The initial impact of ebola on first-party property insurance coverage

By Todd M. Rowe and Paul S. White

INTRODUCTION

On Sept. 30, 2014, the “first laboratory-confirmed case of Ebola to be diagnosed in the U.S.” was found in an individual who had traveled to Dallas from West Africa. The person did not have symptoms when leaving West Africa, but developed symptoms approximately four days after arriving in the U.S. Two of his nurses subsequently tested positive for Ebola. Other U.S. aid workers who contracted Ebola while treating Ebola patients in West Africa have also been returned to the U.S. for treatment.

In the wake of these confirmed U.S. Ebola cases, the Centers for Disease Control, the media, employers, government agencies and the public at large have, in somewhat of a frenzy, tried to grasp what the consequences are and what this means to them. Predictably, measures have been taken to prevent the further spread of this virus. On Oct. 13, 2014, the CDC asked 132 passengers on a Frontier Airlines flight traveling from Cleveland to Dallas/Fort Worth to monitor their health when a healthcare worker began showing Ebola symptoms while on the flight. Schools have been closed. Patients have been quarantined. Individuals who have been potentially exposed to Ebola given their proximity to Ebola patients have been quarantined. Apartment buildings have been put on lock down. Remediation and sterilization measures have been taken in private and public buildings. A cruise ship was diverted and returned to port while its passengers were monitored for Ebola. Multiple flight passenger lists have been scrutinized to determine whether Ebola has spread. A U.S. dog was tested for Ebola while a Spanish dog was put down after his nurse owner contracted the virus. While the current Ebola outbreak may not be considered a “pandemic” at this time, there is no dispute that it is the deadliest Ebola outbreak on record. “This epidemic is without precedent,” said Bart Janssens, director of operations for Doctors Without Borders. “It’s absolutely not under control, and the situation keeps worsening. … There are many places where people are infected but we don’t know about it.”

Admittedly, the connection between the current Ebola outbreak and first party property insurance claims is not immediately clear. However, history has shown us that the fear of a pandemic, whether warranted or unwarranted, can be worse than the actual danger posed to health and safety. While the current Ebola outbreak may not cause direct physical loss to property, research has shown that “secondary impacts” related to a pandemic event could cause actual damage. Also, business owners can suffer further financial loss when people stay away from the business for fear of contracting the Ebola virus, or when they are forced to stay away because of mandatory evacuations or curfews. While the current Ebola outbreak, hopefully, will not reach pandemic proportions, it does present ripe opportunity to consider insurance coverage issues related to pandemic events.

THE CURRENT EBOLA OUTBREAK

Ebola, once known as “Ebola hemorrhagic fever,” was first discovered near the Ebola River in what is now the Democratic Republic of the Congo in 1976. And, until recently, outbreaks were confined to countries in Africa. A high percentage of those infected with Ebola will die as the disease interferes with an individual’s immune system. As Ebola progresses, it can cause organ failure; severe bleeding; jaundice; delirium; seizures; coma; and shock. The Ebola virus is designated as a “Category-A” virus by the Centers for Disease Control because of its high mortality rates and ease of transmission. See, Allen v. NIH, 2006 U.S. Dist. LEXIS 97356, 2-3 (D. Mass. Oct. 20, 2006).  At present, the CDC has classified the West African countries of Guinea, Liberia and Sierra Leone as “countries with widespread transmission.”  Nigeria, Spain and the United States are classified as “countries with localized transmission.”

There is no FDA-approved vaccine available for Ebola. The CDC recommends the best protection against Ebola is through good hygiene, not coming into contact with items that have come into contact with an infected person, and, to monitor anyone for 21 days if there is a concern of infection. Infected people typically are not contagious until they develop Ebola symptoms.

Over the last couple of decades a number of disease outbreaks — including bird flu, swine flu, MERS, and SARS, have threatened society and commerce. We have also seen threats from manmade substances including anthrax and smallpox create similar threats. One common characteristic among these outbreaks and bioterrorist attacks has been the danger posed by the fact that these threats could spread through the air. Ebola is not an airborne disease and it can only be transmitted through direct contact of broken skin or mucous membranes with bodily fluids of the infected patient: blood, sweat, tears, saliva, vomit, stool, urine, breast milk and semen. In short, the possibility of contracting Ebola is extremely low without having contact with the body fluids of an infected person or animal. 

POSSIBLE CLAIMS UNDER FIRST PARTY PROPERTY POLICIES 

The nature of a property insurance policy is to provide an insured with benefits for accepted risks of loss, in exchange for the receipt of premiums. Property insurance policies generally insure either (1) “all risks” of physical loss unless perils are specifically excluded; or (2) “named perils” such as losses from specifically identified causes, for example, fire or earthquake. The typical “all-risk” policy begins with a broad insuring provision which states that the policy covers “direct physical loss or damages to Covered Property.” The insurer then specifies which risks it will not assume by listing those causes of loss as policy exclusions. See, Mutual Fire Ins. Co. of Calvert County v. Ackerman, 872 A.2d 110 (Md.App.2005); Morgan v. Auto Club Family Ins. Co., 899 So.2d 135 (Md.App.2005); Garvey v. State Farm Fire & Cas. Co., 48 Cal. 3d 395, 406, 770 P.2d 704 (1989); Jordan v. Allstate Ins. Co., 116 Cal.App.4^th 1206 (2004).  In other words, “the insurer promises to pay money to the insured upon the happening of an event, the risk of which has been insured against.” Montrose Chem. Corp. v. Admiral Ins. Co., 10 Cal.4th 645 (1995); H. Walter Croskey & Ron Heeseman, California Practice Guide: Insurance Litigation § 6:200 (The Rutter Group 2004). The property insurer covering the insured risk when property damage first manifests itself is generally the insurer solely responsible for the loss, even if property damage continues after the insurer’s policy expires. See, for example, Prudential-LMI Commercial Ins. Co. v. Superior Court (Lundberg), 51 Cal. 3d 674, 679, 274 Cal. Rptr. 387, 404 (1990); Allstate Ins. Co. v. Quinn Constr. Co., 713 F. Supp. 35 (D. Mass. 1989), opinion vacated, 784 F. Supp. 927 (D. Mass. 1990); Cohen v. North Am. Life & Cas. Co., 150 Minn. 507 (Minn. 1921); Jackson v. State Farm Fire & Cas. Co., 108 Nev. 504 (Nev. 1992).  A minority of jurisdictions, however, may consider when damage first began as opposed to when it first became manifest. Kief Farmers Coop. Elevator Co. v. Farmland Mut. Ins. Co., 534 N.W.2d 28, 35-36 (N.D. 1995); Ellis Court Apartments Ltd. P’ship v. State Farm Fire & Cas. Co., 72 P.3d 1086 (Wash. Ct. App. 2003).

Potential For Direct Physical Loss Caused By A Pandemic

First party property claims require direct physical loss to the property and proof of causation. Property policies require that the loss at issue result from “direct physical loss or damage.” For example, California courts have concluded that this phrase requires “direct” loss, and as such encompasses only physical harm to the covered property. “Direct” loss does not include consequential or resulting economic loss bearing a more attenuated connection to the covered cause of loss. Id. Similarly, California courts have concluded that the phrase “direct physical loss” also requires a “physical” loss. Id.; Ward General Ins. Servs., Inc. v. Employers Fire Ins. Co., 114 Cal.App.4th 548, 554, 556 (2003).  “Physical” loss requires the loss of tangible property. Ward, 114 Cal.App.4th at 554, 556.

The predominant and most anticipated issue is whether the impact of an Ebola outbreak would constitute a direct physical loss or damage as defined under a first party property policy. Policyholders may have difficulty arguing that an Ebola outbreak is similar to traditional “perils” such as a fire or earthquake. As it stands presently, research indicates the Ebola virus will have little or no impact on physical property. As discussed above, transmission of the Ebola virus is limited to the extent that it cannot move through the air or water. Rather, at this point, it appears the Ebola virus can only be transmitted through contact with an infected person. This characteristic may limit the chances for the Ebola virus to be considered a “peril” as defined under the typical first party property policy. During prior pandemics, such as the Bird or Swine Flu, the virus was transmitted by air. Consequently, there was at least a chance that those viruses could be found on an altered physical property in some manner.

Of course, while the Ebola virus does not presently appear capable of altering physical property, there is research indicating “secondary impacts” from a pandemic could result in property damage. For example, if a pandemic taxes emergency services in a particular community, there is a greater chance fires will take longer to extinguish, which in turn, could cause more property damage. Costs to repair property damage may increase which may cause people to stop repairing their property as wells as drive up repairs costs for insurers responding to a claim under a first party policy.  Consequently, while an Ebola outbreak may not create direct property damage, policyholders may attempt to link secondary impacts to their damaged property.

Even if the Ebola outbreak does not take hold in the U.S., business interruption coverage may also extend to temporary closures of U.S. businesses due to Ebola outbreaks impacting “dependent properties,” such as a major supplier to the policyholder. A policyholder’s suppliers may be shut down if they are in a location where Ebola has impacted the local community and disrupted the supply chain. Possible claims arising from businesses being disrupted carry the specter of touching nearly every type of business where people interact: 

The economic effects of a pandemic could be devastating, says Laurie Garrett, a senior fellow for global health at the Council on Foreign Relations in New York City whose article on the subject is in the July/August issue of Foreign Affairs.

The airlines and travel industry would feel the hit first, predicts Garrett, who is the author of the book The Coming Plague: Newly Emerging Diseases in a World Out of Balance.

She says that international trade might then dry up as frantic governments try to shut down their borders to prevent spread of the disease. Essential imported goods, such as raw materials, medicines and certain foods, would become suddenly unavailable. As the pandemic progresses, schools and day care centers would be almost certain to shut down.

“Parents will stop coming in to work to stay home and take care of their children,” Garrett says. “Business will grind to a halt all over the place. What if the supermarkets stop being stocked? What if you can’t get milk?”

Kristin Choo, The Avian Flu Time Bomb, 91 A.B.A. J. 36, 40 (2005).

Consequently, there is still an opportunity for insurance claims under first party property policies regardless of whether an Ebola pandemic creeps into the United States on a measurable scale.

Pandemics Can Have “Concurrent Causes” Of The Damage

First-party cases may involve losses that result from more than one concurrent cause — property damages accentuated by the aftermath of the event causing the property damage. Relative to causation, there are two schools of analysis currently employed by courts across the country.  A minority follows the doctrine of concurrent causation where coverage is afforded so long as a covered cause of loss contributes in a meaningful way to the insured’s damages. In jurisdictions that follow a “concurrent cause” analysis, coverage is allowed whenever two or more causes contribute to a risk and at least one of the causes is covered under the policy. It is completely unnecessary to determine exactly which event occurred first or even the degree to which the various causes of loss contributed. So long as a covered cause of loss appreciably or meaningfully contributes, and is not remote or tenuous in nature, then the insurer must find coverage under the policy.  Concurrent causation analysis utilizes a “but for” analysis that is akin to the “direct causation” theory employed in tort law. See, for example, Ang v. Martin, 114 P.2d 637 (Wash. 2005); Hurd v. Williamsburg County, 611 S.E.2d 488 (S.C. 2005). If the damages would not have occurred “but for” the contribution of a covered cause of loss, then there is coverage on the claim. This is the case even if there are multiple contributing causes that are clearly excluded under the policy.

By contrast, the majority of jurisdictions employ the doctrine of efficient proximate cause. In these states, coverage is afforded if the predominant cause of the loss is a covered cause of loss. Just as concurrent causation is akin to the “but for” theory in tort law, the doctrine of efficient proximate cause is more analogous to the proximate or legal causation analysis in tort law. See, Palsgraf v. Long Island R. Co., 162 N.E. 99 (N.Y. 1928). “Efficient proximate cause” means the “predominating cause of the loss,” or the most important cause of the loss. Garvey, 48 Cal.3d at 403. The “efficient proximate cause” need not be the first or immediately cause of loss. Id.; See also Murray v. State Farm Fire & Cas. Co., 509 S.E.2d 1 (W.Va. 1998). Under this doctrine, once the “predominant” cause of the loss is identified, coverage turns on whether it is a covered or excluded cause of loss under the policy. If that predominant cause is excluded, then the entire claim may be excluded, even if there are covered events that contributed along the chain of events.

Catastrophic events present ample opportunity for property damage to result from “concurrent causes.” For example, in the aftermath of Hurricanes Katrina and Rita in 2005, the various business interruption losses from the storms had two independent, concurrent losses. First, many businesses suffered physical losses when property was damaged. However, these physical losses gave rise to additional losses when authorities declared a state of emergency which shut down New Orleans. Therefore, policyholders argued they sustained losses from the storms as well as separate loss from the impact of the storms. We could see a similar situation related to an Ebola outbreak if authorities prohibit access to a policyholder’s property due to an Ebola outbreak at a neighboring property. For example, storekeepers may suffer a business interruption if their store is located in or near a store where an outbreak occurred. Consequently, business owners’ financial losses from property damage can be increased by mandatory evacuations, curfews or mass hysteria driving away any hope of business after a pandemic. 

Pandemics May Cause “Business Interruption” As Defined Under First Party Policies 

In the case of a pandemic event, policyholders would be expected to look to the “business interruption” or “business income” coverage under first party property policies to recoup financial losses. “Commercial property insurance covers loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations. Coverage applies to loss suffered during the time required to repair or replace the damaged property. It may also be extended to apply to loss suffered after completion of repairs for a specified number of days.”

In order to trigger business interruption coverage under a property policy, a policyholder must sustain a loss in business after suffering a direct physical loss attributable to a covered “peril” under policy. Commentators have already began to note that while the current Ebola outbreak may cause business interruption, there are serious questions as to whether there will be direct physical loss to trigger coverage:

Business interruption is most likely to occur in mining, agricultural, energy, chocolate and travel sectors that have a strong presence in the affected West African countries,” the Boston-based catastrophe-modeling firm said in a recent media advisory. However, it is unclear what, if any of these losses are covered by existing insurance policies, especially since business-interruption policies typically require physical damage to a location.

In a decision that could provide some guidance as to how courts may interpret the coverage issues related to a pandemic event, the Eighth Circuit Court of Appeals addressed whether a plaintiff could recover the loss of business income resulting from an embargo on beef products due to “mad cow disease.” In Source Food Tech., Inc. v. U.S. Fidelity & Guar. Co., No. 06-1166 (8^th Cir. Oct. 13, 2006), the insured argued that the closing of the border to imported beef product caused direct physical loss to its beef product because its beef product was treated as though it were physically contaminated by mad cow disease and lost its function. The insured relied on Gen Mills, Inc. v. Gold Medal Ins. Co., 622 N.W. 2d 147 (Minn. Ct. App. 2001) and  Marshall Produce Co. v. St. Paul Fire & Marine Ins. Co., 98 N.W. 2d 280 (Minn. 1959) to support its position that the impairment of function and value of a food product caused by government regulation is a direct physical loss to insured property. The Eighth Circuit found that those cases were distinguishable and that coverage in those cases was triggered by actual physical contamination of insured property. However, the Eighth Circuit found that Source Food’s inability to transport its truckload of beef product across the U.S.- Canadian border did not constitute product that was physically contaminated or damaged in any manner and to characterize an inability to transport such beef product across the border would render the word “physical” meaningless. Consequently, the court granted summary judgment in favor of an insurer on the plaintiff’s breach of contract claim on the basis that Source Food did not experience direct physical loss to property.

And, those seeking coverage for the effects of a pandemic will not be limited to the owner of the property. Several entities, including various property owners, mortgagees or tenants all may have an insurable interest in the property impacted by an Ebola outbreak.

From a practical standpoint, it may be difficult to envision a scenario where a pandemic would give rise to a peril under a property policy. However, as seen with large-scale tragic events in the past, there will be a search for deep pockets if businesses are forced to cease operations during a pandemic event. As some commentators have observed:  “One of the distinguishing elements of a pandemic versus other types of business interruption is that pandemics will result in the temporary – and in some cases permanent – loss of human capital . . .”  Mark A. Hofmann, Government Releases Pandemic Plan, Employers to Play a Key Role in Fight Against Avian Flu Threat, Business Insurance, May 8, 2006.  This “loss of human capital” may result from the quarantined employees or customers, fearful employees or customers or, in the worst- case scenario, death of employees or customers.

Further evidence of the potential for “business interruption” losses caused by Ebola is the fact that insurers are offering products targeted at losses from this Ebola outbreak. As of October 2014, Lloyds of London is offering business-interruption coverage to “facilities such as hospitals, hotels, airports, shopping centers, restaurants, theaters and gyms” or any other business that may be forced to shut its doors because of an Ebola outbreak. Even more recently, insurers are starting to exclude Ebola-related claims from new and renewal policies for policyholders “that have foreign travel exposure to certain African countries.” And, while it is still unknown whether this coverage will be needed, these programs and exclusions are helpful to the extent they will serve as a model for insurers to respond for future pandemics.