San Francisco Bay Area Update: On March 31, 2020, health officers in six counties in the San Francisco Bay Area issued an order extending California's previously implemented shelter-in-place restrictions through May 3, 2020 and further tightening the restrictions imposed on people and businesses. The new order mandates the shutting down of all construction projects other than certain limited types of construction specified in the Order, most notably healthcare facilities, housing projects that include low-income units, and projects required to maintain the safety, sanitation, and habitability of residences and commercial buildings. If you have questions about whether your project can continue, or what insurance coverage you may have for this event, please feel free to reach out to Mitch Evall or Andy Schmerzler (Real Estate) or Michael O'Connor and Sarah Cronin (Insurance Coverage) in our Los Angeles office.
New York Update: When we first published this advisory on March 23, 2020, we reported that Governor Andrew Cuomo’s order closing all non-essential businesses in New York State exempted construction generally as one of the “essential” industries that could continue. Today New York State issued a new guidance on the definition of essential services that are not subject to the current in-person restrictions. All non-essential construction (as defined) must shut down. If you have questions about whether your project can continue, or what insurance coverage you may have for this event, please contact Suzanne St. Pierre (Real Estate) or Jessie Beeber and Patrick Boyle (Insurance Coverage) in our New York office. The article below also provides guidance on key insurance issues related to your construction project.
We should expect construction to shut down. The only question is when, not if, this will occur. Owners will be given a few days to secure their sites, but what comes next?
As COVID-19 spreads, its impact on the construction industry could be severe. Faced with deadlines to complete pending projects, city and state orders for residents and non-essential workers to “shelter in place,” and substantial supply chain disruptions, will your insurance policies provide any coverage for the extra expenses and losses you are about to incur? This alert considers some of the key insurance issues that developers, owners, and contractors may face. But here is the bottom line: Notify your insurance company of a claim without delay under any potentially applicable insurance policy and have coverage counsel review your specific policy, since it is the language in your policy, including endorsements, that will control.
This update is intended to answer some questions that we expect will arise right way.
1. What insurance policies should I look to as potentially covering these losses?
There are a few policies in the construction context that are most likely to provide insurance coverage for a shutdown of a construction project based on COVID-19.
Most property and builders risk policies require a “loss,” which is often defined as “physical” damage, that is the result of a certain cause of loss, to trigger coverage. Typically, the covered cause of loss is a named peril, or a physical event, like 9/11 or Hurricane Sandy, but it could also arise from other types of events as well. These policies cover buildings, contents, and business interruption-related losses related to that cause of loss. Other property and builders risk policies are called “all risk” policies, but do not let the name fool you, because in those policies there could very well be an applicable exclusion to coverage.
a. Builders Risk Policies
Builders risk policies are a type of property policy intended to cover buildings under construction, as well as the materials, supplies and equipment, and business interruption-related costs related to the cause of loss.
A typical coverage grant under a builders risk policy states: “We will pay for direct physical loss of or damage to covered property at the premises described in the declarations caused by or resulting from any covered cause of loss.” Builders risk policies can also provide coverage for business interruption-related costs, but the key will be whether a COVID-19-related claim amounts to a physical loss. As many have already pointed out, there is a body of law discussing whether the presence of bacteria, odors, or microorganisms constitutes “property damage.” There are also endorsements incorporated into such policies which may exclude many of those claims. We will be following up this FAQ with an update discussing the specific cases that are most likely to apply to the issue of whether the presence of bacteria, odors, or microorganisms constitutes “property damage,” which we will link to here.
Every set of facts will be different, and every policy will contain its own variations on language and endorsements that can significantly change or broaden coverage. This is a time to dig into the facts and the law. What if a project was shut down because of COVID-19 and leaving the job mid-work led to damage to sealant on the envelope of the building that caused damage to the building? Could that be sufficient to trigger coverage for that damage and certain related business interruption-related costs? To answer that question, you should have a coverage attorney take a close look at the specific policy at issue.
Finally, coverage for extra expense, business interruption, and time element damages can have its own sublimits under a policy, which should also be taken into account.
b. Pollution Liability Policies
Pollution liability policies may provide coverage for first-party and third-party claims arising from bodily injury, property damage, defense, cleanup, and related defense costs as a result of a sudden, accidental, or gradual release of a pollutant. Many such policies also include first-party business interruption coverage.
Pollution covered by these policies may include viruses, often under the definition of “mold.” If so, these pollution policies may cover business interruption costs. They could also cover the cost of decontamination of a project site if someone at the project site tested positive for COVID-19 and cleanup costs for the construction site must be incurred.
c. CGL Policies
Commercial General Liability (CGL) policies insure against claims made against your business. While the initial wave of coverage disputes is likely to involve first-party policies, at some point, the different parties’ CGL policies may come into play. For example, what if, after construction is allowed to resume, you find that one of your subcontractors did not properly close up shop and its work damaged someone else’s work on the project? A lawsuit ensues. CGL policies may be another avenue to recover certain costs to fix damage caused by shutting down construction projects.
To be clear, most CGL policies issued after the SARS outbreak of 2003 include an exclusion for any property damage or loss caused directly or indirectly by “[a]ny virus, bacterium, or other micro-organism that induces or is capable of inducing physical distress, illness or disease.” Even with such an exclusion present, however, a review of a specific policy is always worth the time, as endorsements to the policy can change or add coverage and are specific to each policy.
2. Can I expect the government to intervene and remove some of these pandemic exclusions?
Probably not. Virus exclusions are common in some policies (although not typically pollution policies). In 2006, ISO (Insurance Services Office, Inc.), the organization that writes and revises most standard insurance forms, recommended adding an exclusion for loss caused by disease-causing viruses or bacteria because of the possibility of future pandemics.
Since COVID-19 has become a full-fledged pandemic, certain state legislatures have considered bills to force insurers to pay COVID-19 business interruption claims. New Jersey, for example, considered a bill that would force insurers to pay COVID-19 business interruption claims that would have otherwise been expressly excluded by the ISO’s “virus” exclusion. That bill appears to be on hold indefinitely, following a backlash from the insurance industry and questions over the bill’s constitutionality.
Action is also being considered at the federal level to address insurance and COVID-19, but at the time of this writing, nothing has been passed.
We will continue to monitor these activities as a potential source for relief.
3. Does it matter that I had to shut down the construction project because it is in a city that has been ordered to “shelter in place”?
Yes. This may be sufficient to trigger business interruption or pollution coverage as noted above. Also, certain policies contain what is referred to as “civil authority” coverage, which insures against the business loss that results from an order of a civil authority restricting access to an insured’s premises. There is typically a 24-hour or 48-hour waiting period before coverage is triggered. Importantly, however, coverage is almost always limited in duration, with coverage existing only for the losses incurred during the first few days or weeks. Civil authority coverage may also have its own separate sublimit, in dollars, and its own exclusions, including for viruses or pandemics, aside from the short duration of coverage.
Civil authority coverage, and related types of coverage, will certainly be at play as a result of COVID-19 and should be reviewed for potential sources of money that could offset some of the extra costs.
As of the writing of this update, Governor Gavin Newsom’s order for Californians to shelter in place does not apply to construction workers, as construction activities have been deemed “essential.” Similarly, Los Angeles mayor Eric Garcetti also referred to construction as being essential. Accordingly, for the time being, construction projects in California should continue.
Similarly, Governor Andrew Cuomo’s order closing all non-essential businesses in New York State also exempts construction for the time being, deeming it one of the “essential” industries that can continue.
The mayor of Boston, Marty Walsh, on the other hand, has ordered a suspension of construction activity until further notice, in an effort to stop the spread of COVID-19 in his city.
4. If someone on the job site tested positive for COVID-19, would insurance cover any decontamination work that needed to be performed?
Possibly. Some property and environmental policies may cover decontamination and other similar expenses. These policies can include additional coverages that may apply, such as for decontamination, communicable disease cleanup, crisis management, and emergency vacating expenses.
5. Do I have an obligation to minimize any losses?
Generally speaking, yes. It is important for both property and builders risk policy coverage to obey restrictions put in place and to follow proper and prudent protocols to secure buildings and sites during a shutdown.
6. What should I do now to maximize the potential for insurance coverage if my construction project is shut down by COVID-19?
The most important step you can take now to preserve your ability to pursue a claim in the future is to give notice of the claim to the insurance company. This can be done in a number of ways, including through your broker or your coverage counsel. You will be asked to provide further details down the road, but for now, you can simply provide notice of the fact that the construction project was shut down. You should also keep careful track of any expenses related to the possible claim, and preserve any photos, receipts, and other documentation of loss.
Once you have notified the insurance company, a coverage lawyer can assist you in presenting your claim to the insurance company based on your specific policies and situation.
We will continue to provide updates, including further details on the above.