COVID-19 Pandemic-Related Insurance Coverages

ERIC H. KARP, ESQ., GENERAL COUNSEL TO NCASEF

The COVID-19 pandemic has created a wide range of issues and challenges for franchisees. The National Coalition received a large number of questions from franchisees regarding whether their insurance coverage will help them as well as their employees in the context of the pandemic. In order to address those concerns, the Executive Team of the National Coalition facilitated a conference call regarding insurance coverages with John Barbot and Robin Partridge of Barbot Insurance, which operates principally in California and Nevada, and Ryan Fulton representing Aon, which provides coverages for a large number of franchisees in other parts of the country.

As you are aware, franchisee who signed the so-called 2019 franchise agreement have taken on the responsibility for having their own insurance coverages, a significant departure from past practice. This is one of many costs which were transferred from SEI to the franchisee in that agreement. Under the 2019 franchise agreement, SEI is only responsible for fire and casualty loss to the store and the equipment, unless the loss is caused by the intentional acts of the franchisee or his or her employees.

The franchisee is subject to broad indemnification obligations in favor of SEI and is required to name SEI as an additional insured under all required insurance policies. This latter obligation is one that franchisees should always comply with because it provides for the defense of any claim brought against SEI as a result of the operation of the store. One Business Owners Policy we were provided with contains a separate document entitled “Acknowledgment of Additional Insured Status-Grantor of Franchise or License” and names “7-Eleven, Inc. & All Wholly Owned Subsidiaries & Divisions” as additional insureds. This is the proper way to comply with that obligation.

If you did not sign the 2019 franchise agreement, and your location is operated under an older agreement, you are subject to the indemnification provisions found in Exhibit C to the franchise agreement.

The amounts that SEI pays pursuant to those indemnification provisions are very different than what is available to franchisees that have their own insurance. Exhibit C is very complex, it has 10 separate instances and circumstances under which the franchisee will not be indemnified, and lists five additional categories of losses and obligations which are outside the scope of the contractual indemnification.

For example, based on the 2016 franchise agreement, starting at page F-39:

  • General liability coverage up to a maximum of $500,000.
  • The indemnification does cover a burglary (a theft of inventory when the store is closed), as well as a robbery (theft in the store or while on the way to the bank).
  • For a robbery while the store is open, SEI pays up to $500 for inventory.
  • For a burglary while the store is closed, SEI pays full replacement cost less $100 for inventory other than tobacco. For tobacco, there is a complicated formula based on the lesser of replacement cost and historical purchases over the most recent 12 weeks, in both cases, less $100.

The balance of this article is a summary of what we learned from insurance professionals for franchisees who have their own insurance pursuant to the 2019 franchise agreement. The specific coverages and the amount of coverage required are listed in section 18 of the franchise agreement and are beyond the scope of this article. This summary should not be considered legal advice and there is no substitute for a franchisee having direct contact with his or her insurance agent or broker with respect to any questions that relate to a specific location.

Business Interruption Insurance

Business interruption insurance may not be helpful to franchisees for two separate reasons. First, business interruption insurance generally requires physical injury to property in order to generate a valid claim. At least one insurance company, with which we have been in contact on behalf of a franchisee in another franchise system, has taken the position that a virus does not create physical injury to property, and thus there is no coverage on that basis alone.

Second, these coverages have an industry-standard exclusion for viruses that create illness or disease. It turns out that to our knowledge, no one in the insurance marketplace offers virus coverage within their Business Owners Policy form. There was one insurance company that offered a plan that covered viruses, but the premium was 2 percent of gross sales and there were essentially no takers. The insurance professionals believe that at some point in the future virus coverage might be available, but only if the government steps in and subsidizes or backstops the coverage in the same way it did with respect to terrorism coverage.

Workers’ Compensation

There is no exclusion for coverage for an employee that alleges that they contracted the COVID-19 virus in their employment workplace. This would apply whether they allegedly contracted the virus by interacting with another employee, or a customer, or came in contact with an infected hard surface in the store. However, the standard of proof necessary to demonstrate a causal connection between the virus and the place of employment would present a steep challenge to any employee that made such a claim. As with this and other coverages, the insurance professionals indicated that all insurance companies are being very cautious about making any statements regarding coverages related to virus because they expect an onslaught of claims. Therefore, there is little to be lost by making a claim because the employee may succeed, and it is even possible that there may be government intervention making it easier for employees to make these claims.

Property And Casualty

As with workers’ compensation, there is no specific exclusion for claims arising from a virus. There was an extended discussion about whether or not coverages for inventory arising from robberies, burglaries, riots or civil unrest, or fire and casualty would be affected while the store is closed. The insurance professionals advised that all of these coverages would remain in effect whether the store is open or closed and irrespective of the reason the store closed. They also stated that under the insurance policies, the franchisees have an obligation to take reasonable steps to preserve and not abandon the property that is the subject of the insurance. This means making sure that if the store’s closed, the front door is securely locked and that high-value items such as cartons of cigarettes and lottery tickets are placed out of public view and locked away in the office. When a claim is made, it is often very difficult to prove how many cartons of cigarettes were in store at the time of the robbery. Deposit all cash in the bank before the store is closed. Take the cash drawers out of the registers and place them upside down on the counters. SEI has issued a 20 step COVID-19 Closure Checklist for use in these situations. We were also advised that when a franchisee closes the store, Asset Protection steps up its video monitoring.

General Liability Claims

There was a general discussion of whether or not a franchisee would have coverage for claims asserted by a customer that he or she contracted the virus within the store. While there is no specific exclusion for claims of a customer based on contracting a virus, the standard of proof, like that in the workers’ compensation context, would make such claims very difficult to prove. In the event that such a claim is asserted against the franchisee, or threatened against the franchisee, the claim should immediately be tendered to the insurance company.