scope of these representations during their underwriting reviews.

Are insurers seeking to put coronavirus/COVID-19 exclusions on RWI policies?

We are currently seeing three approaches around limiting potential coronavirus exposure:

  • Full policy exclusions: We are seeing around 60% of RWI insurers propose broad, policy-wide exclusions for coronavirus exposure. Below are examples of proposed exclusions we’ve seen to date:
    • “Losses arising out of or resulting from any outbreak, including any pandemic or epidemic disease outbreak, relating to the COVID-19 virus (or evolution thereof).”
    • “Losses arising from or relating to any business interruption or other business downturn solely to the extent such interruption or downturn arises out of the coronavirus (including any resulting COVID-19 sickness) or any government or other regulatory sanctioned response thereto).”
    • “Any business interruption or other losses arising out of, or resulting from, COVID-19.”
  • Others (around 20%) have taken the approach to specifically underwrite the exposure, potentially resulting in either full policy exclusions, or representation-specific exclusions – which would be preferable to a full policy exclusion.
  • The third approach (taken by 20%) has been not to reference coronavirus exclusions. Several RWI insurers have, to date, taken the position that RWI as a class of business is not implicated by coronavirus exposure. It seems likely that this position will change, and that exclusions will be added, as US and global COVID-19 exposure matures.

Under a full policy exclusion, coverage would be defeated for all coronavirus related losses, including latent loss events not anticipated at underwriting – the “unknown” that RWI policies are typically designed to cover.

Are there other remedies for COVID-19 exposure under SPAs available to sellers and buyers?

Given that approximately 75% of private equity and other M&A transaction have a split signing and closing with an interim period, the following are examples of remedies that protect one of the parties against assuming COVID-19 exposure risk.

Closing Condition Examples:
  • Seller protection: buyers are unable to secure financing or authorization to complete the transaction. Credit markets supplying acquisition financing have become very tight since the onset of the COVID-19 pandemic. Break fees payable to sellers may exist in addition to walk away rights.
  • Buyer protection: interim financial or other target company performance covenants will likely be specified with a walk away or repricing right.
Material Adverse Change or Effect:
  • Buyers will also have a general protection, in the form of a walk away right, in case there has been a material adverse change (MAC) at the target company’s business during the interim period.
  • Notably, we are seeing coronavirus carveouts to MAC provisions on some deals, so that a material coronavirus event or exposure will not trigger the MAC walk away right for buyers.
Specific Indemnities, Earn-Outs and Purchase Price Adjustments:
  • Post-closing, buyers and sellers can rely on specific indemnities, earn-outs and purchase price adjustments to manage target company performance risk, whether coronavirus exposure related or otherwise. 
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Business Continuity | View All

Coping Strategies

With the dramatic economic downturn caused by COVID-19, the cost of insurance and benefits is something NFP and our insurance market partners are addressing with clients. The following are areas to be aware of with regard to your coverage.

  • Grace Period – Many insurers have already announced grace periods for both payment of insurance premiums and notices of cancellation for “affected industries.” Several state insurance departments are also moving quickly in this direction. We anticipate grace periods will gain broad adoption.
  • Premium Financing – Many companies offer premium financing for clients whose cash flows have changed to relieve some of the short-term economic burden and extend the payment period.
  • Exposure Changes – As exposures (revenues, payroll, auto fleet, etc.) used in initial negotiations of these lines of insurance are no longer relevant (or, more to the point, are an inaccurate proxy for the current business climate), insurers may provide interim relief and revise the exposure basis to more accurately reflect current economic conditions.
  • Cancel/Rewrites – Depending on the length/magnitude of disruption, we may see clients requesting cancellation/rewrites of their coverage. The inherent dangers in this approach are (1) time it takes to recapture premiums, (2) penalties imposed by insurers, and (3) the loss of continuity of coverage (which becomes highly relevant if either state insurance departments or the courts reinterpret aspects of these coverages more favorably for clients).
  • Solvency – Revisiting/monitoring the solvency ratings of key insurers may become increasingly critical if there is solvency deterioration for the industry. Insurance companies typically don’t die slow and painful deaths; they go off cliffs.

Addressing Liquidity Impact of COVID-19*

  • How much money do we need and for how long?
    • reforecasting operating cash flows, rapid action around working capital, cost-out measures
  • Where does existing new funding slot into your existing capital structure?
    • review existing credit facility/intercreditor documentation, identify sources of collateral of additional borrowing, value transfer, seek consent with current financing arrangements
  • Who can we borrow from and on what terms?
    • incumbent lenders, special situation lenders

*Deloitte Corporate Restructuring Group

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Federal Updates | View All

Federal Regulatory Activity

April 01, 2020

We are seeing an emergence of state and federal activity to redefine certain terms in insurance contracts (most notably, property) in order to “re-engineer” the business interruption coverage to respond to non-physical damage claims arising out of the COVID-19 pandemic. The consequences are profound to both sides (policyholders and insurers), both in the magnitude of the potential insurance recoverables currently uninsured, and the threat to insurer insolvency caused by a catastrophic loss that was never modeled or priced for an insurer/reinsurer’s balance sheet.

At the federal level, a bipartisan group of U.S. House members signed a letter asking insurer trade groups to recognize COVID-19 losses as included under policies’ business interruption coverage. In response, the four industry groups said they’re working to provide relief to policyholders, but not through the coverage in question, indicating that business interruption policies do not, and were not, designed to provide coverage against communicable diseases such as COVID-19.

  • There are very preliminary discussions to contemplate a federal backstop for COVID-19 business interruption claims, given the lack of perceived coverage with respects to property policies, along with the economic loss sustained by policyholders.
  • Trade groups (the American Property Casualty Insurance Association and the Reinsurance Association of America) have joined the discussion with a proposal to create a small business compensation fund (small business being described as less than 500 employees) as follows:
    • Creation of a federal financial facility under the stewardship of Treasury (IRS) funded by the federal government under the jurisdiction of a Chair/Czar appointed by the president and authorized by Congress.
    • The federal facility would process, validate and pay claims submitted by claimants. An immediate minimum payment or floor would be provided upon submission of a valid claim.
    • Claims criteria would include (1) business interruption losses based on factors such as maintaining a working employee headcount, economic and financial impact, or lost revenue, and (2) employee indemnity and medical benefits resulting from COVID-19 virus for employees that would not be covered by applicable workers’ compensation insurance.
  • The potential for a reinsurance vehicle somewhat similar to the introduction of TRIA(Terrorism Risk Insurance Act) in 2002 funded by the United States, but absorbing COVID-19 losses on a retrospective basis. TRIA was designed to provide coverage behind property/casualty insurers on a prospective basis (not for historical uninsured/underinsured losses) for future terrorist acts as certified by Treasury.
    • Several substantive issues would need to be addressed to make this a viable approach
      • This “facility” would be construed as a necessary additional means of financial support to insureds over and above the estimated $2 trillion stimulus package currently being voted on by the US Congress
      • The logistics of execution (reinsurance to insurers, a direct payment by the federal government, some component of loss sharing, what lines of coverage and time period, etc.)
      • Congressional support to effect into viable legislation

It’s speculative to determine the direction of such federal intervention other than (1) it will probably be driven by the risk of insolvency of large number employers due to the lack of viable insurance recoverables out of COVID-19, (2) how it fits with other “relief” legislation addressing similar issues, and (3) potential participation by insurers (either simply as administrators and/or as risk sharing participants).

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State Updates | View All

State Action on Business Interruption Insurance Coverage

We are seeing an emergence of state legislative activity seeking to redefine certain terms in insurance contracts (most notably, property) in order to “re-engineer” the coverage to respond to non-physical damage claims arising out of the Covid-19 pandemic. Thus far, Ohio, Massachusetts, New Jersey and New York have introduced legislation. The consequences are profound to both sides (policyholders and insurers), both in the magnitude of the potential insurance recoverables currently uninsured, and the threat to insurer insolvency caused by a catastrophic loss that was never modeled or priced for an insurer/reinsurer’s balance sheet.

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Generally, the bills require every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption, be construed to include among the covered perils under that policy, coverage for business interruption due to the COVID-19 pandemic during the state of emergency. Thus, the bills would force insurers to pay for losses which, in the first place, do not constitute “direct physical loss or damage” to covered property, and seem to require payment despite the presence of a policy’s unambiguous Virus exclusion.

The bills have some limitations. For example, three states’ provisions apply to policies issued to insureds with 100 or fewer employees, while Massachusetts’ bill applies to insureds with 150 or fewer full-time equivalent employees in Massachusetts. The bills also limit such coverage to cover only the period in which we are under a state of emergency, defined by each bill.

All the bills include a provision whereby the insurers may seek reimbursement from funds collected for this purpose; however, such funds will be collected through an assessment to insurers engaged in the business of insurance . . . in an amount as necessary to recover amounts paid to insurers who submit claims for reimbursement insurer.

COVID 19 State Action on Premium Grace Period

At least twenty-five states have requested (a few have required) insurance companies to implement a grace period for individual and business policyholders to pay insurance premiums so that insurance policies are not canceled for nonpayment of premium.

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The requested grace periods are intended to be applied to premiums due after the initial premium has been made to secure coverage. They are not intended to change the terms of the issued policy or be considered a forgiveness of the premium. Rather, it merely grants the policyholder an extended grace period for the payment of premium due without penalty or interest. Not all insurance companies are abiding by the requested grace periods and if granted, the grace periods may be limited to only certain policyholders. The fifteen states that have issued this request or directive: AL, AR, CA, CT, FL, GA, IN, KS, MD, MA, MO, OH, OK, OR, PA, NJ, NM, NY, SC, TN, TX, VA, WA, WV, WI.

For more detail on each of the states, click here for all state updates. For information on a particular insurance company's response, please reach out to your insurance consultant.