COVID-19 and Business Interruption Coverage

By Anthony Cappelletti

In the June 2020 edition of General Insurance Insights, I looked at how the COVID-19 pandemic[1] was specifically influencing many GI lines of business and coverages. One of the areas I examined was the business interruption (BI) coverage included in commercial property policies. At the time I wrote the article, there were many unknowns surrounding the coverage. Insurers were denying many BI claims resulting from the pandemic based upon their interpretation of the policy wording, insureds were considering suing their insurers over coverage denials and politicians in some jurisdictions were considering legislation that would compel insurers to pay BI claims from the pandemic even when the policy wording clearly excludes this coverage. In this article, I will provide an update on how the issue of BI coverage for claims resulting from the pandemic has developed over the past six months.

BACKGROUND

The COVID-19 pandemic compelled many governments around the world to invoke stay-in-place orders or lockdowns to slow down the spread of the virus. While some businesses could continue having employees work from home, a wide range of other businesses—such as restaurants,[2] bars, workout facilities, beauty salons, hotels, theaters and clinics for elective health care—were forced to remain closed or severely restrict operations. While these government orders helped to slow down the spread of the virus, it has caused financial distress for the businesses that had to restrict operations. Many businesses require financial assistance to make it through these challenging times.

Some governments around the world have made funds available to individuals and businesses harmed financially by the pandemic. While government assistance programs vary significantly by jurisdiction, funds from government assistance are generally intended to provide basic requirements. They generally do not fully compensate the financial loss incurred. 

Many businesses harmed financially by the pandemic looked to their property insurers for compensation from the BI coverage in their policies. BI coverage in a commercial property policy generally provides compensation for lost income (and some expenses) due to a business being shut down as a result of a “direct physical loss.” As is the case with many commercial policies, policy wording is often modified to the exposure being underwritten.

BI coverage was generally intended to cover the costs of business interruption due to physical damage or loss to property from an insured peril. Some policies have wordings that make this point very clear, while others were less clear. Some policies specifically mention that disease is an excluded peril, while others make no mention of this exclusion.

Insurers have mostly denied BI claims resulting from the pandemic due to the interpretation that the pandemic does not constitute physical damage or loss to the property from an insured peril. For policies with a disease exclusion, denial of claims for BI coverage from the pandemic should be clear. For policies without this exclusion, questions of coverage can arise. Whether or not disease constitutes physical damage is one of the main issues being looked at by the courts. 

Another question raised regarding BI coverage is for policies that include actions of civil authority as a peril. Stay-in-place orders may be interpreted as an action of civil authority. But what if a policy included actions of civil authority as a peril but excluded disease as a peril? Questions such as this in coverage disputes require interpretation and resolution in the courts.

Court proceedings take time. Some businesses may not survive the time it takes for cases to be resolved. Some state legislators in the U.S. are considering legislation that would compel insurers to pay BI claims for losses due to the COVID-19 pandemic to keep affected businesses out of financial distress. As of this writing, this type of legislation has not been enacted in any state. Legislation was drafted in California, but it failed to receive the support required to be enacted. There are currently several states where this type of legislation is still pending.[3] Any legislation in the U.S. forcing coverage could expose insurers to losses in the hundreds of billions of dollars for a risk that it did not price for. This would likely weaken the solvency position of the U.S. general insurance industry as a whole and cause financial distress to some individual U.S. general insurers. Insurers are lobbying state legislators to make them aware of the ramifications of passing this type of legislation.[4] Assuming this type of legislation does not get enacted throughout the U.S., it will be the court system that will determine whether or not there is coverage on a case-by-case basis. 

"APCIA estimates that closure losses for small businesses with fewer than 500 employees are estimated to reach between $393 billion to $668 billion per month. … Surplus for all the U.S. home, auto, and business insurers combined to pay all future losses is roughly $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount."

The American Property Casualty Insurance Association (APCIA), April 28, 2020

There are several arguments being made by the lawyers of insureds who were denied BI coverage. These arguments include the following ideas on how the pandemic caused an impairment of property (that may be interpreted as a “direct physical loss or damage” to property):

• Temporary loss of use of property due to lockdowns and stay-in-place orders is an impairment of property.
• Potentially contaminated property is an impairment of property.

In 2006, the Insurance Services Office (ISO)[5] introduced policy language for excluding loss due to viruses, bacteria and contagious diseases. Many general insurers in the U.S. use ISO developed policy wordings for commercial policies. Before this, many insurers had already included a virus exclusion as a response to the SARS outbreak of 2002–2003. The ISO language of 2006 standardized the wording being used for this exclusion. 

The ISO policy wording for commercial policies also includes details on BI coverage from actions of civil authority referring to how the coverage is triggered. The ISO wording states that the trigger involves physical damage to property from a covered peril, other than to the insured property, in which access to the insured property is restricted by civil authority due to the damage to the other property causing a dangerous physical condition in the surrounding area. This ISO wording would appear to invalidate using a government stay-in-place order for COVID-19 as the covered peril of civil authority for a BI claim unless there is physical damage to property from a covered peril.

Of course, not all policies are the same. Some use standard wording. Some use standard wording that is modified. Some use unique language tailored to the needs of the insured. Additionally, not all commercial property policies sold include BI coverage. That is because BI coverage is an optional coverage that can be added to a commercial property policy for additional premium. Sometimes BI coverage is a separate policy instead of an add-on to the commercial property policy.

NOTABLE DEVELPOMENTS IN BI COVERAGE LITIGATION

Court cases move at different speeds. The few cases that are resolved the earliest may be used as precedents. However, because policy wordings are not identical for the policies of different insureds, use of resolved cases as precedents must be considered carefully as to how it would apply in any specific subsequent case. Furthermore, court decisions are often the subject of appeals to higher courts. Court decisions under appeal may not convince other courts that the decision is a precedent.

COVID-19 BI coverage litigation involves both individual suits, joined suits[6] and class actions. The fact that there are class actions is somewhat interesting. This is because class actions generally involve the joining of numerous individual claimants banding together their lawsuits in which questions of law or facts are common to the case. Class action claimants are not usually businesses. Commercial policies are not standard—each case in which a business is the claimant usually has unique elements. This would typically disqualify a class action. Courts will have to determine whether or not any of the proposed class actions for COVID-19 BI coverage meets the legal prerequisites of a class action.

Several plaintiffs filed motions to coordinate COVID-19 BI coverage cases on an industry-wide basis before the U.S. federal Multi-District Litigation (MDL) Panel. In August, the MDL Panel denied most of the motions on the basis that there existed only a few commonalities to the cases. However, the MDL panel is still considering motions for coordinating cases against four insurers that face multiple suits in four separate single-insurer MDLs.  

There are hundreds of cases filed against insurers over denial of COVID-19 BI coverage. The following outlines developments in a sampling of these cases:

Gavrilides Management Company v. Michigan Insurance Company:

This case was notable because it was the first decision on this issue from a state court and it dealt with both the physical damage requirement and the virus exclusion. In this case, Gavrilides Management Company, owner of two restaurants, sued its insurer, Michigan Insurance Company for BI coverage due to a government ordered COVID-19 shutdown. The case was filed in a Michigan state court. In the proceedings, Gavrilides asserted that coverage was afforded by the policy because their customers inability to dine in the property constituted physical damage and the virus exclusion was too vague. Early in July, the judge hearing the case ruled against the plaintiff noting that the physical damage requirement in the policy was not met. Furthermore, the judge stated that even if the physical damage requirement had been met, the virus exclusion would have been sufficient for the insurer to deny coverage.

In-N-Out Burger v. Zurich American Insurance Company:

This case is notable because it involves a large restaurant chain with an all-risks policy. In May of this year, the In-N-Out Burger chain sued its insurer, Zurich American Insurance Co. for BI coverage due to government ordered COVID-19 shutdowns. The suit was filed in a California court but includes all In-N-Out locations nationwide.[7] The “all-risks” policy provided to In-N-Out by Zurich did have an exclusion for contaminants. In-N-Out claims that it drafted an endorsement redefining contaminant to delete references to pathogens and viruses and that this endorsement was then issued by Zurich at policy inception. Zurich denies that this endorsement was issued. While the base policy does require “direct physical loss or damage caused by a covered cause of loss” for BI to apply, In-N-Out’s claim is that contamination meets this requirement and that it was not excluded. In late June, Zurich denied the claim. In-N-Out alleges that Zurich did not conduct any investigation of the claim before denying it. Zurich filed a counterclaim for a declaratory judgment against In-N-Out in June. The case is now in pretrial/trial scheduling with the courts.

Back2Health Chiropractic Center, LLC, individually and on behalf of all others similarly situated, v. The Hartford Financial Services Group, Inc.:

This case was notable because it is an attempt to form a nationwide class action. In this case, a chiropractic clinic located in New Jersey, Back2Health, sued its insurer, Sentinel Insurance (a member of The Hartford Financial Services Group) for BI coverage due to a government ordered COVID-19 shutdown. The case was filed in June in a New Jersey court. Back2Health seeks to bring claims on behalf of itself and similar businesses nationwide in a class action. Proceedings continue on this case. No decision has yet been made by the courts. The fact that Back2Health only operates in New Jersey, does not have any out-of-state interactions with its insurer and that the suit does not list any similarly situated claimants would appear to weaken its case to form a nationwide class action.

Mayssami Diamond, Inc. v. Travelers Casualty Insurance Co. of America:

This case was notable because it is an attempt to claim physical damage to property regarding the “potential of virus droplets on merchandise.” In this case, a jeweler located in California, Mayssami Diamond, sued its insurer, Travelers Casualty for BI coverage due to a government ordered COVID-19 shutdown. The case was filed in May in a California court. Mayssami Diamond’s claim is interesting because it is based on the assertion that direct physical damage requirement was met by the fact that virus droplets may be present on every surface in the store. Furthermore, Mayssami Diamond’s suit claims that its policy with Travelers includes “Limited Fungi, Bacteria, Or Virus Coverage.” No decision has yet been made by the courts.

Truhaven Enterprises Inc. d/b/a Fiorino Ristorante v. Chubb Ltd.:

This case is notable because it is an attempt at a class action and includes an alternative interpretation of the definition of physical damage. In this case, a restaurant in New Jersey sued its insurer for BI coverage due to government ordered measures to slow down the spread of the virus. The case was filed in April in a New Jersey court and includes “all others similarly situated” for the class action. It does not identify any of the other plaintiffs. The plaintiff’s complaint alleges that “the COVID-19 pandemic and the corresponding response by civil authorities to stop the spread of the outbreak … has caused physical property loss and damage to the insured property”[8] which would trigger BI coverage. The case is now in pretrial/trial scheduling with the courts.

Century 21 Department Stores LLC et al v. Starr Surplus Lines Insurance et al:

This case was notable because the lead plaintiff, Century 21 Department Stores LLC, has filed for bankruptcy. In this case, a discount retail chain in New York, Century 21, sued its insurers for COVID-19 BI coverage. The case was filed in September in a New York court. The suit included multiple plaintiffs and defendants. Century 21 also filed for bankruptcy at the same time blaming its insurers for the denial of BI coverage. By filing for bankruptcy, Century 21 convinced the court to have the suit moved to bankruptcy court in order to expedite it.

Studio 417, Inc. v. The Cincinnati Insurance Company:

This case was notable because the court denied the insurer’s motion to dismiss. In this case, a hair salon in Missouri, Studio 417, sued its insurer, Cincinnati Insurance for COVID-19 BI coverage. The case was filed in a Missouri court. The insurer promptly filed a motion to dismiss the suit on the basis that there was no direct physical loss or damage that caused the BI loss. In August, the court rejected the motion to dismiss stating that the complaint “plausibly alleges ‘direct physical loss’ based on ‘the plain and ordinary meaning of the phrase.’” It should be noted that the Cincinnati Insurance policy did not include a virus exclusion. The case is moving forward in the legal system.

Numerous insurers’ motions to dismiss cases against them regarding denial of COVID-19 BI coverage were granted in court orders—even after the Studio 417 ruling not to dismiss. They include the following cases:

• Diesel Barbershop LLC et al. v. State Farm Lloyds, dismissed Aug. 13, 2020 (Texas)
• Vandelay Hospitality Group v. The Cincinnati Ins. Co., dismissed Aug. 18, 2020 (Texas)
• Malube LLC v. Greenwich Ins. Co., recommendation to dismiss Aug. 26, 2020 (Florida)
• 10E, LLC v. Travelers Indemnity Company of Connecticut, dismissed Aug. 28, 2020 (California)
• Mauricio Martinez, DMD, P.A. v. Allied Ins. Co. of America, dismissed Sept. 2, 2020 (Florida)
• Turek Enterprises Inc., d/b/a Alcona Chiropractic v. State Farm Mutual Automobile Insurance Co., dismissed Sept. 3, 2020 (Michigan)
• Mudpie, Inc. v. Travelers Casualty Ins. Co., dismissed Sept. 14, 2020 (California)
• Infinity Exhibits Inc. v. Certain Underwriters at Lloyd's London, dismissed Sept. 28, 2020 (Florida)
• Mark's Engine Company No. 28 Restaurant, LLC v. The Travelers Indemnity Company of Connecticut, dismissed Oct. 2, 2020 (California), under notice of appeal Oct. 5, 2020.

In Canada, many class actions have been filed, each identifying numerous plaintiffs and defendants. To date, none of these cases have had a decision rendered.  

In the U.K., the Financial Conduct Authority (FCA) brought forward a test case against eight insurers regarding denial of COVID-19 BI coverage. The test case was limited to 21 BI policy wordings from the eight insurers. None of the policy wordings in the test case explicitly include or exclude pandemics nor do they require “physical damage to property” to trigger BI coverage. Judges examined these policy wordings and their decisions tended to favor policyholders. Insurers appealed the decisions against them. The FCA appealed the rulings in favor of the insurers. These appeals have been fast-tracked to be heard directly by the Supreme Court in order to expedite a final decision.

Insureds that have been denied COVID-19 BI coverage and are unsuccessful in their suits against their insurers could decide to sue their insurance brokers/producers. The basis for these suits would be that the broker/producer failed to inform them of the risk of a pandemic and that their policy did not cover the risk. To date, there has been one suit filed against a producer. The plaintiff sued both the insurer and the producer. The case was dismissed by the judge because the policy included a clear virus exclusion. It is too early to tell if this will be a precedent.[9]

Moving forward, it is possible that insurance regulators may not approve pandemic exclusions in an insurer’s commercial policies. Insurers may then be in a situation where they will not be reinsured from catastrophic pandemic losses because reinsurers are now including pandemic exclusions in reinsurance agreement renewals.

"Reinsurance treaties are now including near-absolute communicable disease exclusions, particularly as they relate to liability protection. That means primary insurers must file similar exclusions in order to maintain consistency between the coverage they offer and the reinsurance available to them."

Dr. Robert Hartwig & APCIA, August 2020[10]

RISK OF BAD FAITH CLAIMS

Insurers have a duty of good faith to their insureds when conducting a claims investigation. Claims of bad faith against insurers can include very large amounts for punitive damages. In order to avoid bad faith claims, insurers need to ensure that they deal fairly and promptly with a claim, with a reasonable investigation.

Denial of a claim that is subsequently found to be valid by a court decision should not necessarily result in a bad faith claim against the insurer. The insurer’s decision still could have been based upon a reasonable interpretation of the policy wording. But there is a big risk if the insurer does not appear to have made a reasonable investigation. For the question of BI coverage from the pandemic, an insurer denying coverage must fully document its investigation and the basis for its decision. The insurer’s documentation should address all the arguments from the insured that supports coverage for the claim.

Each jurisdiction has its own laws and statutes, and each policy is unique. Insurer’s must tailor their investigation to the facts of the claim before them. There is a risk that a “boilerplate,” one-size-fits-all, claims denial may not be viewed as a “good faith” investigation by the courts. Many insurers have released public statements regarding the basis for denial of COVID-19 BI coverage. Despite these public statements, insurers must conduct reasonable investigations on a case-by-case basis.

"Insurance for business interruption can provide coverage when a policy holder suffers a loss of income due to direct physical loss or damage. … It does not cover loss of income due to market conditions, a slowdown of economic activity or a general fear of contamination. Nor does the policy provide coverage for cancellations, suspensions and shutdowns that are implemented to limit the spread of the coronavirus. These are not a result of direct physical loss or damage. … Losses resulting from these types of events do not present covered losses under our property coverage forms.

"Even if there has been direct physical loss or damage to property, your policy contains a number of exclusions. … [One] important exclusion to note is the exclusion for losses resulting from a virus or bacteria. … Refer to your Travelers policy for additional provisions. … Coverage can depend on underwriting qualifications and state regulations."

Travelers letter to NY Property Policyholders

So, insurers are exposed to bad faith claims. But if they conduct good faith claims investigations that are prompt, fully documented and support reasonable denials of claims, they should be protected against claims of bad faith. However, there will still be expenses for the defense against these claims.

Most of the claims filed against insurers over denial of COVID-19 BI coverage include allegations of bad faith by the insurer.    

WHEN WILL THIS ISSUE BE RESOLVED?

Court cases take time even when the situation is normal. The pandemic has created a new normal. Cases are moving much more slowly through the legal system. It will take more time to see how these claims are ultimately resolved. Early decisions are mixed, but many have been in favor of insurers. The next six months should provide a great deal more clarity.

Whatever occurs in the near future, it would appear that insurers will be reviewing policy wordings more carefully for renewals. Policy wordings will likely be revised to clear up any potential areas of ambiguities as to what constitutes a valid BI coverage claim. We may also see the marketing of pandemic coverage endorsements and requiring documentation that the policyholder has made an informed decision on whether or not to purchase the endorsement. In the past, when pandemic endorsements were offered, they tended to be expensive so very few policyholders purchased it. It will be interesting to see if this holds true moving forward. It will still be expensive, but some policyholders may decide that it is worth it.

Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.

Endnotes

[1] COVID-19 is the disease caused by coronavirus SARS-CoV-2. The first case of COVID-19 was reported to the World Health Organization (WHO) on Dec. 31, 2019. On March 11, 2020, with over 120,000 reported cases worldwide, the WHO announced that the outbreak of COVID-19 was a pandemic.  The number of reported cases surpassed 40 million on Oct. 19, 2020. [Reported case counts are from Johns Hopkins University & Medicine, Coronavirus Resource Center. https://coronavirus.jhu.edu/]

[2] Not all restaurants were harmed financially by COVID-19 restrictions. Those that were well suited for takeout orders (fast food with drive throughs and/or established delivery services) may have actually experienced an increase in business. 

[3] Pending legislation requiring insurers to retroactively include BI coverage for COVID-19 (for policies with BI coverage, regardless of policy language that would exclude coverage) includes: Massachusetts  SB 2655; Michigan HB 5739 & HB 5928; New Jersey AB 3844 & AB 4551;  New York AB 10226, AB 10327, AB 10837, SB 8211 & SB 8853; Ohio HB 589; Pennsylvania  HB 2372, HB 2759, SB 1114 & SB 1127; Rhode Island HB 8064 & HB 8079; South Carolina SB 1188. It is unknown at this time if any of this legislation will be enacted. In California, AB 1552 passed Assembly but failed in the Senate. [Reinsurance Association of America https://www.reinsurance.org/COVID-19/]

[4] The passing of this type of legislation in one or two states would not likely cause great financial harm to insurers. However, once this type of legislation is passed in one influential state, it is likely that all states would follow with their own similar legislation. This would then likely lead to a number of insurers becoming financially distressed or insolvent.

[5] ISO is a provider of services to the U.S. general insurance industry. Among its many service offerings, ISO develops policy language that is used by most U.S. general insurers. These policy wordings are viewed as standard policy language.

[6] Joined suits in this context refers to the consolidation or coordination of two or more cases with similar facts. This is not a class action as each case is still judged on its own merits. However, common facts can be determined for the group of cases that are joined. 

[7] The principal base of business for In-N-Out Burger is Irvine, California. The chain operates over 350 restaurants with the majority of locations in California. Other locations are in Arizona, Nevada, Utah, Oregon and Texas.

[8] https://www.classaction.org/media/truhaven-enterprises-inc-v-chubb-ltd-et-al.pdf

[9] Rhonda Hill Wilson, et al. v. Hartford Casualty Insurance Company, et al.  U. S. District Court, E.D. Pennsylvania (Sept. 30, 2020). Refer to Court: Broker not liable for COVID-19 business interruption claim denial, PropertyCasualty360, Oct. 20, 2020.

[10] From the report “Communicable Disease Exclusions: Maintaining Stability in Property Casualty Insurance Markets Amid a Global Pandemic”, Co-authored by Dr. Robert Hartwig and APCIA.