We all pray the COVID-19 crisis will be past us for good soon. But the pandemic will forever change the way we think about certain things and perhaps better prepare us for another episode of this magnitude. New laws will likely mandate specific policy forms, endorsements and language in your insurance policies and limit coverage through exclusions.
If and when something like the coronavirus happens again, it will be necessary to report both preventative measures and actual infections to your insurer. Builder's risk policies cover a wide range of losses for construction projects unless they are specifically excluded. The coverage may be for hard costs, soft costs, and sue and labor, among others.
To avoid a declined claim due to unreported “increased hazard” and to preserve the escalation clause (due to major changes to claims costs) in a policy, documentation and prompt notification is vital. Some builder’s risk (BR) policies are written such that they void coverage if an “increased hazard” is not reported to the carrier. Most BR carriers will consider a coverage extension known as an “escalation clause” which can serve as a helpful backstop in a crisis situation. Barring upfront known or foreseeable cost adjustments, this wording allows for an automatic increase in coverage limits should the final contract value exceed a stated percentage versus the original amount (typically 5% or 10%).
Two high-profile issues with respect to making claims for business interruption due to COVID have been “direct damages” wording of the policies, as well as the presence of virus exclusions on most policies. The direct damages wording states that in order to file a valid claim, your property has to have suffered direct damage. Courts as far as New York state have consistently failed to agree that COVID-19 constitutes “direct damage” to a facility or project. If you ARE making a claim, you’ll need to develop a detailed list of financial impacts your business is experiences as a result of any civil authority or Emergency Orders issues that restrict access to an insured location as well as how these actions disrupt your supply chain for materials, equipment, inventory and labor. Lost revenue and missed business opportunities due to delays, job site or project shutdowns, expenses associated with working remotely, additional cleaning costs, and salaries paid to employees who are ill and absent should also be noted.
Other exclusions or limitations to watch out for in a BR policy are “cessation of work” and “abandonment.” Some policies void or reduce cessation of work after a certain time period or may void coverage if work is stopped for a reason other than what is specifically outlined in the policy. Project abandonment clauses in some policies can also be troublesome. Contract abandonment is when both parties involved in a binding contract have conducted themselves in a manner where the original contract is no longer valid. Abandonment is defined as “when the contractor does not start on the project in a reasonable amount of time, if the contractor is unable to complete the agreed upon work, or if the contractor fails to resume their work in a reasonable amount of time.”
Property insurance often covers lost income while a business is closed due to property damage, but doesn't always contain provisions that protect a business that is unable to reopen after an evacuation. As stated before, courts across the country are split on what constitutes “direct physical loss” covered by a peril, and most casualty insurers have insulated themselves from COVID-19 losses due to the aforementioned specific exclusionary language in property policies including limitations and specific exclusions for “virus,” “contagion” or “pandemic.”
Since there is the onerous burden of linking the civil authority orders precluding occupancy of an insured job site or location to actual “direct property damage,” questions arise including: Does the presence of a human virus constitute “direct physical damage to the insured property” or simply “property damage”? Does the inability to occupy an insured building, job site or location because of the presence of a virus constitute “property damage”? What about mandated cleaning requirements for surfaces of shared equipment, walls, HVAC units, etc. where COVID-19 was found — are these costs a result of “property damage”? Sadly for policyholders, most courts have not forced carriers to accept these liberal coverage triggers.
Savvy homebuilders should take action now to review their BR and property coverage and consider Business Interruption and Extra Expense Coverage with their agent. But be warned, scams are out there, and the existence of legitimate, low-cost pandemic virus protection is virtually non-existent, until the carriers can get more comfortable with COVID-19's long term economic and health effects.
Ross Conner, CIC, partner, Hotchkiss Insurance
This article was originally printed in Building Savvy Magazine.