The Doctor is In: Insurance for the H1N1 Pandemic

Transcription

1 Summer 2009 The Doctor is In: Insurance for the H1N1 Pandemic By Lisa M. Cirando, Esq. (Of Counsel, New York) INTRODUCTION On Thursday, June 11, 2009, the World Health Organization ( WHO ) declared the first global influenza pandemic of the twenty-first century. The WHO s designation of a pandemic for a new strain of influenza A virus subtype H1N1 ( H1N1 ), commonly referred to as swine flu, reflects the existence of ongoing community level outbreaks in over 70 countries worldwide. WHO s Director-General Dr. Margaret Chan has acknowledged that Further spread is considered inevitable. Past pandemics have reached at least a third of the global population. Governments and businesses should carefully consider the potential for insurance coverage for their pandemic-related losses. This commentary presents a brief summary of the history and treatment of H1N1/swine flu and identifies some of the special challenges that will be faced by governments and businesses. This commentary also analyzes three broad types of insurance coverage that may be available to those entities grappling with the H1N1 pandemic: Property and Business Interruption (including Loss of Attraction); General Liability; and Directors and Officers Liability. Finally, some helpful hints for pursuing insurance coverage claims are offered. HISTORY AND TREATMENT OF H1N1/SWINE FLU The current pandemic is not the first time that humans have been infected with swine influenza. In 1976, a limited outbreak attributed to a different strain of the virus occurred among soldiers in Fort Dix, New Jersey. Until recently, the Centers for Disease Control and Prevention had received reports of approximately one human swine influenza virus infection every one to two years in the U.S., primarily among those persons with direct exposure to pigs. From December 2005 through February 2009, those numbers increased slightly, with approximately 12 reported cases of human infection. The numbers associated with the current pandemic have been steadily rising over the past few months, resisting early conclusions that the infection would not be widespread. Symptoms associated with H1N1 appear to be mild, with only roughly 150 deaths reported by the WHO since officials first discovered the virus in Mexico in March (In comparison, seasonal influenza kills about 500,000 a year worldwide). Reported cases of H1N1 now top out at nearly 30,000 worldwide, though experts believe that millions of people may have already been infected. Outbreaks have been most severe in Mexico and among Canada s indigenous populations, resulting in significant numbers being hospitalized.

2 When it comes to treatment, there are four different antiviral drugs licensed for use in the U.S., though the current H1N1 strain appears resistant to two of the four. A vaccine is expected to be ready for dissemination by October 2009, just in time for the start of the northern hemisphere s seasonal flu season. GOVERNMENTS AND BUSINESSES GRAPPLE WITH THE PANDEMIC A pandemic designation places increased pressure on all levels of government to take steps to contain the spread of H1N1, especially in the months before a vaccine is developed. In response to the initial outbreak, U.S. officials declared a public health emergency and the U.S. State Department warned citizens to avoid all nonessential travel to Mexico. In the U.S. and elsewhere, officials imposed quarantine measures such as school closures. Hong Kong instituted a quarantine at a hotel where Asia s first H1N1 case was traced, preventing 280 guests and employees from leaving the facility for a week. Businesses have followed suit, taking extra precautions and assembling teams to develop and implement contingency plans in line with the Business Pandemic Influenza Planning Checklist posted by the U.S. Department of Health and Human Services at In fact, much of the actions taken by governments and businesses in the past few months had been developed in response to the avian flu and severe acute respiratory syndrome ( SARS ) threats earlier this decade. THE PANDEMIC PRESENTS SPECIAL CHALLENGES FOR GOVERNMENTS AND BUSINESSES DEALING WITH AN ECONOMY IN DISTRESS The pandemic s likely effects increased travel complications and declining productivity, coupled with escalating health care costs present serious complicating factors for both governments and businesses as they respond to the worst global economic crisis in generations. In April 2009, the U.S. Congressional Budget Office estimated that a pandemic would reduce real (inflation-adjusted) gross domestic product by about one percent, or approximately US$1.4 trillion. Experts have estimated that up to 30% of a company s employee base may be unable to work at some point in the pandemic, with potentially dire consequences for all businesses throughout the supply chain. In addition, governments and businesses may incur significant expenses, including the cost of sanitizing and decontaminating properties as well as the loss of income, either from property closures during decontamination or the resultant loss of customers due to the identification of the presence of H1N1. Though international health authorities attempted to mitigate the effects on the economy by, for example, issuing recommendations against travel bans and other restrictions, some airlines canceled flights and waived change fees while cruise lines suspended port calls in Mexico. In addition, H1N1 s link to pigs has led some countries to ban meat imports from Mexico and the U.S., even though it is not transmitted through the ingestion of pork, exacerbating a global slump in pork sales. -2-

3 THREE TYPES OF INSURANCE FOR PANDEMIC-RELATED LOSSES Governments and businesses may be able to recoup some of their pandemic-related losses under a variety of different insurance policies. The three most common types of insurance policies that may be implicated by the H1N1 pandemic include Property and Business Interruption (including Loss of Attraction); General Liability; and Directors and Officers Liability. PROPERTY INSURANCE AFFORDS COVERAGE FOR CONTAMINATED PROPERTIES Property insurance protects against the risk of loss to the policyholder s buildings and building contents, such as equipment, furniture, computer hardware, etc. It may be written in one of two ways: All Risks or Listed Perils. All Risks policies provide coverage unless barred by a specific enumerated exclusion, whereas Listed Perils policies provide coverage for only certain defined risks (such as earthquakes, flooding, etc.). Regarding All Risks coverage, certain property policies may contain disease or virus exclusions. To be enforceable, such exclusions must be narrowly tailored and written in clear and unmistakable language. In addition, exclusions are to be construed most strongly against an insurance company, with any ambiguities weighing in favor of coverage. As to Listed Perils coverage, H1N1 is not likely to be a listed peril; however, some businesses may have purchased infectious disease coverage (which does not require physical damage to premises) in the wake of the SARS epidemic. Such additional coverages typically have significant limitations on the amounts available for loss, such as sublimits and high deductibles. Loss or damage to property is a prerequisite to coverage under either All Risks or Listed Perils coverages. Significantly for businesses grappling with H1N1, contamination may constitute physical loss or damage. That is, the losses associated with the decontamination or destruction of insured property may be covered under first-party property insurance. Additionally, some first-party property policies include favorable language for policyholders that defines property damage to include the loss of use of insured property. In this way, a business may have property insurance to cover the loss of use of property made unavailable during times of quarantine or decontamination. BUSINESS INTERRUPTION INSURANCE COMPENSATES FOR LOSS OF INCOME Property insurance policies also contain coverage for business interruption (or time element) losses that compensate policyholders for loss of business income in addition to the cost of repairs. Such coverage is typically triggered when a particular location becomes damaged and is not usable for an extended period of time. A typical insuring agreement states: The Company will pay for actual loss sustained by the Insured resulting directly from the necessary interruption of the Insured s business caused by a peril covered hereunder. For -3-

4 example, the pandemic could lead to business interruption claims as a result of forced shutdowns or reduced access to a business physical location, plant or warehouse. The measure of the appropriate period of loss is often the subject of dispute. One definition is the length of time that it should take to repair or replace damaged property. Policyholders may also have an extended period of indemnity that provides additional coverage beyond the initial period of loss. In addition, extra expense coverage for additional costs incurred because of the loss may be available. To gain these types of business insurance coverage, however, a policyholder must prove loss or damage to covered property. Some businesses may have contingent business interruption coverage. Such coverage is triggered if an entity experiences pandemic-related losses as a result of a supplier s inability to deliver a product or service necessary to the policyholder s business. Other forms of business interruption insurance also recognize coverage where employees or customers are denied access because of a government decree, as in the case of Hong Kong s hotel quarantine. Insurance companies may assert defenses to coverage, suggesting that the policyholder s loss is not due to H1N1 but instead a result of the economic crisis. Policyholders should consider retaining experts, such as forensic accountants, to assist with the determination of the extent of the loss. LOSS OF ATTRACTION: SPECIAL COVERAGE FOR PANDEMIC-RELATED LOSSES In addition, some property insurance policies (especially those purchased by large hotel/hospitality-related businesses) may contain coverage for pandemic-related claims under loss of attraction provisions. Sample wording states: This policy is extended to cover the actual loss sustained by the Insured resulting from cancellation of or inability to accept bookings for accommodation and/or a cessation or diminution of trade due to a loss of potential customers, as a direct result of: the occurrence at an insured location of murder, suicide, rape, attempted rape, armed robbery, and malicious activities, contagious and/or infectious disease, food or drink poisoning, vermin, pests or defective sanitation. To be covered, the policy typically requires that the loss exceed 24 hours. Some coverages specifically exclude loss directly or indirectly arising out of, contributed to, or by resulting from SARS, Avian Flu, and/or atypical pneumonia, or fear of threat thereof. GENERAL LIABILITY PROVIDES DEFENSE AND INDEMNIFY COVERAGE AGAINST THIRD-PARTY CLAIMS General liability (or comprehensive/commercial general liability) policies provide insurance for various types of claims brought by third parties alleging property damage, bodily injury, personal and advertising injury, as well as medical payments coverage. Some industries may be more susceptible to liability claims for pandemic-related losses than others. These include hospitality and food service industries, such as hotels, restaurants, cruise ships, resorts, tour companies, conference and event companies; common carriers such as airlines, trains, busses, taxi companies; and health care industries such as hospitals, elderly care homes, etc. -4-

5 Public institutions, such as prisons and detention centers, also may face pandemic-related claims. Claimants asserting pandemic-related losses will look to hold entities accountable on the basis that they allegedly helped to spread H1N1 or failed to contain it. For example, employers experienced a wave of liability claims in 2003 for allegedly being unprepared for the SARS epidemic. There may be coverage for such claims, though causation may be a point of contention between insurance companies and policyholders. The determination of causation by the policyholder is fact-intensive, and it may be impossible for people who become ill to prove the precise moment and location of exposure; however, some cases may be easier to prove than others (i.e., cruise ship v. supermarket). The standard general liability insuring agreement provides both defense and indemnity coverages. Defense costs coverage is an important component and is available in addition to limits of liability. Where the allegations arguably fall within the coverage provided, the duty to defend terminates only when the limits are exhausted by payment of judgment or settlement. The definition of defense expenses may include expert and consultant expenses and site investigation costs, as well as attorneys fees and costs. DIRECTORS AND OFFICERS LIABILITY INSURANCE PROTECTS AGAINST LOSS FOR WRONGFUL ACTS Companies purchase directors and officers (D&O) liability insurance as the last line of defense for themselves and their directors and officers. In exchange for substantial premiums, D&O insurance companies promise to indemnify directors and officers for Loss that those individuals become legally obligated to pay due to Wrongful Acts committed in their capacity as directors and officers. Wrongful Acts may be defined to include negligent acts, errors or omissions, misstatements, or breach of duty committed by the directors or officers in the discharge of their duties and solely in their official capacity as such. Though each policy is unique, D&O insurance policies typically provide three types of coverage: Side A or non-indemnifiable loss coverage, which protects directors and officers when the company is legally prohibited from indemnifying them or where the company is insolvent and cannot indemnify them; Side B or corporate reimbursement coverage, which pays the company back for amounts it expends to indemnify directors and officers; and Entity coverage, which, when available, covers the company itself against securities fraud claims. D&O insurance typically covers defense costs, settlements and judgments against directors and officers in securities fraud lawsuits and shareholder derivative actions. It also provides coverage for investigative and defense costs incurred by directors and officers and, sometimes, the corporation itself, with respect to SEC, regulatory and criminal investigations and proceedings. -5-

6 Federal securities laws prohibit registered entities from making material misstatements or omissions of fact in their Securities and Exchange Commission ( SEC ) filings, press releases and other public communications. With respect to the H1N1 pandemic, companies could violate the federal securities laws if they make false or misleading statements concerning or if they fail to disclose entirely the impact or lack of impact of a potential outbreak on their financial results. Securities class actions may be filed alleging nondisclosure or misstatement of risks. Shareholders of companies adversely affected by the H1N1 pandemic may claim that the conduct or decisions made by the company or its executives caused loss. Some allegations that may be made include not taking steps at the early stages of the outbreak to prevent exposure. Public companies should consider the impact of the pandemic on their financial results. Certain industries, such as pharmaceuticals, may need to employ special accounting rules and SEC guidance for sales of their products. It is crucial that companies demonstrate corporate responsibility and accountability to their stakeholders through transparent actions and communications. Companies will need to assure their stakeholders that they can adequately respond to the pandemic from a humanitarian perspective and anticipate legal and public challenges. CONCLUSION: HELPFUL HINTS FOR PURSUING INSURANCE CLAIMS It is imperative that both governments and businesses acknowledge the potential that pandemic-related losses will trigger the protection afforded by several different types of insurance. Policyholders should gather and read all potentially relevant insurance policies and give timely notice of claims (or circumstances which may subsequently give rise to claims), as directed. Documents should be organized and well-maintained and experts, including legal counsel, should be retained early in the process, particularly for large claims. Relevant dates for filing proof of loss and lawsuits against the insurance company should be calculated as soon as possible. Time limits are strictly enforced under first-party property insurance; however, in most instances, time limits may be tolled by agreement. Policyholders should be mindful of their duty to cooperate and keep insurance companies (including excess insurers) regularly updated and informed of decisions, especially any that involve large expenditures. Many policies require that policyholders seek insurance company consent to retain defense counsel or settle an action. Be assured that anything said to or shared with the insurance company may be used in its defense of the claim. If the claimshandling process should become adversarial, policyholders should remind the insurance companies that their duties of good faith and fair dealing continue even through coverage disputes and coverage litigation. This article appears online in the Lexis-Nexis Insurance Law Center. -6-