Our limited podcast series, COVID-19: Diagnosing Liability, is an open dialogue between industry experts and litigators discussing what negligence looks like in the age of COVID-19, assessing liability across industries, and uncovering insights into the kinds of lawsuits that may be viable.
Ep. 3 Business Interruption Insurance: Litigation, Legislation, & Ethics
A continuation of our previous episode on COVID-19 business interruption insurance coverage. In Part 2, our panelists tackle pending legislation regarding retroactive business interruption coverage during the pandemic, how it will impact future litigation, and the ethical implications of these decisions on future insurance contracts.
Hosted by: Zach Barreto, Vice President of Research at Expert Institute
Special Guests: Craig Andrews, Certified Property and Casualty Underwriter, James Fazio, MBA, Certified Property and Casualty Underwriter, Richard Golomb, Esq., Founding Partner, Golomb & Honik, PC.
Disclaimer: The opinions expressed in this podcast are those of the experts and do not represent the views or opinions of Expert Institute or its members.
Mr. Barreto: Hi everyone, Zach Barreto here. Welcome back to COVID-19: Diagnosing Liability. On this episode, we’ll be continuing our coverage of business interruption insurance claims during the COVID-19 pandemic.
We’re going to center today’s discussion around pending legislation related to COVID-19 business interruption insurance coverage, how it will impact future litigation, and the ethical implications of these decisions on future insurance contracts and covered causes of loss.
So picking up where we left off—at the tail end of our previous episode, class action litigator, Richard Golomb introduced the idea of the “three-legged stool,” so to speak—that state governments, insurance companies, and businesses would have to collaborate in developing a long-term solution that makes all parties whole.
So I want to kick off our discussion with the “third leg” of the stool, which we haven’t covered yet: state governments. At least seven states have proposed legislation that would require insurers to provide retroactive coverage for businesses interruptions due to the coronavirus. So Richard, let’s start with you. How likely is it that this legislation will even pass?
Mr. Golomb: Right, well, the question is twofold, right. The question is, will it pass? And the second question is, is it constitutional? And just to be clear, essentially what the, there are, seven states currently that have legislation that’s been drafted, nothing has been passed. And the legislation essentially says if the business has business interruption coverage, notwithstanding the fact that there may be exclusions, and arguably those exclusions would make these claims invalid, extraordinary circumstances require extraordinary remedies, and therefore, we’re going to require the insurance company to pay these claims. And the states that are involved include Pennsylvania, New Jersey, Louisiana. So it’s not….we’re not just talking about in the vernacular “red” or “blue” states. It’s across the board. So whether or not the legislation passes, I think it’s a state to state thing. That’s we’re just going to see how that plays out.
Then the question is if it passes, is it constitutional? And I think it’s 50/50 that it’s constitutional. I mean, on the one hand, it’s certainly going to be argued that it’s unconstitutional because of the contract clause in the constitution. But on the other hand, these policies all have this liberalization language, which essentially says if there’s a state statute that doesn’t exist at the time that we enter into this insurance contract, but it exists during the pendency of the policy, then we’ll abide by that new statute. And so I think it’s yet to be seen.
And so ultimately I think, again, going back to the solution is there’s got to be a solution where we figure out how much money is involved here and how much of that money is going to come from the insurance industry. How much of that money is going to come from government? And frankly, how much of that is going to come out of the pocket of the small businesses. And that again is where, you know, where maybe the PPP money comes into effect, and there may be other set offs. Because if somebody has a $200,000 loss, making them whole may not in this circumstance may not be getting them $200,000. It may be, you know, they have to take a hit as well. But we want them to be able to continue in their business and to continue to employ people. And so we need to figure out what is that? So that we can get the economy,if not where it was, you know, three months ago, at least on that road.
Mr. Barreto: I’m actually curious about hearing from James as well, because early on in the conversation, you had mentioned solutions and how maybe there needs to be one that doesn’t necessarily involve bankrupting the insurance industry. So I wanted to kind of get an idea from you on what the challenges will be for the insurance companies and what you think appropriate solutions would be.
Mr. Fazio: Moving forward, we know what the solution is going to be, and I’ll talk about that in a few seconds. But going back to what Richard was saying, it’s a dual-edged sword there, because if they forced the insurance companies to pay all those claims, then there’s going to be another issue. Because now, as I mentioned early, a lot of these companies are going to probably go bankrupt. So then what is the government going to do? The government’s going to try to bail out some of these insurance companies or the state liquidation bureaus are going to be bombarded. It’s a very difficult situation.
Not being prejudiced because I work in the insurance industry, but you know, you want the insurance companies to stay in business. And again, you know, you want the business owners to get the coverage that they thought that they purchased. But there’s got to be a resolution.
So we know that this is going to have an effect like terrorism did with the TRIA act (Terrorism Risk Insurance Act). So now there’s already talks that Congress is talking about a pandemic risk insurance act of 2020. But again, that’s going to help us moving forward, where they’re probably going to say, well, you know what, we’re going to sponsor this bill. You’ll have to buy separate insurance, which the insurance companies and the government, the federal government, will split. But the key here is how do we get through those existing claims? Moving forward, I know we’ll have a resolution, but the problem is now. And how do we keep everybody afloat?
Mr. Andrews: I just want to add a couple of those comments there. I don’t think you’d find a lot of politicians who want to raise their hand in undying support for the insurance industry, because everybody loves to hate insurance. Okay.
You know, I also wanted to mention, when we talk about trying to estimate the total loss from this event in the aggregate, from all businesses across the country, one of the things that crosses my mind is something I mentioned earlier, and that is the Business Owners Policy. The Business Owners Policy is a specific coverage form, and one of its primary characteristics—as a matter of fact, one of the reasons agents sell a lot of them, is because loss of business income and extra expense is included automatically, at no limit other than 12 months coverage.
Now, an awful lot of these small businesses that Richard deals with I’m sure are insured under these Business Owners Policies and paying $2,000 a year, $5,000 a year, maybe 10 with unlimited loss of business income. Calculating that will be quite an exercise.
We so often think in terms of large businesses that have sophisticated risk management programs. But as Richard has mentioned, the folks really hurting are these small businesses, for which I feel. But the policies that they’re insured under for loss of business income are tremendously expansive. They don’t even have to complete the business income worksheet to get this 12 months of coverage with no dollar limit. So that is going to be a real tough nut, if, for example, some of these laws in the states pass forcing insurance companies to pay these losses.
With all due respect to my attorney, friends, if we believe what Chubb CEO, Evan Greenberg stated on April 16th in an interview that retroactively forcing insurance companies to pay these claims will bankrupt the industry, I’m just not too sure how many attorneys want to bankrupt their golden goose.
Mr. Barreto: Craig, when you put it like that, it’s easy to see how tremendously expansive and potentially insurmountable it could be to compel insurers to cover all business interruption insurance claims during the pandemic. Let me ask you though, how will insurance companies be handling claims from businesses that have been able to remain partially open? For example, restaurants that are doing delivery or even gyms posting online workouts. When insurers are examining coronavirus business interruption claims, are those partially-open companies viewed differently than companies that have had to shut down completely?
Mr. Andrews: Well there’s certainly provision in the standard loss of business income and extra expense policies for that in the claims settlement procedure. Obviously, nobody knows what the loss of business income is going to be during the period that there was no income. So a business income claim is always subject to negotiation. And smart insurance companies almost always will use the services of a forensic accountant to help them through coming to a reasonable settlement. And if for example a restaurant, let’s say, which is continued, carryout operation—so they have some income, but not the income they would have had without the COVID-19—that difference would be calculated by the forensic accountant and taken into consideration when the final loss is calculated.
Mr. Fazio: Just a quick point reflecting off of Craig’s comments. If we look at it like a small business, a restaurant, a gym, even if they do get some reimbursement, that doesn’t guarantee they’re going to survive because now things are going to be changing. Many people are not going to be going out to restaurants. Many people are not going to be going to public gyms. So things might change. So companies are going to have to get creative and try to find different ways to accommodate this type of environment that we’re living in at this time, unfortunately.
Mr. Golomb: Yeah, I mean, I can give you a very concrete example of what James was just talking about. And that is in the restaurant business. You’re really going to have a couple of different kinds of losses. Let’s just say for the sake of discussion I’m in Philadelphia and Philadelphia is opening up to some extent on June 4th. But they’re still not opening up in restaurants and bars. So let’s just look at the restaurant that is not doing takeout. They’re shut down. They’ve got no revenue at all. So they’re going to have that loss for whatever period of time that is from March 16th until whenever they’re able to open again. And then we know that once they are opened, that because of the continuing civil authority and the orders of the federal local and state governments, that if you had a restaurant that seated 200 people before, they’re going to open up with social distancing, so maybe now they can open up with 80 seats. And so their revenue is still going to be reduced by 60%. And what James was just talking about there, the national restaurant association did a report where they’ve concluded that 40% of the independent restaurants will never open their doors again. And then an additional 20% will go out of business in the first six months because they can’t survive with the rules that will be in place at that time. So, I mean, that’s a very concrete example of what James was talking about.
Mr. Andrews: I certainly concur with everything that Richard said about the number of businesses that will never come back. I just wanted to put it out there in most standard business income policies, there is an additional coverage called extended business income, which the standard is 60 days and that can be increased to 360 by endorsement that will pay the difference in the income between what they were actually earning after they opened and what they were earning prior to the insured loss. So it’s definitely an exposure.
Mr. Barreto: I have a question for James first, and then I’ll have a similar one for Richard. In your opinion, in what scenario will a business have the most viable COVID-19 business interruption claim? Who do you think may come out on top here?
Mr. Fazio: I think if the word “virus” or “pandemic” is not in the contract, they’re going to have the most viable claim. But as far as like, if somebody goes to a broker and you know, now they’re going to come to the broker and say, ‘Hey, you’re my broker. Why didn’t you tell me that I didn’t have coverage for virus?’ You know, I don’t think they’re going to be able to get an errors and omissions claim at this point. But the ones that clearly spell it out, it’s going to be more difficult for the attorneys to win those cases. Unless, as we spoke earlier about local state governments come in and say, well, you’ll have to cover it. But it’s not going to just be a win-win situation.
Mr. Golomb: I agree. For the most part, I don’t think these are claims against the agents either. I’ve seen very limited circumstances where a business has a seven-figure premium where I think they may have been led astray. But I think that that’s far and few between
Mr. Barreto: Craig, I’m interested to hear your response as well.
Mr. Andrews: I did have a comment on the folks who might have the most viable claims. And I think the most favorable coverage scenario for a recognizable COVID-19 business income claim would be those very large organizations with policies comprised of special non-standard coverages or manuscript coverage forms that specifically cover pandemic exposure, which maybe have been drafted in cooperation with the insured to coincide with their risk management programs. Beyond that, at least from my perspective, there are some pretty tall mountains to climb besides the virus exclusion in order for a policyholder to receive coverage.
Mr. Barreto: So Richard, from your perspective, who do you think has the most viable COVID-19 business interruption claim? And then also, what do you think will be the biggest challenges in meeting the burden of proof for these cases?
Mr. Golomb: Well, as far as the viable claims, I agree. I see about 20% of the policies that don’t have virus exclusions at all. And then there are other policies that are “virus exclusions” that don’t use the word virus. They talk about bacteria. They talk about microbes. But they don’t use the word “virus” at all. And I think that because of that ambiguity, that I think the carer has a problem. But again, even for those policies that do have virus exclusions, again, I don’t think it’s the virus that shut them down. And invariably, they have civil authority language. So, you know, while I agree that when you look at which is the most viable, it’s those cases without virus exclusions at all. But I think that they’re all viable claims.
Mr. Barreto: And Richard, just to follow up on that. Craig brought up before how any smart insurance company will have forensic accountants take a look at these cases. From your perspective as a litigator, what experts do you think you’ll need to make the strongest case?
Mr. Golomb: Any smart lawyer’s going to have a forensic account also. And I agree 100% with what Craig was talking about, talking about the use of forensic accountants. We use them in our cases all the time. And they’re going to have to look at revenue numbers. A lot of these businesses are cyclical or seasonal. And so while what happened three months before the shutdown may or may not be relevant, certainly the same time period a year ago, two years ago, three years ago is relevant. And so, I agree with Craig when he was talking about some smaller businesses that whether it’s intentional or not, they don’t have the best of records. And I’ve turned down cases for that reason. Where we’re unable to prove the damages because they just don’t have the documents or the support to make the claim.
Mr. Barreto: That’s interesting to hear Richard, that the availability of financial records will play such a big role in assessing the viability of these cases. Craig, I want to turn it back to you for a minute regarding your role as an expert witness in these business interruption cases. Have you seen attorneys reaching out to you yet to act as an expert in their cases? Is it already starting to show up as a need?
Mr. Andrews: Yes. They’ve all been from the defense side, and I think that’s primarily because most of our practice has been on the defense side. So these entities have been reaching out to us, have been at least to this point, all insurance companies. All of the companies that we’ve been talking to are all very, very much tied to insurance service, offices and ISO coverage forms.
Mr. Barreto: I want to dive into the ethics of these COVID-19 business interruption claims from the insurance side. So James, I’m interested to hear from you about how the insurance carriers are held to good faith, and how ethics will play a role in handling these claims moving forward.
Mr. Fazio:Well, being a CPCU (a Certified Property and Casualty Underwriter), being in this business for many years, we have a code of ethics. And having worked, you know, in the claims area for a couple of years in my experience, every claim that comes through the door has to be examined and adjudicated. And they have to prove whether it’s covered. Are they going to pay the full loss? Are they going to pay a partial loss? Are they going to deny the claim? And there’s got to be a valid reason for it.
And I’ll still say that, you know, being in this industry, that we have a duty to the insured to make sure that we act ethically. And whether or not everybody’s doing that, you know, I’m not answering that. But we’re supposed to do that.
Mr. Barreto: And Craig?
Mr. Andrews: I couldn’t concur more greatly with James. I’m also a Charter Property Casualty Underwriter, and I subscribe faithfully to the society’s code of ethics. And in this particular case, one section of the code of ethics talks about placing the needs of others above those of yourself. Basically the definition of altruism. And, you know, I don’t want to sound too hokey, but I do think that there are a good number of insurance professionals who, whether their CPCUs or not, subscribe to that ideal.
Mr. Barreto: It’d definitely rare, Craig, to hear the word “altruism” associated with insurance coverage, and certainly an interesting proposition in light of the circumstances of the coronavirus pandemic. I want to switch gears a little and discuss what the future of this litigation might look like. Richard, you mentioned you’ve had upwards of 200 COVID-19 business interruption cases cross your desk already—what are you predicting we’ll see on the litigation front, in both the near term and the long term?
Mr. Golomb: Well, it’s so hard to predict. This litigation is probably the largest, most complex litigation that this country has ever seen. You know, I’m a trial lawyer, and I’ve always taken the position for myself and for the people who work for me, you know, as a general rule, when you handle a case to try it, that’s when the case settles. And if you handle a case to settle, it’ll end up being tried. And if there’s an exception to that rule, this is one case where I think that certainly we have to prepare to go the distance in this case. But it is also a case where I think that we have to be mindful from day one about what is the solution for everybody to get this resolved.
And so that’s why it’s so hard to predict—because it’s very early on in the litigation. So we haven’t had the opportunity really to sit down with insurance carriers yet. And we don’t know what the government’s position is going to be on this. I mean, we’ve all been aware of the various government actions through the CARES act that they’ve taken so far. But I don’t think that this is a solution where the government can just say, okay, here’s another $2 trillion. I think it needs to be a more thoughtful, more creative solution to that. And the sooner that the three entities—that is government, small business, and the insurance industry—comes to the table with an open mindedness towards getting this resolved for the betterment of everybody, I can then predict a little bit better timing. And I get that question all the time from my clients, because like I said earlier, I’m a class action lawyer. My cases take four, five, six years. A lot of these businesses can’t wait four, five, six years to get this resolved.
Mr. Barreto: You make a great point about timing, Richard. James, I’m interested in your response to this question as well—what effects do you think the outcomes of this COVID-19 business interruption litigation will have on the insurance side of things moving forward?
Mr. Fazio: I think, you know, moving forward, it’s going to have to be a coverage that we’re going to have to have separate. We’re going to have to advise the clients that, you know, give them a choice if they want to purchase it or not. And if they don’t purchase it, there’s going to have to be a waiver stating that they denied the coverage. So we’re going to have to have some protections in place. You know, this is a business where we’re constantly learning because there’s always going to be something that’s going to change the way we do business.
Mr. Barreto: Thanks, James. And Craig? Final thoughts on what you think the outlook might be here?
Mr. Andrews: Well, as I so often hear in the news media today, we are truly in uncharted waters at this particular time. You know, I think back to September 11th, 2001. If memory serves, suits were still going on in relation to that in 2018. I really expect nothing less going forward here.
I also have to agree with James that it would seem to me that some sort of combined government-industry initiative, similar to TRIA, would seem to be a workable solution. Of course, as has been intimated several times here, this evening, much of this is going to depend on how this is looked at legislatively and judicially, from jurisdiction to jurisdiction. I think though what we need is a coherent national solution, which brings me back, in my opinion, to something like TRIA. And I must say, as someone who developed the response to TRIA for a super regional property casualty insurance company, I would hope that if it goes that way, that the lessons learned from all the screw ups in TRIA are applied to whatever this turns out to be.
Mr. Barreto: That’s a wrap on Part 2 of our business interruption coverage on our limited podcast series, COVID-19: Diagnosing Liability. Thank you to all our panelists for joining us and sharing your thoughts. To all our listeners out there, stay safe.