The outbreak of the COVID-19 is at the forefront of everyone’s mind. As outlined in previous blogs, generally, a pandemic may be considered a force majeure event, and if so, a construction contractor may be entitled to a time extension, but generally is not entitled to additional compensation. The bad news is that for the majority of construction contractors, under standard insurance policies and present law there will likely be no insurance coverage for the COVID-19 outbreak. Regardless, we have to change our thinking if we desire to have a future different from our present. Here are some creative ideas to keep in mind when insurance coverage appears to be a “long shot”:
- Remember, there is a saying in the insurance industry “A claim was never paid that was not filed.” In other words, just because an insurance claim might be creative and/or others may disagree with its merits, generally, it is good practice to bring the claim regardless of the merits or misgivings others may have.
- Courts may jump in and interpret policies favorable to the insureds. Judges and juries in the Pacific Northwest, when damages are extreme and the fact situation is unique, may decide to alter the intent of the insurance policy favorable to insured contractors.
- Government may come to the rescue. State legislatures may introduce bills to change coverage. In New Jersey, a recent bill forced insurers to pay COVID-19 business interruption claims expressly excluded by ISO virus exclusion. At the writing of this post, a congressional bill has been introduced to address the corona virus outbreak, which includes many features of interest to construction contractors, including expansion of military treatment facilities, temporary quarantine facilities, funding for FEMA facilities, Mobile Triage Units, and Mobile Treatment Centers for Veterans Affairs. Also included in the draft are significant increases in funding to the Department of Housing and Urban Development to address issues of homelessness and public health, and there are several billion dollars available for housing, building and facilities scattered throughout HUD, FEMA, Veterans Affairs, Bureau of Indian Affairs and other agencies.
- The insurance company may have made an error. Most insurance policies are written on standard insurance (International Organization for Standardization (“ISO”)) forms. Some contractors may not have standard policies and exclusions. Either they bought in the excess and surplus insurance market, or the carrier made a mistake by using the wrong policy, or not attaching the proper endorsement. Contractors should check with their brokers to determine whether the insurance company left an avenue open that would not otherwise exist.
Despite bleak coverage aspects, we are in a rapidly changing situation and accordingly we recommend the following actions that if laws change or other favorable events occur (see above):
- Provide blanket or contract-specific (if possible) notice to clients of disruptions to your operations caused by the corona virus response.
- Track any occurrence of infection of an individual or reported viral contamination involving:
- Your employee or a close relative to an employee;
- Your office or property locations;
- Clients with whom your employee has had close contact or who have visited your office;
- Project sites or other offsite locations to which your employee has visited recently.
- Maintain detailed records of any increased cost or delays. (Yes, this is repetitive, but documentation is key.) While documentation can be difficult to perform, particularly in times of crises, it will ensure maximum recovery for any impacts if recovery can be had.
- If project performance is delayed because of unavailability of labor, materials, supply chain, and equipment, you should immediately provide notice of suspension of work. This action at the least will preserve your right to recovery costs during an inevitable period of government or owner indecisiveness.
- If there are creative ways to work safely and continue work, but at an increased cost, request an immediate, forward-priced equitable adjustment under the changes provision of your contract.
- If it appears there may be a lengthy non-compensable delay in contract performance, you may want to trigger the termination for convenience clause of your contract. Termination for convenience will facilitate compensation for costs incurred going forward. Owners may be very reluctant to grant a termination for convenience unless they can afford to postpone the project until another time. Regardless, the request should be made, and if the owner does not respond favorably—or fails to respond at all—the contractor may be entitled to costs incurred during the period of owner/government indecisiveness.
Finally, contractors should check all of their insurance coverage in these uncertain times, including:
- Business Interruption: The corona virus pandemic may cause several categories of expense for construction firms including the cost of additional cleaning of offices and property, staff and equipment expenses associated with increased remote working and office closures, costs and penalties related to canceled meetings and salaries of employees who are absent because of infection or under-utilized because of operational or project concerns. Firms may encounter lost revenue and missed business opportunities due to delays, shutdowns or other impacts caused by the virus and government and business reactions to the pandemic. This coverage will only be available if it’s a covered peril. Business interruption insurance may respond with coverage for these income losses. Common exclusions and the lack of “direct physical damage to property” may preclude coverage.
- Workers Compensation: If an employee contracts corona virus arising out of or in the course of employment, then workers compensation and employer’s liability coverage may respond with coverage for medical costs and lost wages in accordance with state statutory requirements. That said, viral diseases typically are not presumptively considered arising out of or contracted in the course of employment, and will be the employee’s burden to establish the causal connection between the infection and employment by a preponderance of the evidence.
- Liability to other employees and related persons: Should one employee contract corona virus and expose others, the firm may face greater likelihood of coverage workers compensation claims as noted above. The firm could also face claims for bodily injury to third parties arising out of routine, non-professional operations (operating the office premises), which could be covered by the firm’s CGL insurance. CGL insurance is generally not applicable to bodily injury of an employee unless liability is assumed under an “insured” contract.)
- Professional Liability insurance: Many contractors now carry professional liability insurance. This is another potential avenue for the contractor to check.
Comment: The scope of the insurance coverage for the corona virus fallout will depend on the specific language of each insurance policy. Contractors interested in proactively managing the corona virus exposure will be well-served to evaluate the adequacy of the coverage provided under their existing insurance programs. Additionally, keep in mind that courts and legislatures may change the law and thus, documentation of the costs will become essential to recovery.
We are living in extraordinary times. The corona virus is a substantial change beyond the contemplation of most contractors and owners when they entered into the ongoing contracts. Governments and large public owners are going to be hard pressed to simply apply the protection and limitations in public works and owner contracts that would limit liability under normal circumstances. Since it is in the national interest to preserve the industrial base of the United States, including the construction industry, large-scale cancellation of contracts is unlikely. While cancelling contracts might save the government money in the short term, the government may avoid such action and support contractors, particularly those that operate in industries that are crucial to the national security and commerce. Congress may enact legislation at least in part to compensate contractors for financial impact of delayed performance. For example, there are Federal Acquisition Regulations (FARs) which empower the president to exercise “extra-contractual relief” that is not otherwise available under the contract in times of need (see FAR part 50). Such government action will help public works contractors, but not those contractors working on private projects.
 Thanks to Gregg Bundschuh of Greyling Insurance Brokerage; Michael Payne’s Blog Post “A Government Contractor’s Roadmap for Navigating the Coronavirus Pandemic; and Jones Day website (3/21/20) for their contribution to this post.