As business losses continue to mount from the pandemic-induced economic shutdown, parties from different civil arenas are pursuing various solutions to cover the losses. Judicial, legislative, and political developments are all pressuring insurance companies to contribute. Despite these forces, the insurance industry continues to balk at the notion of covering business insurance (BI) claims that they insist they are not liable.
As expected, the number of legal actions that are being brought by plaintiff attorneys with the intent to get a court-ordered ruling on business interruption coverage are increasing. Several early suits are being watched closely across the country.
One of the first cases filed was in Louisiana by attorneys representing the Oceana Grill restaurant. The suit was filed in state court in New Orleans and asserted that the policy covers civil authority-ordered shutdowns and has no exclusion for viruses or pandemics. Interestingly, the restaurant filed the suit before they submitted any claim for coverage. The attorneys are seeking a declaratory judgment from the court in anticipation of a denial from the insurers. A significant aspect of the case is the plaintiff’s argument that the COVID-19 coronavirus causes physical property damage because it “physically infects and stays on the surface of objects or materials, fomites, for up to twenty-eight days, particularly in humid areas.” This argument strikes at the property damage requirement in most business interruption insurance policies.
The first case filed in Texas involves a Houston-area wig store. This suit was filed in a Harris County state court and alleged that the plaintiff has incurred losses and will continue to sustain losses attributable to the county’s COVID-19 pandemic stay-at-home order. Unlike the Louisiana case, the plaintiff was denied after filing a BI claim. While the suit doesn’t reference the specific policy language or basis for denial, the swift denial by the insurance company seems to validate expectations that insurers will readily deny claims without an in-depth investigation.
Like Texas and Louisiana, California’s courts will become a testing ground too. A high-profile chef with two world-renowned restaurants in Napa County has filed suit against Hartford Fire Insurance Company. The attorneys representing the plaintiff, in this case, are the same ones representing Oceana Grill in the Louisiana case. With no claim yet filed or denied, their strategy is the same—seek declaratory relief in anticipation of a denial of the claim. The suit asserts that the policy extends coverage for direct physical damage caused by a virus.
These cases are what observers believe to be the start of a forthcoming onslaught of class-action lawsuits. Plaintiff attorneys seem to be thinking that historical precedents favor their chances of success. Previous lawsuits for environmental cleanup costs and 9/11 terrorism losses were successful after adamant coverage denial claims by the insurance industry.
While the attorneys move forward with judicial actions, state legislators are taking steps as well.
New Jersey’s legislature was the first to put forth a bill (proposed Bill A-3844) to compel insurance companies to cover COVID-19 related losses incurred by businesses with 100 or fewer full-time employees. It was voted out of committee on March 16, 2020, with no further action taken since.
Proposed Bill SD 2888 in Massachusetts would prohibit insurers from denying a claim on the basis that COVID-19 is a virus, even if the policy explicitly excludes losses due to viruses. The bill also aims to prohibit claim denials due to lack of physical property damage. As drafted, the bill would be retroactive to March 10, 2020, and apply to insureds with 150 or fewer full-time-equivalent employees in Massachusetts.
Similar bills are making their way through the legislatures in Ohio and New York. Both are seeking to mandate coverage for pandemic-related losses under property policies containing business interruption coverage and would apply to policyholders with 100 or fewer employees. At the federal level, the debate for the need for legislation to require insurers to cover costs from business interruption caused by the pandemic has been heard by Congress.
Expect to see more legislative proposals in the coming weeks as pressure continues to mount from business owners facing millions in losses due to the pandemic.
Political pressure is increasing as well with state politicians looking to Congress for help in developing a viable solution. A letter from New Hampshire governor Sununu provides an excellent example in which he wrote:
“In the long term, we can hope that Congress will work with both state regulators and the insurance industry to develop a more permanent solution to this coverage problem. The National Flood Insurance Program and the Terrorism Risk Insurance Act are examples of such efforts. Now,
however, what is needed is a short term and temporary solution that goes beyond the Economic
Injury Disaster Loan Program administered by the Small Business Administration.”
Congress seems to be responding to their pleas. On March 18, 2020, members of the U.S. House of Representatives sent out a letter to the leaders of the American Property Casualty Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents & Brokers of America, and the National Association of Mutual Insurance Companies, that urged insurers to provide business interruption coverage for COVID-19 related losses.
Congresswoman Maxine Waters, who serves as the Chairwoman of the House Financial Services Committee, recently released her plans for a Pandemic Risk Insurance Act (PRIA). This Act would create a reinsurance program similar to the Terrorism Risk Insurance Act (TRIA), mandating the prospective offer of pandemic business interruption coverage but capping the total losses that insurance companies would face. In the wake of 9/11, the insurance industry dealt with a similar issue regarding the unavailability of terrorism insurance. This event prompted Congress to pass the TRIA in 2002. As such, many believe there is a blueprint in place for the U.S. government to step in and backstop pandemic insurance risks and provide adequate market availability for such products.
Zachary S. Finn, clinical professor and director of the Davey Risk Management and Insurance Program in the Lacy School of Business at Butler University, is among those supporting the idea of a federal pandemic backstop. Finn, among others, has warned that a wave of uninsured business interruption losses has the potential to destabilize the economy further. His recommendation includes the notion that Congress should immediately create a PRIA or amend TRIA to include pandemics and associated perils.
Despite the pressure, insurers continue to insist that existing BI policies were never intended to cover COVID-19 related losses. There are currently two grounds for denial that seem to be the most common ones cited. First, insurance companies deny that viral contamination qualifies as direct physical loss or damage. However, policies do not define terms like “direct physical loss,” which means courts will have to sort this out. Second, most policies contain exclusions for matters caused by a virus, pathogen, biological agents, or communicable disease.
Even if legal or legislative action compels insurance companies to cover these losses, insurers contend that such payouts would cause the industry to collapse. Forcing insurance companies to take responsibility for risks they never underwrote nor charged for is seen as an existential threat.
A preliminary calculation by the American Property and Casualty Insurance Association (APCIA) estimates that “business continuity losses just for small businesses with 100 or fewer employees could fall between $220-383 billion per month. The total surplus for all of the U.S. home, auto, and business insurers combined is roughly only $800 billion, with the combined capital of the top business insurance underwriters representing only a fraction of that amount.”
Claims can also be denied if proper notice is not provided as required by policies. The expectation is that insurers will use this as a means to quickly deny claims since it is highly unlikely a policyholder will be able to overcome this argument if they do not give proper notice.
As pressure builds from judicial, legislative, and political actions for insurance companies to cover losses related to the COVID-19 pandemic, the insurance industry continues to mount a rigorous defense. They will claim that standard business interruption coverage does not apply on the grounds that virus-related losses are typically excluded, and that necessary physical damage to property has not been incurred.
However, the issue is not that clear-cut and litigation will move forward. As we have seen in prior disasters, the basis for claim denials commonly faces rejection by courts. Politicians are also under pressure from their constituents and will continue to push for solutions via legislation or by providing some governmental backstop.
Insureds need to take action now to preserve their claim rights, all while still expecting a drawn-out battle. It is crucial that you immediately contact your insurance agent and make the necessary notification filings to avoid denial for lack of notice. Securing the assistance of both an attorney and an experienced CPA with knowledge in these loss calculations can help you accurately assess your loss claim and position you for a positive outcome. For more assistance with loss calculations, contact your CRI advisor.