Communicable Disease Coverage in Workers’ Compensation and Casualty Programs

This blog post can also be found on our Coronavirus Resource Center.

COVID-19 brought a heightened interest to the treatment of communicable diseases in casualty insurance policies during 2020. The Delta and Omicron variants have renewed attention to communicable disease exclusions and coverage extension endorsements as well.

Occupational disease statutes extend workers’ compensation (WC) benefits to employees who have contracted diseases in the workplace. Communicable diseases—illnesses caused by viruses or bacteria that people spread to one another through various types of contact—can qualify as occupational diseases in certain circumstances.

Historically, it has been difficult to prove compensability under workers' compensation for a communicable disease as it was difficult to prove that an illness was acquired in the workplace, even for high-risk industries like healthcare, first responders and public transportation. However, presumptions signed into law by many states have shifted the burden to the employer to provide evidence that the disease was not contracted in the workplace.

Over the past two years, the Woodruff Sawyer loss control team has published in-depth risk management techniques and strategies to mitigate exposure to COVID-19 and its variants. These best practices toolkits can be found on our Coronavirus Resource Page.

For example, an employer can focus attention on reducing exposures by revisiting and improving safety programs and incorporating COVID-19 policies and procedures within this plan. Employers can also make sure they follow closely legislative mandates and enforce COVID-19-related state and federal regulations.

Given the above mentioned presumptions that eliminate the need for proof of industrial causation, an outbreak among a company’s employees could quickly escalate to millions of dollars in claim costs. If an employer utilizes a high deductible or self-insured retention program, a multi-claimant disease incident could prove to be financially catastrophic.

An outbreak would not count as a single occurrence and could require satisfaction of multiple deductibles or retentions. In this article, we provide guidance on treatment of communicable disease in casualty insurance policies and how different approaches to risk transfer and risk financing can affect coverage.

The History of Large-Deductible WC and Communicable Disease Coverage

Employers looking to cap their exposure to deductible losses resulting from a communicable disease outbreak have historically had one available strategy: Obtain an extension endorsement applying a single deductible regardless of the number of infected employees. This extension was often called a “Same Communicable Disease” endorsement and was typically provided for no additional charge.

Extension coverage grants typically came in two forms: broad term and defined. Broad term does not define communicable disease, while defined schedules the communicable diseases that are either included or excluded from coverage depending on if it’s an exclusion or extension endorsement.

However, the pandemic caused a considerable tightening of coverage terms from the deductible and excess markets concerned with absorbing massive losses. Many carriers have removed any coverage extensions from their policy forms, and others have revised their broad coverage to a limited coverage form with substantial additional premiums required to even obtain any sort of aggregate protection for communicable disease.

An unfortunate consequence of reduced availability of the communicable disease extension endorsement is that it eliminates benefits for other non-COVID-related diseases, such as Legionnaires’ disease.

How to Evaluate Your Coverage Options

While it may seem immediately beneficial to seek out the extension endorsement, a cost benefit analysis must be performed due to the coverage limitations of the endorsement. At their core, the Same Communicable Disease endorsements partially cap the employer’s exposure to their per-claim deductible or self-insured retention in exchange for an additional premium charge. The endorsements provide this aggregate protection subject to a total limit.

Let’s look at a conceptual example for an employer with a $250,000 deductible per employee for disease. Without the disease extension endorsement, the client would be responsible for $250,000 for each infected employee in the event of an outbreak.

Alternatively, the employer could opt to pay additional premium to modify the coverage per the Same Communicable Disease Extension specifications.

With the above enhancement, the employer would only be responsible for the first $500,000 of claims costs associated with an outbreak. The insurer would then pay the next $2,000,000 of claims costs on a first-dollar basis. Once the extension’s $2 million aggregate limit is exhausted, the employer’s $250,000 per-employee deductible would be applied again.

Note that the newly-released extension forms provide a restriction of coverage to a specific disease period—grouping infections of employees to specific time brackets and including increased retentions specific to communicable disease.

The carrier will establish an event time-period to capture various outbreaks. For example, all exposures within the same 30 days are considered one outbreak. Once the communicable disease retention is met, any additional employee who reports a claim within that same 30-day outbreak will be fully covered by the insurance carrier. Remember, however, that these extension endorsements carry a communicable disease aggregate limit, or the maximum amount of money an insurer will pay for all covered communicable disease losses during the policy period.

Should You Purchase An Extension?

Given that the cost of a Communicable Disease Extension may be significant, is this enhancement a wise purchase? The answer depends on the employer’s risk financing objectives and tolerance for risk.

The aggregate coverage provided by the extension must provide good value to an employer relative to the premium. A financially strong employer with high tolerance for risk may not see value in trading material premium for a modest aggregate limit on the extension. A risk-averse organization may seek to cap their exposure to outbreak costs, even at a material premium charge.

Finally, keep in mind that for the most risk-averse organizations, an increasingly viable strategy is to pay up for Guaranteed Cost coverage and thereby eliminate retentions altogether. Certain employers, such as healthcare providers, may struggle to obtain Guaranteed Cost options, but for other organizations the Guaranteed Cost market is more competitive than it has been in recent years.

Communicable Disease Exclusions in General Liability and Umbrella/Excess Liability Policies

So far, we have focused largely on communicable disease treatment under WC, but what about general liability and umbrella/excess liability?

Historically, outbreaks of viral illnesses, especially pandemic risk, have not been considered insurable. Outbreaks on a global scale carry so much exposure to loss it would outweigh the entire available capital of the property and casualty insurance marketplace. As a result, many general liability policies and therefore follow-form excess coverages have excluded communicable disease (CG 21 32 05 09), and many property policies exclude loss caused by or resulting from viruses, bacterium, and microorganisms (CP 01 40 07 06).

These exclusions, designed to clarify coverage intent, have been commonly applied for over a decade and were initially written to inhibit litigation for alleged bodily injury and property damage stemming from diseases such as SARS, MERS, and the Avian Flu.

Absolute Communicable Disease Exclusions

The COVID-19 pandemic has brought about a rise in absolute communicable disease exclusions for primary coverages and umbrella/excess markets have begun to attach their own communicable disease exclusions rather than following the underlying ones. The appearance of absolute exclusions in the primary layer may be as a result of a requirement within their reinsurance treaties. Many reinsurance carriers have applied absolute exclusions to their policies, which means the primary carrier must treat that exposure consistently.

Retail, Real Estate, Food Service, Hospitality

Communicable disease exclusions are most common on GL and Umbrella/Excess policies for organizations in the retail, real estate, foodservice, and hospitality/gaming industries, with few insurers being willing to provide coverage at any price. Companies in other industries are more likely to avoid these exclusions. However, like all other aspects of an insurance program, disease coverage wording is negotiable.

Please contact your Woodruff Sawyer representative if you have any questions on treatment of communicable disease in your property, casualty, or excess casualty programs.