It is approaching two months since state and local governments began to issue orders requiring businesses deemed non-essential to close. As noted in McGuireWoods’ prior alerts, commercial property policies may afford business interruption coverage for lost profits and unavoided expenses incurred due to an order from a civil authority that bars access to a business property. Some policies also contain contingent business interruption coverage that provides similar coverage to the policy holder if its direct or indirect customers or suppliers are closed by order of the civil authority.
For a policyholder to preserve its rights to potentially recover business interruption losses, it is vitally important to comply with the notice and other conditions set out in the policy. Policies typically include vague terms requiring the insured to provide notice “as soon as possible,” “as soon as practicable,” “promptly” or even “immediately.”
In many states, an insurer must establish that it suffered prejudice from receiving an untimely notice from an insured. Insurers may claim prejudice if they are unable to investigate a loss or if evidence is missing. In other states, however, the insurer is not required to show prejudice and may decline coverage simply by showing that the insured failed to comply with the notice provision in the policy. Essentially, the insured forfeits its coverage by failing to give timely notice.
Most courts equate the phrase “as soon as practicable” (and similar phrases) with “a reasonable amount of time.” The facts and circumstances of each case will determine whether notice was within a reasonable time. If the policyholder’s delay in providing notice raises an issue as to its reasonableness, the question may go to a jury. In some circumstances, where notice is extremely tardy, the court may rule as a matter of law that notice was unreasonably late.
Policyholders must pay attention to other notice requirements in their policies. Policies may specify what details about the loss the insured must provide and where the insured must send notice. To provide notice, use the address specified in the policy. Provide any information that the policy requires to be included.
Following notice, most policies require the insured to submit a sworn proof of loss, setting out the particulars of the loss. Insureds should carefully review the relevant policy provisions to understand when the proof of loss is due, and what information must be provided in the proof. It is often helpful to employ an accountant to prepare the financial information necessary to establish a loss of profit.
Excess policies present different notice considerations than primary-level policies do. Notice to excess insurers must generally be given when a loss is reasonably likely to involve the excess policy. However, excess policy notification provisions may vary significantly, with some requiring notice regardless of loss amount. For this reason, it is essential to pay close attention to policy language and to carefully evaluate the loss with the assistance of counsel when considering whether and when to notify an excess carrier.
Insurers will use any violation of a policy condition as potential leverage to lessen or escape their payment obligation under the policy, even in jurisdictions where the insurer must establish prejudice in order to deny coverage. The best way to deny an insurer this leverage is to eliminate any argument it may have that notice was late. Accordingly, all potential insureds should quickly determine if they have a potential claim, and if so, notify their carriers in order to preserve their rights under the policies.
McGuireWoods has established a COVID-19 Response Team to help clients navigate urgent and evolving legal and business issues arising from the novel coronavirus pandemic. Lawyers in the firm’s 21 offices are ready to assist quickly on questions involving healthcare, labor and employment, education, real estate and more. For assistance, contact a team member or email [email protected].
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.