Third-Party Claims in the Era of COVID-19: Exposure to Businesses and the “Safety Net” of Insurance

As states push to re-open, retailers will be balancing the welcome prospect of renewed business and cash flow against the fear and cost of claims that could be made against them by customers, vendors, subcontractors, and others. These “third-party” claims, fueled by hungry plaintiffs’ lawyers and a lamentable rush-to-sue culture, pose real threats to our emerging business recovery. These threats are so obvious that Congress is contemplating legislation to protect companies from such claims. Similarly, insurers are girding for increased third-party claims, sharpening pencils to invoke exclusions and issue reservation of rights letters.

Nevertheless, there is hope. Unlike in the business interruption insurance realm, where there may be bars to coverage for many claims (but read your policy closely first!), companies should be able to find significant refuge in their third-party insurance policies, principally commercial general liability (“CGL”).

The kinds of claims we expect to see

As businesses open and invite customers back on premises, they will face inevitable claims that the business failed to protect third parties from exposure to the virus. The claims will be made by customers, as well as invitees who come on site to service your business and premises (e.g., cleaners, delivery). (Employee claims will abound; those issues are outside the scope of this article.)

The claims will be that the business failed to take adequate protective measures with respect to people management and facilities maintenance. On people management, the claims will include that the business did not reconfigure and structure the premises consistent with various guidelines (e.g., CDC, state, and local guidelines regarding social distancing, mask wearing, flow and physical structure of the business). On facilities maintenance, the claims will predominantly be a failure to disinfect and air filter adequately, likely in terms of frequency, scope, and manner. While the CDC is expected to be the leader in defining guidelines, the fact that not all businesses are created equal—more on that below—and that guidelines are likely to proliferate from state agencies and local governments, keeping up and conforming with them may be impracticable. Akin to the Americans with Disabilities Act compliance space, there will be plenty of room for hyper-technical “failures” to give rise to claims.

Customer and third-party claims will usually sound in negligence. Vendor claims (and anyone else who is on premises pursuant to a contractual relationship) will typically be negligence claims as well, but indemnity provisions and releases of liability in contracts may complicate, or simplify, the claim.

How to mitigate against third-party claims and maximize insurance coverage

There’s an important convergence between the way you manage your business operations in the era of COVID-19 and your ability to bring your CGL insurance to bear in defending your business in any third-party claims: the same people- and facilities-management efforts you bring to bear to limit third-party claims are the same efforts that will preserve your insurance claims.

First, mitigating against third party claims:

The standard against which your business’s conduct will be measured in a lawsuit with a negligence claim will be that of the reasonably prudent business: what would a reasonably prudent business in these circumstances have done to protect its customers and invitees from contracting the virus? “Comply with the applicable guidelines” is just a starting point to mitigate the claims by third parties and preserve available insurance coverage. But, by itself, it’s insufficient. This is because the standard of care against which your business will be measured in any third-party claim will be a moving target. Figuring out which guidelines are applicable, current, workable, and affordable is the first hurdle. We also expect the guidelines to evolve and to increasingly recommend additional technological solutions, like the use of mobility and customer-tracking data.

More challenging will be the fact that reasonable measures to address people management and facilities maintenance will not be amenable to a one-size-fits-all solution. The current understanding of the risk of infection rests on two key variables—time of exposure and proximity of infection source—both of which will vary considerably depending on the nature of the business and on geographic the location of the business (population density, current infection rate). For example, big box retailers have the luxury of space that small shops do not. Businesses involving brief transactions (gas stations) have lower risk than experiential businesses (movie theaters, hair salons). And the risk of customer touch varies considerably: compare high-touch stores that have items that are not easily disinfected like furniture and home goods stores, with lower-touch venues with limited or easily disinfected touch surfaces, like restaurants. Some retailers have combinations of these differential risks under one roof.

Some tips for mitigating risk:

Have a plan for people and facilities that is reasonably tailored for all of your spaces. Document it. Revisit that plan every few weeks (“Moore’s Law” has various analogues in this COVID-19 world). Have people and processes in place to implement the original plan, and to change it as the guidelines and circumstances change.
Document and date the sources of information for the plan and document enforcement of the plan. Recommendations are likely to continue to change, so being able to prove adherence to a guideline when it was still relevant will help (think of the CDC and its “don’t use masks” and “use masks” about-face). Have better evidence than the say-so of employees or third-party witnesses. For example, use disinfectant log sheets, post signs requiring social distancing or mask wearing, and document instances of noncompliance and enforcement.
Be cautious about documenting what guidelines or steps your business will not take, and be extremely careful to avoid making the obvious and sensible link between cost and the decision not to proceed. While cost considerations are the every-day life of a business, in litigation they can be deadly. Consider using counsel in ways that maximize the likelihood of protecting such considerations under attorney-client communication or work product doctrine protections.
Review and revisit your indemnity and liability waiver provisions in contracts with invitees. There are a variety of invitees with indemnity provisions in contracts that do not work for a COVID-19 world. For example, your commercial cleaners can create risk themselves, but on your watch. They can, for example, fail to clean properly, use improper cleaning solutions or methods and, with sick employees, spread the virus. Through that lens, consider adding indemnification provisions that shift risk to invitees who, through means of their sole control, create risk for your business. Accompany those revisions with a fresh look at your insurance requirements in those contracts, and consider being added as an additional insured on the invitees’ insurance.

Second, preserving CGL coverage:

Unless it includes a virus or communicable disease exclusion, your CGL policy is, for now, likely to defend your business against third-party claims. (There is a standard form Communicable Disease Exclusion, but it and “manuscripted” virus exclusions have not been common. They probably will become universal as a result of this pandemic.) CGL coverage is, after all, purchased in order to protect a business against claims of property damage or bodily injury caused to third parties as a result of unintentionally harmful conduct of the business.

Under the framework of a typical CGL policy, it is the policyholder’s burden to prove that there is a third-party claim of bodily injury connected with the policyholder’s conduct, and that the damages complained about were caused accidentally by your business. Then, it is the insurer’s burden to prove that an exclusion applies to the claim, for example, that the business expected or intended the bodily injury. It is these two, closely related concepts—that the damage be accidental and not expected or intended—that guide insurance as a product and that endlessly fuel disputes between insurers and their policyholders. The case law is all over the map, and swimming pools of ink have been used by judges and commentators wrestling over what appear to be simple concepts. For purposes of this article, the fundamental point of insurance is that it is designed to protect against fortuitous events, not those intended or otherwise plainly foreseeable. Whether infection of customers is foreseeable will be the grist for coverage lawsuits.

This is where the convergence of third party claims and CGL coverage happens: the same conduct the business took to mitigate risks of claims will be the same conduct your company will want to point to in order to demonstrate to the insurer that the infection was not foreseeable (as a result of your business’s conduct). That is, the greater the departure of your business’s conduct with respect to people- and facility-management and the applicable guidelines, the greater third-party liability your company is likely to face, and the greater risk your company runs being denied coverage for those claims.

Some tips for preserving coverage:

Follow the same two bullets above: have a plan, people, and processes in place; and document and enforce the plan;
Provide timely notice to your insurers; and
Keep your documentation of the plan at least as long as the length of the applicable statute of limitations for personal injury in your state(s) because CGL policies typically respond to claims if the damage claimed occurred during the policy period, which can be years after the policy expired.

To be sure, many of these third-party claims will amount to little in terms of significant verdicts or settlements. This is because causation is going to be a heavy lift for claimants. With “community spread” of this disease and an expectation (nay, hope) that herd immunity will set in, and with the long incubation period and ability to asymptomatically transmit the virus, it is going to be difficult for claimants to prove a particular exposure in a particular business was the culprit. (This difficulty of proof will be inversely proportional to the degree to which your business complied reasonably with guidelines.) But even in this optimal circumstance where actual liability determinations are minimal and de minimus nuisance settlements may predominate, attorneys’ fees to defend litigation can be a drag on a company’s resources, and many claims will survive into and through time-consuming discovery phases.

Moreover, “judicial hellholes” and putative class actions may create extra wrinkles and levels of risk. There will be cases that clear the hurdle of summary judgment, and the outcomes of those cases that go to trial will depend on juror assessment of what steps were reasonable for company to undertake. What’s reasonable to a juror is often not the same as what was reasonable to a company years prior, especially if the predominant reason the company did not take a particular precaution was cost.

Final thoughts on COVID-19’s effects on your insurance program

First, gird for higher insurance premiums and a “hardening” insurance market. For the last decade, insurance premiums have been on a slow but ineluctable march upward, fueled by numerous factors, including increased major disaster claims (which insurers substantially attribute to climate change), social inflation (increased litigation, broader contract interpretations, plaintiff friendly legal decisions, and larger jury awards), and insurer consolidations. Add COVID-19 to the list, with some twists. While the business interruption claims sound like more bark than bite because of the putative requirement that there be physical damage to property (and courts may conclude that is hard to prove with a virus that can be cleaned or dies with time), the third-party claims discussed above may be more expensive for insurers.

Second, all those people and facilities plans you’ve made are here to stay. There is no doubt that the previously sporadic inclusion of virus exclusions in CGL policies now will be universal. That means that the 2020 pandemic probably will be the last one where widespread coverage exists for liability claims (absent very substantial increases in premiums or separate and expensive pandemic policies).