Possible Pandemic, Coronavirus Poised to Pose Risks to U.S. CompaniesFebruary 26, 2020 | Paul V. Majkowski | | | | |
With the coronavirus outbreak continuing in China, significant new incidences being reported in South Korea and Italy, and stories of quarantines permeating the news, in addition to the catastrophic toll on human health, we are far from business as usual in many respects. In the U.S., a CDC official has now stated, “It’s not a question of if this will happen, but when this will happen, and how many people in this country will have severe illness.” When business diverts from the usual, we must consider the legal and insurance implications of the various contingencies and their attendant risks and losses.
A significant portion of the Chinese economy has been shut down since late January due to measures imposed to limit communication of the virus. Some factories and manufacturing are gradually returning, but reports indicate a return to capacity remains at least several weeks away, into March, with a particular concern being the spring planting season. It is unclear how outbreaks in other countries might result in other lockdowns and suspension of manufacturing and commercial activities. As a point of reference, the World Bank estimated that the 2003 SARS epidemic cost the global economy $54 billion; losses associated with coronavirus would seem likely to exceed that by several multiples.
This disruption of the supply chain from China, as well as suspension of other business in China, e.g., multinationals operating locations there, and other affected locations, will bring about claims under business interruption coverages. Some interruption effects might not yet be fully realized, as existing inventories have not been exhausted, and interruptions would increase the longer the lockdowns impair operations. Issues generally involved in business interruption claims include whether there is direct physical loss to the insured’s property and whether losses are sustained due to an order of a civil authority.
After the SARS outbreak, insurers added exclusions for bacterial or viral outbreaks. Nevertheless, given the losses involved, though, it is foreseeable that coronavirus business interruption claims will become a subject of coverage litigation.
Forward-looking, from both the insurer and policyholder perspective, the coronavirus outbreak puts a focus on management of the business interruption risk. In procuring or renewing coverage, companies must carefully assess their potential exposure arising out of such circumstances and consider whether specialized coverages should be added to their insurance. Even for smaller businesses, thought should be given to whether the “standard” commercial policy is sufficient. On the other side of the ledger, insurers will adjust their underwriting accordingly, based on the claims experience arising out of the coronavirus outbreak.
Record-Keeping and Compliance
Another issue of concern from the business perspective is the potential for heightened compliance requirements with respect to verifying the supply chain. Record-keeping should always be done vigilantly, but in the current setting, greater regulatory scrutiny might be expected, so, this should be given paramount attention to maximize the ability to carry out transactions without undue delay.
Shareholder Lawsuits and Directors & Officers Coverage
With global economic losses associated with the coronavirus outbreak likely to reach hundreds of billions of dollars, there will be scrutiny of companies’ management in addressing the contingencies resulting from the disruption and their reporting of financial performance. This could potentially give rise to shareholder suits, which could trigger directors & officers coverages.
Event Cancellation and Travel Insurance
With the daily media updates of the Diamond Princess cruise ship quarantine, travel and leisure is another area affected by the coronavirus outbreak, i.e., does one want to board a ship with the risk of being quarantined in some foreign port, or put off their dream vacation? Will your travel insurance cover you if you do? Standard travel insurance likely does not cover the cost of a trip cancelled by the traveler over fear of traveling to a destination. This would seem another area that is ripe for claims, and to the extent that a multitude of claims might emerge, we might speculate whether claims would allege some type of unfair business practice theories and be aggregated as consumer class actions.
U.S. Coronavirus Contamination
Assuming a coronavirus outbreak in the U.S., in addition to the scenarios discussed above, other legal implications would arise from materials and locations being considered “contaminated.” Product recalls potentially become an issue. Might there be allegations of injuries arising from exposure to such contamination? This might include products, or exposure in physical locations. In this context, one can imagine claims sounding in toxic tort, but including various failure-to-warn and fear-of-disease theories. Such claims may or may not be covered under liability insurance.
Lastly, what implications does coronavirus have on the management of our workplaces? Businesses should carefully assess whether their policies regarding sickness and leave adequately address coronavirus and potential “quarantine” scenarios, including with respect to its employees’ personal health information. With respect to an employees’ personal travel, what types of inquiries may an employer make regarding travel locations, and may an employer preclude an employee from its workplace based on a suspicion of coronavirus exposure, with or without pay? Do these inquiries or actions have HIPAA or public health reporting implications? But, on the other hand, can an employer become liable for not excluding an infected or potentially infected employee from the workplace if other co-workers then become ill?
Two other workplace issue that touch upon protection against discrimination. First, may an employer take adverse action against an employee who refuses to undertake business-related travel based on a coronavirus fear? Lastly, amid reporting of aggressive, hate activity directed at Asians in the wake of the coronavirus outbreak, what responsibilities does an employer have to police its workplace to avoid a potentially hostile work environment?
While the human health toll and the macro-economic effects of the coronavirus are most visible, the situation implicates a variety of legal and insurance issues for almost everyone, as suggested above.
- Paul V. Majkowski