A Pandemic in the Making

Losses related to coronavirus raise insurance coverage questions and concerns

March 26, 2020 Photo

The story behind coronavirus reads like a Hollywood disaster movie: It appears to be a mutated virus with no available vaccination; over 50 million people in China have been quarantined; over 60,000 people are infected; over 1,300 people are dead; global businesses operating in affected zones in China have shut down or significantly restricted operations; and health experts project the outbreak may not peak until April 2020.

Given this already significant impact of coronavirus, policyholders and the insurance industry alike are watching and considering whether business interruption or event cancellation insurance benefits may be available. Let’s take a look at what coverages may come into play.

Coronavirus: Status and Impact

Statistically, the common flu would appear to be a greater threat than coronavirus. Globally, depending on the year, influenza generally infects hundreds of millions annually with between 500,000 and one million deaths. Unlike the flu, however, there is not a vaccination for coronavirus, which carries with it the potential to become a global pandemic (a pandemic is a global disease outbreak that occurs when a new virus emerges for which people have little-or-no immunity and for which there is no vaccine).


Coronavirus is believed to have originated at a market in Wuhan, China that sold animals for human consumption. Reports from China tell us that, since its discovery in late December 2019, more than 60,000 people have been infected with the coronavirus, resulting in over 1,300 deaths. Outside of China, there have been over 200 cases in 28 nations according to the World Health Organization, which has declared coronavirus a global health emergency. In the United States, the Centers for Disease Control and Prevention report there have been at least 15 confirmed cases.

International travel has been curtailed, national borders have been closed, and millions have been quarantined. Americans evacuated from Wuhan, the epicenter of the virus, are being isolated on military bases as a precautionary measure. Thousands of passengers were not allowed to disembark from a cruise ship carrying passengers and crew infected with coronavirus, causing the numbers of those infected to increase daily. Global businesses like Intercontinental Hotels Group, Hilton, Starbucks, and McDonald’s have shuttered many locations, and Disney may face a $280 million loss. The cessation of business operations is likely to affect China’s role in the global manufacturing supply chain. For example, iPhone manufacturer Foxconn has stopped nearly all of its Chinese production.

Business Interruption

To protect themselves in situations like this, commercial businesses often procure business interruption coverage as part of their commercial property coverage. Business interruption coverage is designed to assist a policyholders that suffer financial losses in their operations, generally arising from a designated cause, such as fire or earthquake. Other policies may provide contingent business interruption coverage arising from disruptions with a supplier or customer, while still requiring that the underlying cause fall within a covered cause of loss.

Commercial property policies also typically require “direct physical loss” to the property and proof of causation. In the event of a claim for coronavirus-related business interruption, questions may arise whether this “physical loss” requirement has been met. In particular, in circumstances where a business has been closed as part of a mandatory or voluntary closure—but is otherwise still habitable and uncontaminated—it’s unlikely to be determined that it suffered a direct physical loss. Generally speaking, “direct physical loss” does not include consequential or resulting economic loss. In contrast, if a property has become physically contaminated and uninhabitable due to coronavirus, then there may be a basis for a policyholder to claim that a direct physical loss has occurred.

A decision from the 8th Circuit Court of Appeals explains the “direct physical loss” requirement. In Source Food Tech. Inc. v. U.S. Fidelity & Guar. Co., Source Food argued that the closure of the U.S./Canadian border for imported beef product due to concerns over mad-cow disease qualified as a direct physical loss, since the company was unable to transport its product. The 8th Circuit disagreed, finding that Source Food’s inability to transport its beef product across the border did not constitute product that was physically contaminated or damaged, and that to hold otherwise would render the word “physical” meaningless.

It is unlikely that the coronavirus will allow for a one-rule-fits-all conclusion when it comes to a determination of whether an insured has suffered a direct physical loss. Rather, it is more likely that each claim will be investigated and evaluated based on its own specific facts.

Specialized Business Interruption

While traditional policies may not cover economic losses arising from the suspension of operations due to a health crisis or pandemic, the insurance industry has made various products available.

For instance, the insurance industry offers specialized coverage arising from the shutdown of operations without requiring physical loss to property. These policies or policy endorsements primarily focus on insureds in the business of health care and hospitality, and it typically extends insurance coverage for business interruption losses caused by communicable or infectious diseases.

Pandemic scares have prompted the insurance industry to offer specialized coverage and exclusions for pandemic events. In May 2018, for example, Marsh launched PathogenRX, a product it described in a press release as a “fully integrated pandemic coverage product,” in collaboration with Munich Re and epidemic risk modeler Metabiota.

“Using triggers like Metabiota’s new Pathogen Sentiment Index, which provides extensive analytics into infectious disease outbreaks, businesses can model their potential financial loss from an outbreak and protect against the threat through an insurance policy underwritten by Munich Re,” the release states. “The policy is customizable and can be tailored to provide coverage for specific expenses, geographies, types of disease, or portions of a calendar year.”

In response to the Ebola crisis, several insurers expressly excluded coverage for Ebola-related claims. Other insurers, however, offered specific business interruption coverage to facilities such as hospitals, hotels, airports, shopping centers, restaurants, theaters, and gyms or any other business that might be forced to shut its doors because of an Ebola outbreak.

Other policies extend business interruption coverage for losses arising from civil authority orders that impair or prohibit access to an insured’s property. The scope and limitations of business interruption coverage under such endorsements vary and can be issued pursuant to an insurer’s standard form endorsement, and can also depend on whether a direct physical loss will be required. Insurers may also issue civil authority coverage on a manuscript basis, addressing specific needs based on expenses, geography, disease, calendar year, voluntary or mandatory orders, direct physical loss, a designated risk, or other criteria.

Event Cancellation/Contingency and Non-Appearance Insurance

Not surprisingly, coronavirus is also impacting scheduled events. For example, the Dalai Lama cancelled all current public engagements; some ports have rejected cruise ships altogether; some airlines have stopped flights to parts or all of China; 50 countries have imposed travel restrictions and visa requirements primarily for those who have visited China recently or are Chinese nationals. Major events such as the Shanghai Grand Prix, the annual Goldman Sachs partners’ meeting in New York, and the Mobile World Congress in Barcelona were cancelled or curtailed.

Insurance products specific to event cancellations or non-appearance of a key person generally provide coverage due to perils beyond the control of the insured, the organizer of an event, and the attendees when such an event results in cancellation, abandonment, postponement, or enforced reduced attendance. Insureds, insurers, and brokers may now find themselves evaluating such products to determine if and when coverage under such policies may have been triggered.

Under most policies, an insured has an obligation to mitigate its losses by reasonably seeking to postpone or reschedule such an event to a different time or location, but of course terms and conditions of each policy may vary. An event cancellation policy can protect an insured from financial losses such as lost ticket sales, out of pocket expenses, contractual guarantees to others, and sometimes even reimbursement to attendees for their purchased tickets.

Covered perils in a typical event cancellation policy may include death, accident or illness, unavoidable travel delay, venue damage, and inclement weather. A covered claim may look like a claim for unavoidable travel delay in which event attendees could not make it to their destination due to travel arrangements that were delayed or cancelled. A common misconception, however, made by insureds in today’s context, would be submitting a claim for an event cancellation due to the attendees or event organizers fear of traveling or spreading or catching the coronavirus even though travel restrictions do not exist and the event is capable of going forward. The cancellation of an event, while possibly in the best interest of the business, may not necessarily be covered under such policies because the cancelation was not beyond the control of the event organizers or attendees.

Lastly, a typical event cancellation policy may contain exclusions for lack of interest or support for an event, a pre-existing condition, terrorism, breach of contract, financial failure of a venture, and even communicable diseases. A possible issue to be aware of is the communicable disease exclusion, which excludes coverage when a loss arises out of fear of any world epidemic determined by the World Health Organization. While communicable disease exclusions may exist in some event cancellation policies, coverage may still be provided in some circumstances. For example, coverage may be provided if the venue where the event was to take place was closed under the order of a government, or public or local authority due solely as a result of the communicable disease that manifested within the venue.

To prepare for the potentially catastrophic impact of a global pandemic, insureds, insurers, and brokers must understand what is or is not covered under such policies and should work together to minimize any potential losses by evaluating potential claims as early as possible.


Reason for Concern

Historically, pandemics have proven to warrant the attention now being given to the coronavirus. Here are a few examples.

• 1918: The Spanish Flu is estimated to have killed 40 million people.

• 1957/1968: “Milder” pandemics are estimated to have killed between one and four million people.

• 1976: Ebola emerges in west African countries, bringing with it a high fatality rate and 21-day incubation period.

• 1997: Bird Flu arises from human contact with infected poultry (or affected surfaces). Confronted with a case fatality of 33 percent, authorities opt to destroy all 1.5 million chickens in Hong Kong. A mutant strain killed a three-year old boy.

• 2003: Severe Acute Respiratory Syndrome (SARS) emerges and is believed to have been carried by international air travelers from a hotel in Hong Kong to several other global cities in a matter of days. Within months, SARS infected more than 8,000 people in 29 countries, causing some 800 deaths—a mortality rate of 10 percent.

• 2004: A mutated Bird Flu reemerges in southeast Asia and results in over 140 human cases and approximately 70 deaths—a case fatality of 50 percent. Over 150 million birds were destroyed, resulting in billions of dollars in economic losses.

• 2005: Bird Flu Influenza A (H5N1) is carried by wild migratory birds to numerous countries throughout the world. By October 2006, there are 251 human cases with 148 deaths—a 59 percent fatality rate.

• 2014: The U.S. has its first diagnosis of Ebola.

• 2015: USDA reports that beginning in January 2015, HPAI HF (a mutated Bird Flu) was reported in commercial poultry flocks in the U.S., resulting in over 48 million birds being destroyed.

About The Authors
Multiple Contributors
Matthew Ross

Matthew P. Ross is partner at Wilson Elser. matthew.ross@wilsonelser.com

Paul S. White

Paul S. White is partner at Wilson Elser.  paul.white@wilsonelser.com

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