01

How Insurers are Responding to Business Interruption Claims

Several insurance companies, including The Hartford and Travelers, have released statements expressing that coronavirus-related business interruption claims are not covered by their policies. Much of the rationale behind such denials of coverage is that the cost would cause the industry to collapse. Moreover, if the pandemic exclusion were nullified, insurers could decide that such coverage is not worth the risk and drop the coverage moving forward.

“A lot of this goes back to Insurance 101,” says Craig Andrews, Director and Principal Consultant at a commercial insurance risk advisory company in Ohio. “Perils, or causes of loss, that are excluded are those that happen to a large number of policyholders all at the same time. A classic example is war. War is excluded because it occurs to a large number of policyholders in the same event. You could say the same thing for loss of utility services. You could say the same thing about a nuclear explosion. Following SARS in the early 2000s, it was recognized that viruses had virtually the same characteristics as these events—that is, if a virus occurred, it affected a huge number of policyholders at the same time. And that type of cause of loss is generally deemed uninsurable.”

02

Active COVID-19 Business Interruption Insurance Lawsuits

As of May 13, 2020, one federal court received 101 lawsuits filed against insurers seeking coverage for business interruption losses caused by COVID-19. This number does not include business interruption lawsuits filed in state courts. Experts expect this number to climb into the thousands. It appears the food, hospitality, beauty, and fashion industries are among those filing the most business interruption lawsuits. Below is a sampling of some of the lawsuits filed:

Six insurers—Aspen American Insurance, Auto-Owners Insurance, Lloyd’s of London, Society Insurance, Oregon Mutual Insurance, and Topa Insurance Company—currently face federal class action lawsuits for denying business interruption claims related to mandatory business closures mandated in the wake of the COVID-19 pandemic. The lawsuits claim that the plaintiff business purchased special property insurance coverage to protect against business interruptions, and that the policies include business income coverage. The firms also noted that all of these coverages either included, or did not expressly exclude, losses caused by viral infections.

In Big Onion Tavern Group LLC vs. Society Insurance Inc., several Chicago restaurants allege that their insurer acted in bad faith by denying their business interruption claims immediately “without conducting any investigation, let alone a ‘reasonable investigation based on all available information’ as required under Illinois law.”

In Mace Marine Inc. v. Tokio Marine Specialty Insurance Co, a Florida Keys dive shop filed a bad faith lawsuit against its insurer alleging Tokio Marine Specialty Insurance denied the claim “without conducting any substantive investigation….The insurance company did not attempt to inspect the premises, nor did they request any photographs or send out any experts or field adjusters to evaluate the claim.” The insured contends that these actions constituted “willful, wanton, immoral, unlawful, malicious and/or deceptive claims handling practices.”

Magna Legal Services LLC filed a lawsuit against Hartford Fire Insurance Co., claiming it arbitrarily and wrongfully denied coverage for business income losses subsequent to state-mandated pandemic closures. Magna is also accusing its insurance broker, Nottingham Agency Inc., of negligence, alleging the broker never explained that the policy excluded coverage for “losses related to viruses, pandemics or related orders of civil authorities.”

Another lawsuit alleging bad faith as a result of a COVID-19 denial was brought in Harris County, Texas, alleging that the insured acted in bad faith by failing to conduct “a reasonable, full and fair claim investigation.”

To determine the viability of bad faith lawsuits arising from business interruptions suffered during COVID-19, courts will need to examine the specific language of each insured’s policy terms as well as the circumstances of their business closure—i.e. preemptive safety measures versus government-mandated closure.

03

Understanding Business Interruption Insurance Policies

Business interruption coverage, which falls under a general property insurance policy, is a supplemental coverage meant to protect businesses from various disaster-related damages. According to The Hartford Insurance, business interruption coverage is generally designed to cover losses that result from direct physical loss or damage to property caused by events such as hurricanes, fires, wind damage, or theft.

Business interruption coverage kicks in for insured events that affect the insured property or premises with a monetary limit based on the insured’s projected revenues—only a limit of 12 months of coverage. It covers loss of income plus all of the normal operating expenses a business has, including payroll, taxes, leases, franchise agreements.

Many businesses purchase business interruption insurance to protect against the loss of income and other losses caused by an interruption to the normal operations of the business. However, because business interruption coverage falls under the terms of their property insurance policy, it is intended to provide coverage when a policyholder suffers a loss of income due to direct physical loss or damage to covered property. It is not designed to apply in the case of a virus. Therefore, pandemics, viruses, microorganisms, etc. are often excluded from business interruption coverage.

“Insurance professionals think in terms of direct damage and indirect damage,” says Craig Andrews. “Those two go hand in hand: indirect damage is occasioned by direct damage. I have yet to see a single COVID-19 business interruption loss where there is also a claim for direct damage by COVID-19. In the absence of COVID-19, if you’d asked me ‘Can an insured have an indirect or a business interruption loss without sustaining direct damage from a covered cause of loss?’ I’d say, ‘No.’”

Travelers Insurance also released a statement that business interruption insurance 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, as these are not a result of direct physical loss or damage. “To me, if somebody is going to find coverage on your standard insurance services loss of business income coverage form,” says Craig Andrews, “they’re going to have to come up with a definition of direct damage that I’m not currently recognizing.”

There are, in fact, some special policies issued by excess and surplus lines carriers to extremely large businesses that may cover some of these COVID-19 business income claims.

Expert insights have never been more important.

04

An Insurer’s Duty of Good Faith During COVID-19

All insurers have a duty of good faith and fair dealing to their policyholders, which means that insurers must uphold the terms of their policies and pay any valid claims. If an insurer engages in deceptive practices to avoid paying a claim, such as delaying payment or failing to conduct a necessary investigation, they may be subject to lawsuits alleging a breach of the implied duty of good faith and fair dealing.

The definition of good faith and bad faith in the context of COVID-19-related claims is a novel issue that will depend upon judicial interpretation. However, there are certain questions that one can ask when determining the viability of a bad faith claim against an insurer.

First and foremost, the policy terms must be examined to determine whether pandemics, viruses, and other infectious diseases are covered or blanketly excluded. While some insurance companies specifically state such circumstances are excluded, others might not unequivocally state so. The policies still play an important role in determining whether an insurer’s conduct is in complete disregard to the policy. Secondly, the requirement that insurers conduct necessary investigations into claims has been a particular point raised by many insureds in their bad faith claims.

05

Examining Policy Terms: Virus & Microorganism Clauses

The advent of SARS in the early 2000s catalyzed wide-spread modifications to insurance policy language regarding coverage for business interruptions related to illnesses. As such, virus, bacteria, microorganism, and/or pandemic exclusions are almost universal in property insurance contracts issued after 2006.

For legacy insured parties whose property policy coverage forms were issued sometime prior to 2006, there is a possibility that viruses are not specifically excluded. For example, the ISO 1999 Business Owner’s Policy coverage form does not have a virus exclusion. ISO Business Owner’s Policy coverage forms issued after 2006, however, do. ISO’s July 6, 2006 circular [LI-CF-2006-175], prepared as part of its filing of the exclusion with state regulators, makes specific reference to such viral and bacterial contaminants as rotavirus, SARS, influenza (such as avian flu), legionella and anthrax.

Some business interruption policies do, however, cover viruses under their policy terms. In Big Onion Tavern Group LLC vs. Society Insurance Inc., the plaintiff cites Section 5 of its Business Owners Special Property Coverage Form, “Additional Coverages,” which includes, part “m. Contamination,” which is defined as “ a defect, deficiency, inadequacy or dangerous condition in your products, merchandise or premises.” Contamination coverage includes the following:

If your “operations” are suspended due to “contamination”:

  1. We will pay for your costs to clean and sanitize your premises, machinery and equipment, and expenses you incur to withdraw or recall products or merchandise from the market. We will not pay for the cost or value of the product. The most we will pay for any loss or damage under this Additional Coverage arising out of the sum of all such expenses occurring during each separate policy period is $5,000; and
  2. We will also pay for the actual loss of Business Income and Extra Expense you sustain caused by
    1. “Contamination” that results in an action by a public health or other governmental authority that prohibits access to the described premises or production of your product.
    2. “Contamination threat”
    3. “Publicity” resulting from the discovery or suspicion of “contamination”. Coverage for the actual loss of Business Income under this section will begin immediately upon the suspension of your business operations and will continue for a period not to exceed a total of three consecutive weeks after coverage begins. Coverage for necessary Extra Expense under this section will likewise begin immediately upon the suspension of your business operations and will continue only for a total of three consecutive weeks after coverage begins, or until the loss of Business Income coverage ends, whichever is longer. The coverages under this section may not be extended nor repeated. The definitions of Business Income and Extra Expense, contained in the Business Income and Extra Expense Additional Coverages section shall also apply to the additional coverages under this section.

Insured parties whose business interruption policies specifically exclude viruses, bacteria, microorganisms, and/or pandemics may be able to cite an act of authority intervention as a viable business interruption claim.

06

Examining Policy Terms: Acts of Authority Clauses

Many businesses that have been forced to shut down because of government orders have also submitted business interruption claims to their insurers. For those insured parties filing business interruption claims citing an act of authority, a critical point to consider on this front is the doctrine of proximate cause. Although proximate cause is usually not applied to questions of liability related to property insurance, in the context of COVID-19 business interruption questions, it presents particular importance.

The primary definition of proximate cause says, “That which, in natural and continuous sequence, unbroken by any efficient intervening cause, produces [an event], and without which, the [damage] would not have occurred.” Applied to the time of COVID-19, in many cases, arguably, the proximate cause of these business interruptions claims is the order of the civil authority, not the actual contamination of the property by a covered cause of loss. Businesses were shut down because they were ordered to do so.

In insurance contracts, there is a provision for coverage in cases when an authority steps in and limits and or denies access to the premises. By definition, an authority can be any central or local government, agency of such government, or any body or person empowered to make regulations or issue directions in relation to the insured property.

Additional coverage for the acts of a civil authority is present in both the ISO Commercial Multi-Peril Insurance Program and also in the Business Owners Policy. According to the Insurance Services Office, Inc. Business Income and Extra Expense Coverage Form CP 00 30 10 12, Copyright 2011, the civil authority provision in a standard business income and extra expense coverage form reads as follows:

“When a Covered Cause of Loss causes damage to property other than property at the described premises, we will pay for the actual loss of Business Income you sustain and necessary Extra Expense caused by action of civil authority that prohibits access to the described premises, provided that both of the following apply:

  1. Access to the area immediately surrounding the damaged property is prohibited by civil authority as a result of the damage, and the described premises are within that area but are not more than one mile from the damaged property; and
  2. The action of civil authority is taken in response to dangerous physical conditions resulting from the damage or continuation of the Covered Cause of Loss that caused the damage, or the action is taken to enable a civil authority to have unimpeded access to the damaged property.”

Civil authority coverage for business income kicks in 72 hours after the time of the first action of civil authority that prohibits access to the insured’s premises and applies for a period of up to four consecutive weeks from the date on which such coverage began. For those insured parties who have civil authority additional coverage, this may be the optimal route for securing cover for incurred losses.

Those insureds whose policies specifically exclude coverage for losses incurred as a result of an act of authority intervention may have more success questioning whether their insurer followed through on its duty to thoroughly investigate their business interruption claim.

07

An Insurer’s Duty to Investigate COVID-19 Business Interruption Claims

Insurance companies are required to conduct a thorough investigation of any insured’s claim for benefits before denying it. This requirement has been a particular point raised by many insureds in their bad faith claims.

For example, California Insurance Commissioner Ricardo Lara issued a notice requiring insurance companies to comply with their obligations to fairly investigate all business interruption claims caused by COVID-19. The notice follows numerous complaints from businesses, public officials, and other stakeholders of certain insurance representatives attempting to dissuade business policyholders affected by COVID-19 from filing a notice of claim under business interruption insurance coverage or refusing to open and investigate these claims upon receipt of a notice of claim.

Under typical circumstances, investigation and evaluation of an insured’s claim requires an insurance company to examine the insured’s proof of loss statement and supporting documents. According to Commissioner Laram, compliance with investigation requirements entails an insurer to acknowledge the notice of claim immediately, provide the policyholder with the necessary forms and instructions the policyholder must provide in connection with the proof of claim to begin the investigation, and accept or deny the claim, in whole or in part, no more than 40 days after receipt of the proof of claim.

In the case of business interruption claims related to COVID-19 closures, however, such investigations have no precedent and may not be so easily accomplished. Although what is considered a reasonable investigation during the COVID-19 era might be up for debate, failure to conduct any investigation at all may likely help an insured’s argument.

Insurers are not permitted to ignore evidence that would justify its denial of the claim. As such, for those arguing an insurer’s failure to investigate a COVID-19 business interruption claim, consulting an expert may prove beneficial in prompting such investigations. Although insurance companies are not required to accept the opinion of an insured’s expert, they can’t ignore the expert opinion and deny the claim without an investigation.

For example, if an insurance company’s claim representative denies a claim based solely on the representative’s interpretation of the insured’s medical records, the insured could argue that a thorough investigation requires an independent medical evaluation or a review of the insured’s medical records by a doctor. In this case, the insurance company is required to take action if it questions the insured’s claim. The insurance company is within its rights to investigate the basis of the expert’s opinion. The company could ask the expert to explain his or her findings. It could also have another expert review the supporting documentation and give an opinion on the insured’s claim.

If the insurance company denies a claim because a genuine dispute exists regarding the coverage or the amount of the insured’s claim, the insurance company may not be liable for bad faith. The genuine dispute rule applies only when the insurance company’s position on a claim is maintained in good faith and on reasonable grounds. Should the insurance company ultimately deny the claim following an investigation, the insured’s counsel should consider whether the insurer considered all the facts of the claim prior to denial.

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08

State Legislation Mandating COVID-19 Business Interruption Insurance Coverage

Numerous states—including Louisiana, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, and South Carolina—have proposed or enacted legislation that would require insurers to provide coverage related to business interruptions due to the coronavirus.

It is yet to be determined whether these bills will be enacted into law, and if so, whether they will withstand constitutional challenges. With the increased financial burden placed on insurers to cover losses secondary to COVID-19, the question remains whether or not insurers can find a way out.

Louisiana

A bill currently being reviewed by Louisiana lawmakers seeks to compel insurers operating in the state to retroactively cover business interruption insurance claims related to the COVID-19 pandemic. The bill states: “….every policy of insurance in force in this state on March 11, 2020, and thereafter insuring against loss or damage to property that includes the loss of use, loss of occupancy, or business interruption shall be construed to include among the perils covered under that policy, coverage for business interruption due to imminent threat posed by COVID-19.” The bill would apply to policies issued to insureds with fewer than 100 full-time employees.

Massachusetts

On March 24, 202, Massachusetts introduced a relief act for policy holders of business interruption insurance, stating, “….no insurer in the commonwealth may deny a claim for the loss of use and occupancy and business interruption on account of (i) COVID-19 being a virus (even if the relevant insurance policy excludes losses resulting from viruses); or (ii) there being no physical damage to the property of the insured or to any other relevant property….”

This act will apply to policies issued to insureds with 150 or fewer full-time employees in Massachusetts, and coverage is subject to any monetary and/or limits set forth in the policy.

New Jersey

On March 16, 2020, New Jersey introduced a bill concerning business interruption insurance coverage during the state of emergency period, stating, “….every policy of insurance insuring against loss or damage to property, which includes the loss of use and occupancy and business interruption in force in this State on the effective date of this act, shall be construed to include among the covered perils under that policy, coverage for business interruption due to global virus transmission or pandemic….” The act will apply to insureds with less than 100 employees, who work 25 hours per week or more, in the State of New Jersey.The act will be retroactive to March 9, 2020.

New York

Under proposed New York legislation, insurers would be required to provide business interruption and loss of use coverage to “business interruption during a period of a declared state emergency due to the coronavirus disease 2019 (COVID-19) pandemic.” The bill would apply to policies in force by March 7, 2020, and would cover businesses with fewer than 100 full-time employees. The New York Department of Financial Services also issued such a notice to insurers operating in the state, indicating that they “must explain to policyholders the benefits under their polices and the protections provided in connection with COVID-19.”

Ohio

In Ohio, there is pending legislation that states “all existing insurance policies that provide coverage for loss of use and occupancy and business interruption shall be construed to include coverage for business interruption due to global virus transmission or pandemic during Ohio’s state of emergency, which was declared on March 9, 2020.” The bill would apply to businesses with less than 100 full time employees.

Pennsylvania

Dueling bills related to COVID-19 business interruption insurance coverage have been introduced in Pennsylvania’s House and Senate. The House bill closely mirrors the bills introduced by other states. However, the Senate’s bill, titled the COVID-19 Insurance Relief Act, is notably different.

According to the Pennsylvania Senate bill, property damage is defined as “direct physical loss, damage or injury to tangible property in a building, office, retail space, structure, plant, facility, commercial establishment or other area of business activity resulting from, but not limited to, the presence of (1) a person positively identified as having been infected with COVID-19, (2) at least one person positively identified as having been infected with COVID-19 in the same municipality of Pennsylvania where the property is located, and (3) COVID-19 having otherwise been detected in Pennsylvania.”

The Senate bill also construes business interruption policies to include as “covered perils” (1) coverage for loss or property damage due to COVID-19 and (2) coverage for loss due to a civil authority order related to the declared disaster emergency and exigencies caused by the COVID-19 pandemic.

The bill requires indemnification for all insureds, regardless of size. For insureds that classify as “small businesses”—those that received, or will receive, funding from the U.S. Small Business Administration— insurers must indemnify 100% of the policy limit. For all other insureds, insurers must indemnify 75% of the policy limit.

Under the proposed bill, the Pennsylvania Supreme Court would be given exclusive jurisdiction to hear any challenge to, or render a declaratory judgment concerning the constitutionality of the act. In addition to these five distinctions, the most notable aspect of the Senate Bill is that it preemptively addresses any constitutional challenges based on the impairment of these insurance contracts by stating, “inherent in the police powers of the legislature is the ability to enact laws that are necessary for the good of the public. Those laws may result in an impairment of contract rights when the legislature has a significant legitimate public purpose, such as remedying a social or economic problem. The bill will not create a reimbursement fund for insurers required to indemnify insureds pursuant to the act.

South Carolina

On April 8, 2020, South Carolina introduced a COVID-19 property insurance relief bill, mandating that South Carolina insurers “cannot deny a claim for a loss of use and occupancy, or business interruption, with respect to COVID-19 for (1) COVID-19 being a virus, even if the relevant insurance policy excludes losses resulting from viruses, (2) there being no physical damage to the property of the insured or to any other relevant property, or (3) orders issued by any civil authority, or acts or decisions of a governmental entity.” The proposed bill would apply to policyholders with 150 or fewer full-time employees.

09

Favorable Scenarios for Business Interruption Coverage

Many businesses and their respective counsel are searching for the most favorable coverage scenario that will be a recognizable business interruption claim under COVID-19. The research reveals a few viable avenues.

Those insured parties whose states have enacted legislation mandating that insurance companies retroactively cover business interruption claims related to COVID-19 will likely have the recognizable claims, although recovering such losses may be a slow process due to the potential volume of claims and the financial burden placed on insurers.

Those with an older property policy issued prior to 2006 with no exclusions for viruses, bacteria, microorganisms, or pandemics have a stronger argument for receiving business interruption coverage than those insured parties whose policy language specifically excludes such cover. Those with special, enhanced forms of coverage, particularly larger businesses or corporate entities with complex coverage may also have an easier time collecting on coverage.

Insured businesses that were not made fully aware of the scope of their coverage may also have viable bad faith claims. For example, in the case that an insurance brokerage firm, and/or an agent on behalf of that firm failed to explain to an insured client the terms and limitations of the insured’s coverage, specifically related to the impact of viral outbreaks and/or acts of authority on business interruption coverage, then an insured may have a case for negligence or breach of duty of fair representation. Moreover, if the broker and/or agent claims to have conveyed such terms orally but failed to solicit express written consent of denial of such related coverage from the insured client, the insured may also have a case for an errors and omissions action.

10

COVID-19 Business Interruption Expert Witnesses

For upcoming business interruption cases, property insurance expert witnesses will be essential for interpreting the specifics of the policies in question and determining whether the alleged insured perils should trigger business interruption coverage. Forensic accounting experts could also help calculate the quantum of the expenses incurred and income lost as a result of business closures.