Author: Chris Boggs
States have gone to war against some municipalities over COVID-19. Executive orders currently in place in many states still bar certain businesses considered “non-essential" from opening; but some municipalities have told their respective governors they are opening the community regardless.
Governors finding themselves in these situations have undertaken various tactics to prevent these municipalities from carrying through with their reopening plans. North Carolina's governor told a county that all state funding would be cut if they opened, the county capitulated. Other governors, seemingly out of options, have undertaken a unique and indirect tactic – misrepresenting insurance coverage.
Although this sounds like an odd tactic, the goal is to scare the business owners into remaining closed. If the governors can successfully dissuade the business owners, it doesn't matter what the city or county does, businesses won't open solely out of fear.
Governors and their representatives are publicly stating that if a business opens in violation of the executive order, doing so places its insurance coverage in jeopardy because of the “illegal," “criminal" and/or “dishonest" acts exclusions. The problem is, there is enough untruth in these statements to make them lies.
Let's review the truth or half-truths of these claims on a coverage-by-coverage basis. Note, the following analysis is of unendorsed policy language,
endorsements can alter application of this policy language analysis.
Commercial General Liability (ISO's CG 00 01 04 13)
Coverage A – Bodily Injury and Property Damage Liability. Simply, there is NO illegal or criminal acts exclusion applicable to Coverage Part A. One state knowingly took indecent liberties with the “Expected or Intended Injury" exclusion in its attempt to assert that coverage would be denied.
The expected or intended injury exclusion does not act to deny claims resulting from opening against a governor's orders. This exclusion applies to the actions of an insured that one would EXPECT or INTEND to cause injury such as punching someone in the nose or setting a trap. A reasonable person intends and would expect that someone would be injured by such acts.
No one opening a store expects or intends to cause injury or damage. Asserting that coverage provided by Coverage A in the CGL is affected by the governor's order is false.
There does not appear to be an applicable exclusion in Coverage Part A. So, a slip-and-fall incident is covered, a products liability claim is covered, basically anything covered under Coverage A in “normal" times is covered if/when the business opens – even against a governor's orders.
Coverage B – Personal and Advertising Injury Liability. There is a “Criminal Acts" exclusion appliable to personal and advertising injury coverage. Within Coverage B the specific exclusion reads:
This insurance does not apply to:
d. Criminal Acts
"Personal and advertising injury" arising out of a criminal act committed by or at the direction of the insured.
“Personal and advertising injury" is a defined term. Basically, this exclusion applies to activities and actions such as libel, slander, defamation of character, violating a right of privacy, wrongful eviction, false arrest and other such actions. If any of the acts listed in the definition is done in violation of a law, there is no coverage.
If the store owner calls the governor a nasty name, that would be excluded; but only if doing so is considered a criminal act. Thus, this exclusion is a non-issue.
Coverage C – Medical Payments. In short, there are no exclusions for “illegal," “criminal" or “dishonest" acts in Coverage C. Where the insured had coverage before the orders, they still have coverage.
Within ISO's CP 00 10 10 12 - Building & Personal Property Coverage Form there is one reference to “illegal." The policy excludes coverage for “contraband, or property in the course of illegal transportation or trade." Although this is intended to exclude coverage for products that are illegal to import, export or sell, the wording may present problems if the insured opens against government orders.
Two key questions arise:
- Is operating in defiance of an executive order a criminal act (making it illegal); and
- If it is a criminal act, does ignoring an executive order mean the operation is “in the course of" illegal…trade?
Illegal or Criminal Act
An illegal act is one that is forbidden by law. In the absence of this pandemic, the reasonable assumption is that the insured is a legal operation and was operating legally. Whether an executive order disallowing the operation of a business is given the effect of or is equivalent to a law is a question for the courts.
If operating in defiance of an executive order is forbidden by law (making it a criminal act), will the “law" be upheld in court? Reports are that at least one state court has determined that stay-at-home orders are not legal. Whether other courts will follow this lead is unknown.
For sake of this analysis, let's make the worst-case assumption that operating in defiance of an executive order is considered a criminal or illegal act. If operating against a lock down order is a criminal act, this is strike one towards the lack of property coverage.
However, given the anecdotal evidence, these orders do not appear to hold status as a law. Governors can make emergency declarations that can be enforced to a certain degree; but if they were, in fact, laws and the actions were illegal, the governors would not need to use scare tactics and/or threats such as the revocation of the business' operating license, they would simply have the owner arrested.
Additionally, laws cannot generally be created by edict. A law (statute) generally requires approval of both houses. Yes, as stated, an executive does have broad powers during a declared emergency, but that does not include the ability to create a law or statute.
Lastly, in general the US is designed as a “bottom-up" regulatory model. The only reason the NC county succumbed to the governor's orders was because the state threatened to take away state funds. Evidently, opening is not illegal, it's just against the governor's wishes contained in the emergency declaration. (It's unlikely that any level of government would want the executive to have the ability to create law by edict.)
If the actions are NOT criminal, coverage for the property is NOT excluded.
Is Operating in Defiance of the Order “In the Course of" Illegal Trade
“In the course of" can be defined to mean “during a specified period." Other definitions include “in the process of," and “during."
Black's Law redirects the definition of “course of trade" to “trade usage." “Trade usage" redirects to “usage." Under “usage" is found the meaning of “trade usage." A long way around to the information needed.
Trade or trade usage in Blacks Law essentially means the common methods of operation. Other sources define trade to mean a business or occupation entered into for profit.
Given the above, it appears any business operating is “in the course of trade." If operating in defiance of a governor's order is illegal (a criminal act), the business is “in the course of illegal trade." Operating in the course of illegal trade negates property coverage during the time of illegal operations.
The commercial property form does not limit the application of this wording to real or personal property – the wording applies to all property.
Unfortunately, there is not a “fix" for this possible exclusion of coverage. The lynchpin or key factor to whether the property is covered or excluded from coverage is whether the operation is illegal. If opening is not illegal, there is coverage; if opening is a crime, there is no property coverage.
ISO's CP 10 30 09 17 - Causes of Loss - Special Form contains an exclusion for dishonest or criminal acts; however, the wording applies to actions undertaken by the insured to damage or destroy covered property. This exclusionary wording does not apply to the operation of the business within or outside the allowances of an executive order.
Is coverage excluded for property losses when the business is operating in defiance of an executive order? This may ultimately be a question for the courts; but it appears:
- If a governor's decree does NOT carry the weight of a law, it's unlikely this wording would apply – meaning there would be coverage regardless the governor's wishes;
- If a governor's decree IS given the weight of a law, making the act of opening illegal, the insured may lose property coverage; or
- If a governor's declaration is granted the weight of a law, but such decree is struck down by the courts, coverage may be reinstated.
From a property coverage perspective, the question of coverage is murky. Carriers may or may not attempt to spit hairs to deny or provide coverage.
Workers' Compensation and Employers' Liability
Does NCCI's workers' compensation policy respond to cover an injury to an employee arising out of and in the course and scope of employment if the business is operating against that orders of the state? Workers' compensation is a unique coverage, the policy responds in accordance to the guidelines of the state's workers' compensation statutes. To answer the question, the statute must be reviewed. If statute does not exclude protection to employees working in violation of the law, the work comp policy responds and pays for injury – regardless of the executive order.
Because workers' compensation is for the benefit of the injured worker, it is unlikely any state law would disallow coverage for any work-related injury, even if the business is operating against an executive order. This violates the spirit and intent of the coverage. In fact, some work comp statutes specify that it applies to workers whether lawfully or unlawfully employed.
The respective state law must be reviewed, but such limitation or exclusion is unlikely to be found. Furthermore, there is no wording in the policy itself that would allow the insurance carrier to seek repayment from the insured. Thus, opening in defiance of an executive order does not appear to jeopardize workers' compensation coverage.
Part Two – Employers' Liability does contain exclusionary wording regarding employment in violation of the law. The policy reads:
This insurance does not cover:
3. bodily injury to an employee while employed in violation of law with your actual knowledge or the actual knowledge of any of your executive officers.
Is the employment in violation of the law or is the operation in violation of the law? The apparent intent is to exclude employers' liability protection for those employed in violation of federal guidelines regarding status as a legal worker in the US. Given the intent, this exclusion does not appear to apply. But remember, this is regarding the employers' liability protection only, this wording does NOT apply to workers' compensation.
Business Auto (CA 00 01 10 13-Business Auto Coverage Form)
There is no illegal, criminal or dishonest act exclusion in Section II – Covered Autos Liability Coverage of the business auto policy (BAP). Like the CGL, there is the Expected or Intended Injury exclusion; but, as in the CGL review, this is irrelevant in regard to this conversation.
Operating in disregard to the executive order does not appear to negatively affect the liability coverage provided by the business auto policy. If the BAP did exclude illegal acts, there would be no coverage for injury caused when speeding, when making an illegal turn or many other actions that are illegal.
Neither is there an applicable exclusion under the physical damage coverage. No specific exclusionary wording appears to affect uninsured/underinsured motorist coverage either.
Apparently, the business auto policy responds regardless of any orders in place.
Professional Liability and Errors & Omissions Policies
There is no “standard" professional liability or errors and omissions (E&O) contract, thus each will require separate review. However, most of these forms do contain exclusions related to criminal conduct. But does such wording exclude coverage simply because the business is open regardless of the governor's declarations?
Given the intent of coverage, professional liability and E&O policies cover the professional activities of the insured and the harm caused by the improper practice of those activities. Opening against the wishes of the governor doesn't seem to entail the professional activities, it is a business decision.
For example, assume insurance agencies were not considered essential businesses and were forced to close. If an agency owner decided to reopen in spite of the order, any act or failure to act for or on behalf of a client may result in an E&O suit. IF opening is a criminal act (it's not clear if such act is criminal), does that activate the criminal acts exclusion?
Opening in defiance of any order has no correlation to the erroneous act of the agent. They are separate and distinct incidents. One has no relationship to the other.
This same logic appears to apply to all other activities covered by either a professional liability or an E&O policy. Opening against the wishes of the governor does not appear to affect coverage.
However, some governors have threatened to revoke and some already have revoked certain professional licenses. If holding a professional license is a condition of the professional liability or E&O coverage, then these coverages appear to be in jeopardy.
Most occupations that require professional liability or E&O coverage also require a license to provide the service (not the same as a business license). If the government, through its police powers, revokes a professional license, the coverage may cease to exist for any future events. Revoking a professional license is not the same as revoking a business license. For agents, this is revoking the agent's P&C license, not the agency's license to exist. Whether such revocation is allowed by law is not a topic for discussion in this article.
Executive or Management Liability
Directors and Officers (D&O), Employment Practices Liability (EPL) and Fiduciary Liability are the three most commonly discussed executive or management liability coverages. Like professional liability and E&O, there are no “standard" forms. Likewise, these forms generally do contain exclusions related to illegal, criminal, and/or dishonest acts.
Following are examples from two separate management liability forms:
The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured:
A. alleging, arising out of, based upon or attributable to:
(2) the deliberately fraudulent or criminal acts of an Insured; provided, however, this exclusion shall only apply when it is finally adjudicated that such conduct occurred;
We will not pay for any "loss" resulting from any "claim":
A. Based upon, attributable to, or arising in fact out of any dishonest, malicious, fraudulent or deliberately criminal act or any willful violation of any statute or regulation;
Notice the key words common to both exclusionary examples, “based upon," “attributable to" and “arising out of." Neither exclusion applies to any management liability suit unrelated to opening against the will of the governor. The only suits that might be excluded are management liability suits directly related to the violation of the decree; otherwise, the policy is unaffected.
Overall, opening in defiance of a governor's decree appears to have little effect on insurance coverage. Questions arise in two policy types:
- Commercial property; and
- Professional liability / E&O policies.
If, and this seems to be a big “if," the act of opening is a criminal act, the insured's commercial property coverage may be compromised. And if the state revokes the business owner's professional license (not business license), the professional liability or E&O policy may exclude coverage.
The fear tactics being used by some states surrounding insurance coverage are largely unsupported. Not being lawyers, no agent should advise on what constitutes a criminal act, but agents can and are within their licensure to explain insurance language.
Last Updated: May 18, 2020