Since the beginning of Covid-19 and mandatory lockdowns small business closures, that you may have visited regularly, whether a restaurant, flower shop, and/or small Mom and Pop deli, have gone out of business. While the government did offer fixed loans payable over long periods and paycheck protections that were for the most part forgiven many still could not stay afloat.
Having worked in the reinsurance industry just shy of 20 years, I learned a thing or two about insurance policies that many do not know. Sticking for a second with business interruption coverage and property damage a #pandemic is typically not a covered loss. To be a covered loss in your policy it would have to be a named risk like #fire. Generally, unless a policy specifically lists coverage for pandemics or contagious illnesses, those events may be excluded.
That means if you run a business that's closed temporarily because of a pandemic, either due to government-mandated shutdowns or out of an abundance of caution, any loss of income you experience may or may not be covered by your policy. I have yet to see an insured bring a loss/claim to their insurance provider and win coverage until today. See below:
August 14, 2020
Big Win for Business Interruption Policyholders as Courts Start Issuing COVID-19 Decisions
Under a ruling out of Missouri, demonstrating that the virus has a physical presence and caused deprivation at the property would be sufficient to invoke coverage.
Background of Coverage Disputes
Commercial property policyholders have submitted claims throughout the country for business interruption based on closures from COVID-19. The claims are generally for business income loss and extra expense incurred due to the closure of the premises because of the presence of the virus or government orders. Insurance companies have almost universally denied the claims, stating that the presence or risk of the presence of the virus does not meet the requirement that there be "direct physical loss or damage" at the covered property (or, for coverage based on closures as a result of government orders, around the covered property). This has led to hundreds of insurance coverage lawsuits, including many putative class actions. Some plaintiffs are seeking consolidation of the federal lawsuits in multidistrict litigation. See IN RE: COVID-19 Business Interruption Protection Insurance Litigation, MDL No. 2942 (J.P.M.L., filed Apr, 20, 2020). The Judicial Panel on Multidistrict Litigation heard argument for consolidation on August 6, 2020, and is expected to issue a decision in the coming weeks.
Of the court decisions to date, most have sided with insurance companies, indicating that the risks posed by COVID-19 would not meet the direct physical loss or damage requirement. A judge from the Southern District of New York bluntly stated, "[The virus] damages lungs. It doesn't damage printing presses." See Social Life Magazine v. Sentinel Ins. Co., Ltd., No. 1:20-CV-03311-VEC, May 20, 2020 Hearing for Prelim. Inj., Dkt. No. 24 at 5:3-4 (S.D.N.Y. 2020). Other decisions out of Michigan and Washington, D.C., have shown similar leanings. See Gavrilides Management Co. LLC v. Michigan Ins. Co., No. 20-258-CB, 2020 WL 4561979, at *1 (Mich. Cir. Ct. July 21, 2020); Rose's 1, LLC et al., v. Erie Ins. Exh., No. 2020-CA-002424-B, Order Denying PL.'s Mot. for S.J. & Granting Def. 's Mot. for S.J., issued on August 6, 2020 (D.C. Super. Ct.).
The new Studio 417 decision provides a well-reasoned counterpoint to those decisions.
Studio 417 Decision
In Studio 417, a hair salon and several restaurants brought a putative class action for breach of contract and declaratory judgment against Cincinnati based on its denial of their claims for loss caused by the COVID-19 pandemic. The plaintiffs submitted claims under several different coverages in their policies, including business income loss and extra expense incurred based on
the suspension of operation from physical loss or damage at the plaintiffs' premises (Business Income Coverage);
government orders based on physical loss or damage around their premises causing a suspension of operation at their premises (Civil Authority Coverage);
a "dependent property," or a property on which the policyholder relies for materials or services, not providing the material or services to the policyholders based on physical loss or damage at the dependent property (Dependent Property Coverage); and
the prevention of "existing ingress or egress" at the policyholders' premises based on physical loss or damage at a "contiguous" location (Ingress and Egress Coverage).
Each of the coverages requires a showing of direct physical loss or damage at some location. Notably, the plaintiffs' policies in Studio 417 do not have a virus exclusion.
Many other policies do have this exclusion, which provides a separate and formidable hurdle to coverage if present. Without the virus exclusion, the plaintiffs in Studio 417 focused on establishing direct physical loss.
The retail plaintiffs alleged that it was likely that persons infected with COVID-19 entered the relevant premises within the past several months and, as a result, infected the premises with the virus. To show this would constitute physical loss, plaintiffs alleged that the virus "is a physical substance," that it "live[s] on," and is "active on inert physical surfaces," and is "emitted into the air." (Order at 4.) Additionally, plaintiffs alleged that the presence of the virus "renders physical property … unsafe and unusable" and that plaintiffs "were forced to suspend or reduce business" at the covered premises. (Id.) In response, Cincinnati Insurance argued that the policies provide coverage "only for income losses tied to physical damage to property, not for economic loss caused by governmental or other efforts to protect the public from disease." (Id. at 5.)
The court sided with the hair salon and restaurants, denying Cincinnati's motion to dismiss and sending the case to discovery. Applying the maxim of contract law that a court must give meaning to all the words in an agreement, including both direct physical loss and direct physical damage in the insurance policies, the court turned to the dictionary definitions of direct, physical, and loss to determine the "plain and ordinary meaning" of the phrase "direct physical loss." (Order at 8.) As the court explained,
direct means, in part, "characterized by a close, logical, causal, or consequential relationship";
physical means "having material existence perceptible especially through the senses and subject to the laws of nature"; and
loss is "the act of losing possession" and "deprivation."
Id. Relying on these definitions, the court ruled that plaintiffs had provided sufficient allegations of the virus's physical presence at the premises such that the property was unsafe and unusable. This satisfied the requirement of direct physical loss.
It remains to be seen if other courts will adopt this position and, if so, what facts sufficiently establish direct physical loss. But, at least under this ruling, showing that the virus has a physical presence and caused deprivation at the property would be sufficient to invoke coverage. This is a win for retailers looking for any means to recover COVID-19 losses.
Source: American Bar Association
This is the first one I've seen won by a small insured. There may be more, but as we keep trying to walk through this Covid-19 world, I want to keep my readers informed of things that can impact your daily lives where I may be able to help. This is why IT IS SO IMPORTANT TO READ YOUR POLICIES AND UNDERSTAND IT, and if you don't understand something in the policy, ask your broker or go directly to the insurer.
Lastly, I know it's boring, but some of you own businesses or work for commercial companies that are taking action against their insurer that could impact you. Here is the trend from https://www.commerciallitigationupdate.com/2021/04/23/covid-19-business-interruption-insurance-litigation-one-year-later/
Only one case has gone to trial so far. That case, Cajun Conti LLC v Certain Underwriters at Lloyds, was the first COVID-19 business interruption case filed in March 2020 and a bench trial took place December 14-16, 2020 in state court in New Orleans. Despite the fact that the policy at issue in Cajun Conti contained no virus exclusion, the trial resulted in a judgment in the insurer's favor. While the court did not include a written legal opinion along with its February 10, 2021 judgment, the outcome suggests that the court agreed with the insurer's main argument that the virus itself causes no property damage within the meaning of relevant policy provisions.
Despite the trend favoring insurers, especially in federal court, insureds have continued to file business interruption lawsuits at a lower rate than in spring and summer of 2020. Although there have been fewer suits filed, within the last month, several major business such as the Los Angeles Lakers, Sacramento Downtown Arena (including the Sacramento Kings), Ceasars Entertainment, Madison Square Garden (including the Knicks and Rangers), Hooters and Planet Hollywood have filed suits seeking coverage for sizeable losses caused by COVID-19. Only the Madison Square Garden and Ceasar's cases were filed in state court. It will be interesting to see whether the insurers seek to remove those cases to federal court.
Thus, it appears that we are still in the early stages of what will likely be a multi-year process to resolve the COVID-19 business interruption insurance cases throughout the country. Stay tuned for additional developments, especially as appellate courts begin to address these issues.
Melissa Mullamphy ©.