Smith Currie & Hancock
Ronald G. Robey
March 30, 2020
Introduction. The proverb “may you live in interesting times,” certainly applies today; however, we wish the times were not so interesting. Most contractors are looking to their insurance for possible assistance with the delays, disruptions, and claims arising from the effect of the COVID-19 pandemic on current construction projects. This article provides a summary limited to builder’s risk and to general liability coverages as they relate to the pandemic, and a general warning that insurers appear to be adding endorsements to renewals and extensions of builder’s risk and first-party property policies that would retroactively exclude all claims arising from the pandemic.
The Warning. March 31 of every year is a common time for renewal of builder’s risk (including master policies), first–party property, and inland marine policies. It appears that some underwriters are attempting to add an endorsement as part of the renewal process. The potential endorsement is as follows:
“[W]ill not pay for any loss, damage, expense or costs caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease. Any contamination of property caused by virus, bacteria, gasses or fumes is not physical injury to property. This exclusion also applies to any loss arising directly or indirectly out of fear or threat (whether actual or perceived) of any virus, bacterium or other microorganism.
The addition of that endorsement as a retroactive exclusion would potentially bar all claims arising from COVID-19.
Builder’s Risk. Whether a preferred “all risk” policy, or a much less desirable “named peril,” or a “designated peril,” policy, the common coverage trigger is there must be a “direct physical loss” to covered property. Most builder’s risk policies contain a delay in completion endorsement (sometimes referred to as a delay in startup or “DSU” endorsement”). The delay in completion is of particular interest to contractors during the COVID-19 pandemic because it potentially provides coverage for losses, including “soft costs” associated with delay. Nearly every delay in completion endorsement has a sublimit for the loss and a deductible usually defined as a number of days.
The delay in completion coverage must be triggered by a covered cause of loss – meaning there must be direct physical loss or damage to the property insured. The question for these times is whether contamination by the COVID-19 virus of the covered property constitutes direct physical loss or damage.
One test case has already been filed in New Orleans by a restaurant seeking a declaratory judgment that its closure and costs of cleaning are a covered cause of loss under its first–party property policy. See Cajun Conti LLC et al. v. Certain Underwriters at Lloyd’s, London et al., No. 2020-02558, complaint filed (La. Dist. Ct., Orleans Parish Mar. 16, 2020).
An analysis of cases involving similar issues shows the potential for coverage. See, e.g., Gregory Packaging, Inc. v. Travelers Property Casualty Co., No. 2:12-cv-04418, 2014 WL 6675934, at *6 (D.N.J. Nov. 25, 2014), the court held that the release of ammonia, which rendered a facility uninhabitable, was physical loss because, under New Jersey law, property can sustain physical loss without experiencing structural alteration. The court reached the same result applying Georgia law, holding that a fortuitous event rendered the property unsatisfactory and in need of repair. Id. at *7, and Essex v. BloomSouth Flooring Corp., 562 F.3d 399, 406 (1st Cir. 2009), under Massachusetts law, an unpleasant odor rendering property unusable constituted physical injury to the property.
In Oregon Shakespeare Festival Association v. Great American Insurance Company, 2016 WL 3267247, Civil Action No.: 1:15-cv-01932 (D. Or. June 7, 2016), the plaintiff association operated open air venues and alleged coverage due to smoke from wildfires in the area. The insurer defended on the basis there was no actual physical damage to the property itself. The district court found coverage stating: “In this case, wildfire smoke infiltrated the interior of the theater, making it uninhabitable and unusable for holding performances. Like the home infiltrated by methamphetamine odor, or the furnace contaminated by lead particles, or the facility filled with ammonia, the theater filled with smoke was unusable for its intended purpose. Even though the loss or damage was not structural or permanent, the property experienced a loss of “essential functionality.” Id. at *9.
Insureds should consider potential coverage under a builder’s risk policy, including a delay in completion if the COVID-19 virus has infected the insured property and caused a loss.
Commercial general liability. Commercial general liability (CGL) policies provide liability coverage from third parties for bodily injuries and property damage caused by an occurrence. An occurrence is historically defined as an accident. Accordingly, one of the threshold issues is whether any alleged bodily injury or property damage arising out of an insured’s failure to prevent or limit exposure to the COVID-19 virus is accidental. Like nearly all insurance coverage issues, state law applies and states vary on the interpretation of occurrence.
CGL polices commonly include “loss of use” of tangible property that is not physically damaged as property damage. This definition raises the possibility of claims alleging the loss of use of premises and other tangible property due to the alleged negligent failure to prevent or limit the transmission of the COVID-19 virus.
Since 2006, ISO has had available CP 01 40 07 06, “Exclusion for Loss Due to Virus or Bacteria.” However, the addition of this exclusion to policies has not been uniform or systemic. In addition, CGL policies generally contain pollution exclusions, which exclude coverage for claims arising out of the actual, alleged, or threatened discharge, dispersal, seepage, migration, release or escape of pollutants.
Pollutants are typically defined as including, in relevant part, any solid, liquid, gaseous or thermal contaminant. The pollution exclusion is usually litigated in the context of environmental pollution claims, not claims because of the exposure to viruses or diseases. There would be some dispute regarding whether the COVID-19 virus is spread or contracted through contact with surfaces. CGL polices also typically contain exclusions for fungi and bacteria as well as pathogen–based, communicable disease.
The cases on similar fact patterns are not as readily available for CGL policies for any prediction. However, and subject to the potential exclusions, insureds should consider potential coverage for loss of use for a third-party claim resulting from the COVID-19 virus.
This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Robey and may not reflect the opinions of Synergy Environmental, Inc., Smith Currie & Hancock or either of those firms’ clients.