The COVID-19 global pandemic continues to cause mass commercial real estate vacancies throughout the US. Many buildings were ordered closed with limited notice and without proper decommissioning of building systems. These abrupt closures have created a great deal of uncertainty for property owners, including the physical and environmental conditions of their assets.
Who bears responsibility when government officials shut down a business or premises due to COVID-19? Do the insureds maintain the same duties during the crisis or are they absolved from their responsibilities? With the risk of properties becoming impaired or diminished during the vacancy period, building owners must protect the value of their assets, protect themselves from liability, and understand the protections and limitations of their insurance policies.
Obligations of Commercial Real Estate Owners and Operators
Owners of commercial real estate must first comply with federal, state and local directives as they become known. In the event of shutdown or cessation of operations, landlords should take all reasonable steps to ensure the integrity of the building and to the extent possible, mitigate future losses.
Facility Management Plans
Property owners should work with their environmental engineer to develop customized facility management plans for vacated buildings. Working with your building engineer, who may already have a standard list of duties to ensure the efficient operation of the building, you can formalize protocols to prevent issues from developing while buildings are unoccupied.
Your Facility Management Plan may include checklists for regular building system inspections during the vacancy to ensure that there are no burst pipes, no leaking ASTs (above ground storage tanks) for emergency generators, no rodent issues, and that the HVAC system is set properly to control relative humidity.
An asbestos and lead paint operations and maintenance (O&M) plan may be of particular value for properties known or suspected to have asbestos and/or lead paint.
Indoor air quality (IAQ) is an important component of a facility management plan, which may include tables of proper IAQ readings and other metrics to ensure the building is operating effectively. Although we hope that the rapid evacuation of the building is a onetime event, routine verification of indoor air readings would be beneficial to understand the interior environment of their building under regular operations, as well as optimal settings for HVAC equipment during temporary vacancy of the building.
Proper maintenance of a building during a temporary shutdown will pay dividends in maintenance expenses, preventing unnecessary losses, and ensuring a rapid re-occupancy once tenants return to work.
Inspections during Lockdown Scenarios
Building owners may be concerned about the availability of property inspections in regions affected by COVID-19 stay-at-home orders. Experienced engineering firms can conduct inspections, either virtually or in person, provided they take measures to “flatten the curve”: follow public guidelines to limit travel by air and public transportation; practice social distancing and recommended hygiene; use appropriate personal protective equipment and medical disclosure forms. For properties that may have restricted access, such as elder care and medical facilities, site inspectors can combine technology to view properties remotely, access public records online, and triage various ways to collect pertinent information to assess these sites despite access limitations.
Pre Re-Occupancy Cleaning
Because COVID-19 can be transmitted as respiratory droplets and may remain on surfaces for extended periods of time, returning tenants may have health and safety concerns for their employees. Industrial hygienists have equipment to screen properties to ensure that they have been adequately cleaned before re-occupancy after an identified COVID-19 case. Although there is no specified COVID-19 surface test, proxy measures taken with a 3M ATP device can be used to determine the effectiveness of cleaning. This verification process, based on the stringent evaluation standards used by the food and hospital industries, may allow property owners to reassure tenants as they begin to return to their places of work.
Insurance Policy Coverage
When buildings are re-opened, landlords will have numerous issues to address from their tenants, lenders, contractors and employees. Once these steps have been taken, landlords should address insurance in place.
While building owners generally know what coverage they have, the unchartered territory of COVID-19 and its impacts will require many owners to seek guidance from their brokers regarding their existing, and potentially attachable, insurance policies. Questions relating to the loss of business income and lost rental income, as well as recouping costs to disinfect exposed premises, are most pressing.
The overall economic costs of COVID-19 will take years to determine, but we are already seeing the immediate effects:
1) Loss of business income resulting from civil ordinance or law
2) Lost wages
3) Widespread defaults of lease agreements and mortgage contracts
Environmental insurance policies were not initially intended to respond to COVID-19 occurrences. However, insureds may seek recovery for economic losses under certain environmental insurance policies.
Insurable Risk Under a Pollution Policy
Risks typically encountered by commercial real estate are generally insurable in an environmental insurance policy. Standard coverages include remediation expenses and tort liability protection arising from:
- Mold and Legionella
- Virus and other bacteria
- Lead based paint and asbestos
- Leaking storage tanks
Many routine building issues, such as a mold or Legionella outbreak, will be discovered when occupants begin returning to buildings. These issues would be covered under most policies.
It is important for insurance purchasers to continually assess the breadth of all insurance coverage, including environmental, in order to ensure they have the correct coverage in place. Annual stewardship reviews ensure coverage available addresses the current risk profile, while providing insureds with the opportunity to understand what coverage is commercially available. Understanding the broader marketplace allows insureds to maintain current coverage with confidence, or correct/ replace in-force insurance policies as appropriate.
Claims and Litigation
Claims and litigation often increase exponentially in times of economic retraction. Certain events are more likely to occur when the economy is suffering. For example:
- Illicit abandonment of hazardous materials on or at an insured but vacant premises
- Poor housekeeping
- Intermittent inspections
- Increased exposure to employee injury
If you have a claim, it is important to immediately file appropriate notice as per the policy terms and conditions. Claims must be filed in a timely manner in order to mitigate potential denials for late notice.
In certain jurisdictions, property owners have filed claims or taken action to compel property insurers to pay business interruption losses arising from the government mandated shutdown. While it is unclear how the commercial insurance companies will respond, it is very likely that both sides will push this argument and let the courts sort this out.