Insurers are already seeing some pushback regarding virus-related claim denials from businesses that suffered losses while closed due to the pandemic, but what about claims a business could file if it opens despite a pandemic shutdown order?

Pennsylvania Governor Tom Wolf issued a warning last month to businesses that choose to open despite the pandemic shutdown, saying they could be jeopardizing their insurance coverage, The Associated Press reported.

Following Wolf’s warning, Pennsylvania Insurance Commissioner Jessica Altman reminded businesses of risks and increased liability they could face if they don’t comply with the shutdown order.

“Businesses and residents rely on insurance coverage to protect them from liability, pay for covered losses, and compensate those who may be injured or harmed,” Altman said in a press release issued by the Pennsylvania Insurance Department. “It is the duty of every business and resident in Pennsylvania to ensure that they and the public at large are provided with the maximum level of protection afforded by insurance. Any actions that could potentially create coverage gaps are the antitheses of the civil duty required of all residents during these times of emergency.”

On March 16, a statewide shutdown order went into effect in Pennsylvania due to the COVID-19 pandemic. Nearly two months later, Wolf announced a phased reopening of the state to begin on May 8, and as of June 5, there are no Pennsylvania counties left in the red phase – the strictest phase of reopening. However, 33 counties remain in the yellow phase, with 34 counties in the green phase which eases most restrictions by lifting the stay-at-home and business closure orders.

“It is rare for the insurance commissioner to issue such a pointed warning so, yes, businesses should take that warning seriously and know that if they defy the shutdown orders, that may affect their ability to collect coverage that might otherwise be due,” said Kristin Jones, a Philadelphia, Penn.-based partner at Pepper Hamilton.

That said, the question of whether coverage would exist in this situation is a complicated one, she added.

“This is not a clear cut issue,” she said. “The analysis depends heavily on the language of each business’ policy and the type of loss for which the business is seeking coverage.”

Jennifer Black Strutt, a Stamford, Conn.-based associate at McCarter & English, agreed, adding that “neither lawmakers nor insurance professionals should make blanket statements about the availability or unavailability of coverage without analyzing the facts and the particular insurance policy.”

Questions regarding insurance coverage may not be limited to businesses that reopen without permission, either, Jones said.

“Courts will also need to determine issues such as whether businesses that properly reopen in the yellow phase, but fail to follow the yellow phase guidance, have engaged in criminal or intentional conduct that invalidates their insurance coverage,” she said.

‘Know Your Policy’

Although there are many types of claims that could arise if a business defies a shutdown order, it is likely that only some can be traced back to the shutdown, said Joann M. Lytle, Philadelphia, Penn.-based partner at McCarter & English.

“For example, if a client slips and falls on a wet floor in a barber shop, that claim has nothing to do with COVID-19, and there should be coverage under a CGL policy,” she said. “Conversely, if that same client is infected with COVID-19 at the barber shop and the shop is sued, insurers may argue that the injury would not have occurred if the order had not been violated.”

However, Anthony Miscioscia, Philadelphia, Penn.-based partner at White and Williams, said that for a business opening despite a shutdown order, it is possible an insurer could argue that any resulting injury or damage was not caused by an accident, something required by most CGL policies, or that the courts should not allow insurance for injuries caused by a deliberate, intentional act that goes against a civil authority order. With this in mind, insureds should proceed with caution.

Directors and officers liability policies, for example, often contain a criminal acts or conduct exclusion that precludes coverage for losses arising from a willful violation of a statute or regulation. Employment practices liability policies also often contain an OSHA (Occupational Safety and Health Administration) exclusion, which can typically prohibit coverage for violation of any federal, state, local statutory law or common laws that govern workplace safety, Miscioscia explained.

Additionally, workers’ compensation policies typically contain exclusions for injury that is intentionally caused or aggravated by the employer, as well as for fines and penalties imposed for violation of federal or state law, Lytle added.

“I can see a debate about whether a governor’s or mayor’s shutdown order falls within any of these categories, or whether a court will apply a public policy exception to preclude insurance coverage for acts that violate such an order and result in the very type of harm such an order seeks to prevent,” Miscioscia said.

Perhaps complicating the issue further is that various types of exclusions in policies can present in different forms and can range in scope, said Sara Richman, Philadelphia, Penn.-based partner at Pepper Hamilton.

“Ultimately, this has to be a policy-by-policy assessment,” she said. “The overall message to insureds is to know your policy. If it has an exclusion for intentional or illegal acts, or defines ‘occurrence’ in a way that does not include intentional acts, the business should proceed with caution.”

That said, there are cases where a business reopening despite a shutdown order could still retain coverage, Miscioscia said. For example, if a business opened despite the order because it thought it could do so safety, but later found that was incorrect, the business may have coverage for bodily injury, property damage claims or lawsuits brought against it, he explained.

“In such a case, the business likely would argue, and a court may agree, that any resulting injury was fortuitous under a CGL policy and was not expected or intended,” he said.

Future Coverage Litigation

To date, most of the pending insurance coverage litigation that exists involving COVID-19 is a result of policyholders’ business interruption losses due to shutdown orders or social distancing guidelines, but that could change, Strutt said.

“It is possible that future coverage litigation will address a policyholder’s failure to comply with a shutdown order,” she said.

Jones said she is not aware of any cases being filed in Pennsylvania in which coverage has been denied on this basis. However, that could change as many businesses are just beginning to reopen, and post-reopening claims have yet to arise or are still in the early stages of handling, she said.

“There will almost certainly be litigation if a carrier invokes exclusions to preclude coverage on the basis that the business owner defied the shutdown order, and it will be up to the courts to settle the debate about whether those exclusions can be properly invoked under these circumstances.” Richman added.

In fact, discussion around this issue is something Jones said she saw begin “immediately following the commissioner’s remarks.” Because of this, it’s something she believes will be raised between business owners and their insurers in court for some time.

“The question of whether violations of shutdown orders amount to illegal or criminal conduct is very complicated, particularly where federal, state and local guidance conflict,” Jones said. “It will undoubtedly be litigated for years to come.”

*This story ran previously in our sister publication Insurance Journal.