A Pandemic Response
COVID-19’s effect on property losses and subrogation claims
Since March, the coronavirus pandemic has impacted virtually every aspect of life across the globe, and its effects have been unprecedented, in both their scope and speed of impact. Even after the U.S. and other countries attempt to ease lockdowns and restore some level of normalcy, the ripple effects will continue. The impacts will be long-lasting and far-reaching, including the influence they will have on the nature, frequency, and extent of property losses.
Property Water Losses
Since early March 2020, the majority of commercial properties in America have sat vacant. A water loss that lasts for just an hour can easily result in damages reaching six figures. Water losses occurring at commercial properties over the weekend, when no one is there to detect it, often result in hundreds of thousands—if not millions—of dollars in damages by the time the loss is discovered 48 hours later on Monday morning. The risk of loss presented by vacant properties where no one is there to discover losses is so great that insurance policies generally contain a vacancy exclusion, which precludes coverage for losses at properties that are unoccupied for a certain number of consecutive days.
Water losses occurring at vacant commercial properties during the coronavirus closures will, on average, be larger than they would have been had they occurred at any other time. Commercial properties that are not normally vacant for more than a weekend will now go weeks without anyone entering the building. That means what would normally have been a small water loss that went undetected during closures will now be a big loss, and big losses will now be catastrophic.
Executive orders have also shut down contractors nationwide. COVID-19 closures will cause substantial delays in property repairs and, thus, increase time-element losses. Even after restrictions are lifted and repairs can commence, contractors will face backlogs that will delay repairs further still. A two-month closure due to the coronavirus could lead to property repair delays of many more months. Delays in repairing properties mean extended periods during which insureds cannot live in their homes and insured businesses must remain closed. These repair delays will increase additional living expenses (ALE) and business interruption losses. Additionally, the inability to place insureds in closed hotels may further drive up ALE damages.
Manufacturing Disruptions and Product Liability Claims
The People’s Republic of China has been the world’s factory—particularly with respect to electronics, household appliances, plumbing products, and other products that regularly cause water losses and fires. COVID-19 has now brought Chinese factories and supply chains to their knees. Lockdowns in China have lifted, but the disruption to manufacturing and exporting will continue for some time to come. For the foreseeable future, closures, labor shortages, financial issues, and other uncertainties will disturb Chinese manufacturing, exporting, and international supply chains.
In the longer term, the coronavirus may also cause global manufacturing to permanently move away from China. At a number of coronavirus task force press briefings, President Trump has noted the problems presented by American dependence on Chinese manufacturing. Companies were already moving away from China as increases in wages and regulations drove up Chinese manufacturing costs. Then, in 2019, the shift picked up momentum when President Trump announced tariffs of up to 25 percent on over $300 billion of Chinese imports. More companies began exploring production opportunities outside of China, especially in Vietnam, India, and Mexico. The coronavirus pandemic has now highlighted our supply chain vulnerabilities and may very well accelerate the development of other manufacturing hubs.
These short-term disruptions and long-term changes in the manufacturing of so many products will inevitably breed quality control issues and, in turn, product failures.
Construction Disruptions and Construction Claims
Construction is similar to manufacturing in that disruptions to the construction process bring about the risks of failures. The coronavirus brought construction to a standstill. Contractors were given days to bring construction projects to an abrupt stop as executive orders closed construction projects across the country. If contractors did not address issues before suspending their work, then the project became vulnerable to losses. When projects finally resume, will contractors seamlessly pick up where they left off, or will steps be missed? Will various contractors be out of business due to financial troubles, leaving other contractors to pick up the pieces?
Contractors will be substantially behind schedule and looking for ways to make up lost time.
Substantial delays on account of closures will be compounded by supply chain delays as so many construction materials come from China. Time is always of the essence in large construction projects, and a time for completion is usually established in the contract. While contractors may try to enforce force majeure provisions, contending that COVID-19 was an event outside their control that necessitates extensions, contractors will still look to finish projects as quickly as possible. This, of course, may result in contractors taking shortcuts that can lead to losses.
Like with product manufacturing, disruptions in the construction process cause quality-control issues and mistakes. Incomplete projects sitting idle, substantial delays in work, financial issues, and contractual completion times will have significant consequences on construction, and these effects may result in losses.
Effects on Courts and Claims Departments
Once courts reopen, judges will face months of backlogged motions, conferences, and trials. In addition to the backlogged dockets, judges will face an influx of filings that were tabled while the court was closed. Some courts plan to also put a moratorium on trials because the jurors would need to convene in close quarters. (In Maryland, for example, trials are being postponed until September.) Litigation across the country will be delayed substantially.
These delays may make early mediation more beneficial than ever. Subrogation claims, with fixed property damages, expert-driven issues, and sophisticated insurers on both sides, are especially ripe for early mediation. Counsel should explore opportunities to mediate subrogation cases early—both pre-suit and post-paper discovery. Doing so will help claims departments economically move claims that would otherwise stagnate due to COVID-19-related burdens on the judicial system.
These are just some of the many ways the coronavirus pandemic will affect property losses and insurers on both sides of the subrogation claim.