Insurance Law Hawaii

Hawaii Insurance Division Issues Request to Insurers on COVID-19

    The Hawaii Insurance Commissioner has requested that admitted and non-admitted insurers offering policies in Hawaii take special consideration of policyholder impacted by COVID-19. The March 27, 2020 bulletin reads: 

    The impact on individuals and businesses due to COVID-19 nationwide is evident in the daily news coverage. The anticipated negative impact on individuals and businesses in this State due to COVID-19 will be realized in the near future. Business will have substantially reduced revenue, employees will have reduced hours and may lose their jobs, with further reaching repercussions. The Insurance Commissioner is issuing Memorandum 2020-3I to encourage insurers selling insurance coverage in the State for all lines of insurance to be mindful of the difficulties individuals and businesses in the State are experiencing.

    The Insurance Commissioner encourages insurers to work with their insureds to ensure coverage continues during this time, policies do not lapse, and to consider the following:

1. Refrain from cancelling or non-renewing policies due to non-payment during this time of hardship and to grant a grace period for premium payments to be made;
2. Work with insureds on a structured payment plan for late premium payments;
3. Waive late fees and penalties;
4. Extend timeframes to complete property and automobile inspections or undergo medical examinations; and
5. Continue working with insureds for a period of 60 days after this health emergency has passed, or as long as reasonably practical.

    The Insurance Division empathizes with those impacted by the business downturn caused by COVID-19 and encourages insurers and policyholders, particularly those with limited financial resources, to communicate and work on a mutually agreeable solution.

    This Memo is directed to all admitted and non-admitted insurers in this State providing any insurance coverage including life, health, motor vehicle, property, casualty, and other types of insurance of insurance for individuals, groups, and businesses.

    The Division will continue to monitor this situation and issue updates on its website at http://cca.hawaii.gov/ins/ .

    The memo is somewhat less forceful than what some states have requested of insurers. In a prior post [here], we noted that New York's Department of Financial Services instructed insurers to advise policyholders of possible coverage under business interruption provisions. 

Pennsylvania Court Upholds Executive Order Closing Non-Essential Businesses Due to Coronavirus

    The Governor's Executive Order compelling the closure of non-essential businesses to reduce the spread of coronavirus survived a challenge before the Pennsylvania Supreme Court. Friends of Devito v. Wolf, 2020 Pa. LEXIS 1987 (Pa. April 13, 2020). The case does not involve coverage issues, but the court's acknowledgment and description of the dangers of coronavirus may have an impact on future coverage litigation. 

    Petitioners were four businesses and one individual seeking extraordinary relief from the Governor's March 19, 2020 order compelling the closure of all non-life-sustaining business to reduce the spread of the coronavirus disease. The Petitioners contended that the Governor lacked any authority to issue the order, and, even if he did have authority, it violated their constitutional rights. Petitioners included a campaign committee, a licensed real estate agent, a public golf course, and a laundry service.

    The order noted the possible increased threat from COVID-19 constituted a threat of imminent disaster to the health of the citizens of the state. The threat of imminent disaster had already caused the closure of schools and would likely prompt additional local measures, including affected county and municipal governments to declare local disaster emergencies because of COVID-19. 

    In challenging the order, petitioners contended that the COVID-19 pandemic was not a natural disaster as defined by the state's Emergency Code. The court disagreed and found the pandemic qualified as a "natural disaster" under the Emergency Code for two reasons. First, and of significance for future coverage litigation over coronavirus claims, the common theme among disasters described in the Code was that all involved substantial damage to property, hardship, suffering, and possible loss of life. Thus, COVID-19 was a type of "natural disaster" referred to in the Code. 

    Petitioners alternatively argued that even if the pandemic was a natural disaster, the Governor only had authority to act in the "disaster area," and there were no disasters in the areas in which their businesses were located. In another important statement for future coverage issues, the court found this argument ignored the nature of the virus and the manner in which it was transmitted. The virus spread primarily through person-to-person contact, had an incubation period of up to fourteen days, one in four carriers of the virus was asymptomatic, and the virus could live on surfaces for up to four days. Thus, any location (including Petitioner's businesses) where two or more people could congregate was within the disaster area.

    The Petitioners' second argument, that there is no significant risk of the spread of COVID-19 in locations where the disease had not been detected (including at their places of business), was also unpersuasive. In another passage that of import for coverage battles to come, the court again stated that COVID-19 does not spread because the virus is "at" a particular location. Instead it spreads because of person-to-person contact, as it has an incubation period of up to fourteen days and that one in four carriers of the virus was asymptomatic. 

    The court went on to reject Petitioners' constitutional arguments: (1) the order violated the separation of powers doctrine; (2) the order constituted a taking requiring just compensation; (3) the Petitioners were not accorded procedural due process; (4) the order violated equal protection principles; (5) and the order interfered with the right of free speech and assembly.

    Accordingly, the court found that the Governor had statutory authority to issue the Executive Order and the Petitioners failed to establish any basis for relief based upon their constitutional challenges. The request to vacate or strike the Executive Order was denied. 

 

Is There Direct Physical Loss Under A Property Policy When Cornavirus is Present?

    Most property policies provide coverage for property damage only when there is "direct physical loss" to covered property. Early indications are that the coronavirus remains on surfaces. The duration can last from a few hours to three weeks, depending on the type of surface material. If an employee is infected and the store or restaurant must closed because the virus may rest on surfaces within the building, is there direct physical loss, even though the building structure itself is unharmed?

    To answer this question, cases from jurisdictions outside Hawaii may provide guidance. In a case from Louisiana, the homeowner had to move out of her home when excessive levels of organic lead were discovered in the kitchen, living room, master bedroom, and attic. Widder v. La. Citizens Prop. Ins. Corp., 82 So. 3d 294 (La. Ct. App. 2011). The insurer denied coverage because there was no direct physical loss. The trial court agreed; since the home was still intact, no direct physical loss had occurred, so there was no coverage under the policy. The appellate court reversed. It compared the presence of inorganic lead in the home to cases that found a direct physical loss from the existence of Chinese drywall, from which gaseous fumes were released, rendering the home unusable or uninhabitable. Physical damage was not necessary.

    What if smoke from a nearby wildfire fills an outdoor theater, forcing cancellation of performances and loss of business income? This was the situation in Oregon Shakespeare Festival Ass'n v. Great Am. Inc. Co., 2016 U.S. DIst. LEXIS 74450 (D. Ore. Jun 7, 2016). Wildfires in the area caused smoke, soot, and ash to accumulate on the surface of seats and concrete ground of the open-air theater. The air quality was poor, but no federal, state or local agency ordered cancellation of the performances. Further, the theater did not suffer any permanent or structural damage to its property. The insurer denied coverage, contending that the loss or damage must be structural to the building itself. After all, the smoke in the air at the theater did not require any repairs to the structure of the property. The court disagreed. The theater sustained "physical loss or damage to property" when the wildfire smoke infiltrated the theater and rendered it unusable for its intended purpose. The decision in  Oregon Shakespeare Festival was eventually vacated by a joint stipulation of the parties. Oregon Shakespeare Festival Ass'n v. Great Am. Ins.Co., 2017 U.S. Dist. LEXIS 33208 (D. Ore. March 6, 2017), but the reasoning is still sound. 

    The Oregon Shakespeare Festival case cited several cases to support its view.  A pervasive odor in a home caused by a subtenant's illegal methamphetamine operation was considered a "direct physical loss." The court concluded that odor was "physical" because it damaged the house. Farmers Ins. Co. of Oregon v. Trutanich, 858 P.2d 1332 (Ore. Ct. App. 1993).

    An accidental release of ammonia into a packaging facility caused the facility to shutdown for one week while the ammonia dissipated. The court noted that while structural alteration provided the most obvious sign of physical damage, property can sustain physical loss or damage without experiencing structural alteration. The release of ammonia into the building, rendering the building unfit for occupancy, constituted "physical loss or damage."  Gregory Packaging, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 165232 (D. N.J. Nov. 25, 2014). 

    Where gasoline vapors penetrated the foundation of the insured church and accumulated, rendering the building uninhabitable, the property was held to have suffered a "direct, physical loss." Western Fire Ins. Co. v. First Presbyterian Church, 437 P. 2d 52 (Colo. 1968). Carbon monoxide levels in an apartment building sufficient to render the building uninhabitable was a "direct, physical loss." Matzner v. Seaco Ins. Co., 1998 Mass. Super. LEXIS 407 (Mass. Super. 1998).

    Finally, contamination due to microscopic asbestos fibers was found to be contamination causing the physical loss or damage required to trigger coverage under a property policy.  United Stat Fidelity & Guar. Co. v. Wilkin Insulation Co., 144 Ill. 2d 64 (1991). 

    Based upon these cases, a building in which the virus is located may well present "direct physical loss" under a property policy. Of course, exclusions will also have to be considered to determine whether coverage exists. 

First Suit Filed for Losses Caused by COVID-19

    Last week, the first lawsuit was filed seeking insurance coverage for business-interruption due to losses caused by COVID-19. The case, Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd's of London, ,et al., was filed in Louisiana. A New Orleans restaurant, Oceana Grill," seeks a declaratory judgment that its "all risks" policy issued by Lloyd's covers losses resulting from the closure of its restaurant due to the Governor's order restricting public gatherings and the Mayor of New Orleans' order closing restaurants. 

    The lawsuit contends that "contamination of the insured premises by the coronavirus would be a direct physical loss needing remediation to clean the surfaces of the establishment." The lawsuit further alleges the policy contains no exclusions for a "viral pandemic." The suit seeks a declaration that "the policy provides coverage to plaintiffs for any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from coronavirus contamination and that the policy provides business income coverage in the event that the coronavirus has contaminated the insured premises." The obvious dispute will be whether the coronavirus  constitutes a "direct physical loss or damage" as required by the policy.

    Assuming there is "direct physical loss," the policy provides coverage for loss where "future civil authority shutdowns of restaurants in the New Orleans are due to physical loss from coronavirus contamination." Further, the policy provides "business income coverage in the event that the coronavirus has contaminated the insured premises."

    This is the first of what promises to be many lawsuits filed by businesses for losses caused by COVID-19. 

 

New York Instructs Property Carriers to Advise Insureds on Business Interruption Coverage

    The New York Department of Financial Services (DFS) took the unusual step last week of instructing all property/casualty insurers to provide information on commercial property insurance and details on business interruption coverage in light of the COVID-19 outbreak. The notice is here. 

    The notice recognizes that policyholders have urgent questions about the business interruption coverage under their policies. Insurers must explain to policyholders the benefits under their policies and the protections provided in connection with COVID-19. 

    The explanation to policyholders is to include the following relevant information.

What type of commercial property insurance or otherwise related insurance policy does
the insured hold?

Does the insured's policy provide "business interruption" coverage? If so, provide the
"covered perils" under such policy. Please also indicate whether the policy contains a
requirement for "physical damage or loss" and explain whether contamination related
to a pandemic may constitute "physical damage or loss." Please describe what type of
damage or loss is sufficient for coverage under the policy.

Does the insured's policy provide "civil authority" coverage? If so, please describe
what type of damage or loss is sufficient for coverage under the policy. Please also
describe any relevant limitations under the policy. Please explain whether a civil
authority prohibiting or impairing the policyholder's access to its covered property in
connection with COVID-19 is sufficient for coverage under the policy.Does the insured's policy provide "contingent business interruption" coverage? If so,
please describe what type of damage or loss is sufficient for coverage under the policy.
Please provide the "covered perils" under such policy. Please also indicate whether the
policy contains a requirement for "physical damage or loss" and explain whether
contamination related to a pandemic may constitute "physical damage or loss."

Does the insured's policy provide "supply chain" coverage? If so, is such coverage
limited to named products or services from a named supplier or company? Please also
indicate whether the policy contains a requirement for "physical damage or loss" and
explain whether contamination related to a pandemic may constitute "physical damage
or loss."

For each instance of coverage described above, please provide the applicable waiting
period under the insured's policy. Please also indicate whether the amount of time
coverage remains in effect once becomes active for a given incident.

    We are unaware of any similar order being issued by the Hawaii Division of Insurance, but policyholder likely have concerns similar to those in New York.

Insurance Coverage and Coronavirus

    Individuals and businesses are asking what insurance coverage is available for harm caused by COVID-19 and the coronavirus. Here is a short survey addressing possible coverage under various policies.

    Property Insurance - Typically, damage to tangible property insured by "covered causes of loss" is covered by a commercial property or homeowner's policy. The policy frequently requires a "direct physical loss." Loss caused by fire or hurricane are examples of covered perils. Tangible property that becomes unusable may be covered.Some courts have found that contamination rendering property uninhabitable constitutes a "physical loss." Arguably, these terms do not rule out the possibility of damage caused by the presence of microscopic organisms, nor require that loss or damage be visible. Issues an insured may face, however, include the cause of the loss, whether an exclusion for viral contamination applies, or whether a building was unusable or voluntarily closed.  

    Business Interruption - Commercial property policies may include business interruption coverage for loss of income due to suspension of business operations. The closing of a business must be due to a covered cause of loss. Actions by government or law enforcement forcing the closure of a business may be a covered cause of loss. Restricting access to a business where transmission of an infectious disease is suspected may lead to coverage for income losses. Business interruption claims can be complex and often require the assistance of experts such as accountants. 

    Contingent business interruption coverage applies if a supplier or customer has to suspend operations, thereby impacting the business of the insured. 

    Federal legislation is currently being proposed to create a reinsurance fund for business interruption losses caused by the coronavirus or other pandemics. The legislation would be similar to that created after the 9/11 terrorist attacks. The reinsurance program would mandate that coverage apply to claims relating to a pandemic. Carriers would be required to enlist to be eligible. Insureds would be covered for an additional premium.

    Directors and Officers - If a corporation faces a securities lawsuit due to its failure to disclose the impact of coronavirus on its business, a directors and officers policy may be implicated. With the recent stock market plunge, investors are likely to investigate whether proper precautions were taken to reduce losses in the stock market and elsewhere. 

    Workers Compensation - Employees contracting the coronavirus at the workplace or in the course and scope of their employment may seek coverage under workers compensation. Further, employees traveling from the workplace to an infected area or those stationed in an infected area may seek coverage under workers compensation if they become infected.

    Liability Coverage - Liability policies typically cover bodily injury or property damage caused by an occurrence, or accident. Liability policies protect businesses against third-party claims for bodily injury resulting from exposure to dangerous conditions. Guests of hotels, restaurants, malls, sporting events, or an office who allege they contracted the coronavirus could sue the owners and/or operators of such facilities. Such suits could be based upon the owners and/or operations' failure to exercise reasonable care in guarding against the danger or failing to warn customers. Liability policies may exclude communicable diseases. 

    The availability of coverage under various policies will heavily depend upon the facts surrounding an incident and the policy language. As always, give notice to the carrier as soon as possible after a loss and document the loss as completely as possible

    Be safe and check your coverage.