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Property and Casualty

COVID-19 Report

close up of a coronavirus molecule

Property and Casualty

COVID-19 Report

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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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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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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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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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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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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